In particular, the merchant doesn’t need to know anything about me. If the bill is valid, then it can be used to make a purchase.
If I pay for a coffee with currency, the only thing the merchant needs to worry about is that the bill I hand over is not fake. The canonical example of a token-based system is currency. This distinction adopts concepts presented in an article by Charles Kahn and Will Roberds, which was written before the current usage of the word “token” to denote a unit of a cryptocurrency became popular.Ī pair of examples is useful to understand the distinction between token-based and account-based systems. In all of these papers, the distinction the authors make is that an account-based system requires verifying the identity of the payer, while a token-based system requires verifying the validity of the object used to pay. It is common to make a distinction between account-based and token-based digital currencies, as in this report from the Committee on Payments and Market Infrastructures (on which some of us collaborated), this working paper from the Bank of Canada, this staff discussion note from the International Monetary Fund, and this note from the Bank for International Settlements, among many other sources. We show that this distinction is problematic because Bitcoin and many other digital currencies satisfy both definitions. In this post, we discuss a common distinction made between “token-based” and “account-based” digital currencies. The interest has only grown in recent months because of a desire for contactless payment methods, stemming from the coronavirus pandemic. Rod Garratt, Michael Lee, Brendan Malone, and Antoine Martinĭigital currencies, including potential central bank digital currencies (CBDC), have generated a lot of interest over the past decade, since the emergence of Bitcoin.
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