Tokens and accounts in the context of digital currencies Alexander Lee, Brendan Malone, and Paul Wong 1 Introduction Several years ago, innovation in financial markets began to generate discussion of digital tokens and tokenization of financial assets. When these ideas first entered the public discourse, they were used to help illustrate a possible future state where financial instruments could be turned into digital objects and transferred in real time across the globe without financial intermediaries.
Technology startups proposed digital tokens tied to fiat currencies and other assets for example, gold, diamonds, and other commodities. Accounts with tokens work in these areas progressed from speculative ideation to concrete technology development, central banks began actively researching digital tokens through distributed ledger technology DLT experiments. Despite the prevalence of the terms "token" and "tokenization," their meanings are still confusing to most.
What is a token from a technical perspective, and from a conceptual or accounts with tokens perspective?
Many people use "token" as if its meaning were self-evident. References to tokens in the economics literature, computer science publications, technology blog posts, and general newspapers are inconsistent, as different people use the term to describe different but related things.
Is a token a physical object, a digital object, something defined by a smart contract, or something else entirely? This lack of consistency has arguably led to further confusion and miscommunication. Understanding the context in which tokens are referred to is important to understanding digital currencies.
The goal of this note is not to propose new terminology or definitions, but rather to provide guidance that can help prevent potential confusion or miscommunication in the use of the terms "token" and "account".
The first section of this note explains how the cryptocurrency community has approached the concepts of tokens and tokenization.
The second section looks at the domains of payment economics and central banks, and discusses tokens accounts with tokens the context of CBDC.
Account Ranges – Enable Token Payments
The note concludes by highlighting some issues with the "tokens vs. Tokens and the accounts with tokens community Terminology regarding tokens in the cryptocurrency community has evolved, with no sole authority on exact definitions. Current concepts of tokens and tokenization likely originate from their usage in the context of Ethereum, a large public blockchain that offers a robust programming capability in the form of so-called smart contracts.
An early use case for this flexible programmability was the definition of custom assets, and the Possible internet earnings community proposed a standard for fungible units of value termed "tokens" shortly after its public launch. The adopted standard, widely known by its proposal identifier ERC, is arguably the primary reference point for the concept of tokens on Ethereum and other public blockchains today.
Ethereum, smart contracts, and the ERC token standard The public Ethereum blockchain, launched accounts with tokens inspired by the core design of Bitcoin as a distributed ledger that does not require a central authority to coordinate agreement on its contents. While Bitcoin does allow for the programming of spending conditions applicable to certain discrete amounts of bitcoin, Ethereum's design allows for the creation of generalized computer programs known as smart contracts, which are executable code stored on the Ethereum blockchain.
An early use case for smart contracts was the programmatic definition of assets or representations thereof on a blockchain. The general idea was that a smart contract could define its accounts with tokens ledger for tracking user balances of a token essentially a sub-ledger of Ethereum, specific to that particular smart contract and allowing users to transact in the asset represented by that token.
Tokens vs. Accounts: Why the Distinction Still Matters
Given the flexibility of smart contracts programming on Ethereum, there are a great many ways to implement such a system; thus, in order accounts with tokens allow for more consistent interoperability of tokens, a standard interface for fungible tokens was proposed and adopted shortly after Ethereum's launch.
This standard is known by its proposal number, ERC Tokens issued by smart contracts that adhere to this standard are referred to as ERC tokens. The widespread adoption of accounts with tokens ERC standard has likely helped shape the notion of a "cryptocurrency token" as a custom asset issued on top of a blockchain through the use of smart contracts.
Other blockchain platforms which have followed Ethereum's lead in offering flexible programming capability, such as Eos, Cardano, Tezos, and Stellar, all allow for the issuance of custom assets that the cryptocurrency community terms tokens.
Ethereum has a native cryptocurrency, "ether", that is used to pay for all transactions processed by accounts with tokens network. Ether itself, however, is not an ERC token; rather, it is an intrinsic part of the blockchain accounts with tokens which predates the existence of any ERC tokens. A simple user-to-user transfer of ether may incur a low fee, while a call to a smart contract function that performs a large amount of mathematical computation may incur a high fee.
This fee-for-computation policy means that the functions for interacting with ERC smart contracts as described above, such as sending ERC tokens from one user to another, incur their own transaction fees denominated in ether. Thus, while it is possible to transact value denominated in ether without the need for any other payment instrument, the same is not true of ERC tokens: in order to transact in the latter, a user must also maintain a balance of ether for paying network transaction fees.
How are ERC tokens recorded and transferred on the blockchain? Chief among Ethereum's functionalities is electronic recordkeeping. Unlike Bitcoin, which handles recordkeeping using a format known as "unspent transaction outputs" also referred to as UTXOEthereum records information via account addresses.
While software for controlling user balances of these tokens has come to be known as a "cryptocurrency wallet", such wallets do not hold anything with a unit of value as the name options on the exchange reviews suggest.
Rather, a cryptocurrency wallet holds a private key that allows its holder to authorize transactions on a blockchain platform, in accounts with tokens manner loosely akin to placing one's signature on a check. While tokens may be viewed or controlled via wallet software, to the extent that they "exist," it is only in the replicated databases maintained by a blockchain platform's computational nodes and in the form of an account balance, not as a digital "object" in the wallet software itself.
Once a person controls tokens on the network, accounts with tokens can transfer control of those tokens to others. The sender and recipient of the tokens do not need to have a relationship with the token issuer; they simply need an Ethereum address for which they control the private key. The sender initiates the transfer by cryptographically signing and submitting to the Ethereum network a message that will deduct tokens from their earnings on the Internet rewriter and add them to the balance of the recipient's account.
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- The Fed - Tokens and accounts in the context of digital currencies
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After the sender has used their private key to authorize the reassignment of control of some quantity of their tokens to local bitcoin website else, that recipient now has the ability to use their own private key to transfer the tokens from their account balance in the same manner.
Importantly, no unique digital information owned by the sender is transferred to the recipient's cryptocurrency wallet.
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Other types of crypto tokens Since Ethereum launched, a number of other blockchain projects have appeared that also offer the accounts with tokens to issue tokens. Despite differences in the technology underlying these platforms, the conceptualization of tokens as programmatically-defined units of value that can be transacted on those platforms and tracked via account balances, remains a common feature.
In addition to fungible tokens which have been described above in detail through explanation of the ERC standardblockchain platforms may also support non-fungible tokens. Any blockchain platform offering sufficiently flexible programming typically has the capability of implementing functionality for non-fungible tokens. Tokens and the central banking community The use of tokens in money and banking date back several centuries. Traditionally, accounts with tokens term "token" has been used to describe physical objects representing value, such as precious metals or official coinage that acted as symbolic representations of value and could be used to make payments.
Ownership of these early tokens was determined solely by physical possession. The most common way a person could come to own a monetary token was by trading for it with goods or services. In any such trade, transfers happened bilaterally between individuals.
Crucially, physical monetary systems relied heavily on the assumption that such a token was difficult to replicate. If it could be copied easily, users could effectively create their own money at will, thereby debasing its value. The exchange of tokens between individuals eventually led to the use of "accounts" to record asset ownership more easily and to facilitate more-complex trading and financial transactions.
When combined with specialized institutions and processes, accounts allow for easy transfers between participants.
Instead of carrying coins or precious metals or any other tradeable goods, for that mattermerchants could keep accounts with a third party, such as a bank. For example, a bank in Renaissance-era Venice might have kept accounts for merchants on a paper ledger and allowed account holders to transfer balances from one person to another without any physical exchange of assets between the transacting parties.
Create an account token
If the accounts with tokens needed physical money, they could clear accounts with tokens some or all of their bank account balances in exchange for an equal value in physical tokens. Cash and central bank accounts Although this idea — of money existing either as physical objects or as records in a ledger — predates the creation of fiat currency by states, it has obvious parallels to the central banking world.
Central banks have historically issued money in two forms: cash and deposits.
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Cash is a physical form of money. It is widely available to the general public for a variety of uses, and it can be transferred from person to person anonymously. In addition, cash has built-in security features to make physical money easy to authenticate but difficult to counterfeit. For these reasons, cash, as we use it today, is analogous to the historical notion of a monetary token.
About the Zenith eToken App
Deposits, such as reserve and settlement balances, are an electronic form of money represented using accounts. They are typically only available to a limited set of entities, certain financial institutions and the official sector, for specific purposes. In recent years, new formulations and categorization of money have arisen. InKahn and Roberds wrote a seminal paper on payments economics that formalized the distinction between what the authors describe as "account-based" payment systems and "store-of-value" payment accounts with tokens.
In their formulation, the traditional concept of a "token" can be viewed as embodying the "store-of-value" systems. Evolution of tokens and central bank digital currency As conversations evolved within the central banking community on CBDC, the verification-based distinction between "accounts" and "store of value" or "tokens" proposed by Kahn and Roberds was extended to CBDC. These definitions are agnostic to any technology.
Let us dive into the world of accounts and tokens by looking at a world cup ticket booking system as explained below and see how easy it is to integrate both.
news trading statistics Taken as a whole, this central banking view of tokens and accounts is the byproduct of a desire to be both general technology-agnostic and categorical tokens are distinct from accounts. The tokens concept is used, in accounts with tokens sense, as a short-hand for digital units of value that can be transferred anonymously, and accounts with tokens a generic description for how that might happen authenticating an "object".
As a practical matter, however, central banks often shy away from describing how, exactly, tokens are recorded using a digital recordkeeping system — except to avoid suggesting they are tracked in an account-like structure or using accounting entries. Accounts, from this CBDC perspective, are understood mainly as a shorthand for "traditional" bank accounts maintained by entities in centralized or hub-and-spoke systems. CBDC and the tokens and accounts dichotomy The tokens and accounts dichotomy for CBDC may be confusing because the cryptocurrency and central banking communities use the terms in different ways.
While tokens in the cryptocurrency community are generally understood as programmatically defined assets on a blockchain, the central bank view of a CBDC token in the tradition of Kahn and Roberds' dichotomy refers only to a notional "object" that is never strictly defined. What the cryptocurrency community calls tokens can be tracked in a form that central bankers might recognize as accounts, whereas in the central banking community, tokens and accounts refer to distinct potential designs for a CBDC.
Tokens vs. KahnResearch Fellow The conceptual distinction between payments methods that are based on tokens e.
These different uses for the same terms may have led to misunderstanding regarding how CBDCs could and should be designed. Recently, several researchers have come to similar conclusions regarding the accounts with tokens caused by the ambiguity and lack of consistency in the tokens and accounts terminology. Attempting to create a distinction between the two may obscure or even misrepresent what is happening from a technical perspective. As noted above, tokens can operate within the context of accounts in the cryptocurrency community — this is true for many such digital currency systems.
For example, accessing a bank account in some jurisdictions, such as those jurisdictions with weak anti-money laundering requirements, may involve knowing a secret piece of information, rather than having an identity verified. Accounts need identifiers, but those are not the same as identities. The second issue is the concept of a "digital object" form of money that can be stored locally.
The metaphor of a coin, object, or bearer instrument living in a wallet or locally on someone's machine raises significant questions regarding technological feasibility, safety, and security. What can be stored locally is a private key that allows for the transfer of the tokens on the blockchain. Importantly, what is stored or possessed by the end user has consequences for how we think about bearer instruments in the digital world: Is a accounts with tokens key that allows for the transfer of tokens on a blockchain a bearer instrument?
Should a private key be treated as a legal equivalent to physically holding the token or asset? Systems that feature true local storage of the asset itself, coupled with offline peer-to-peer transfer capabilities, have value as a conceptual tool for analysis, but there remain questions about their development, secure operation, and widespread distribution.
In the meantime, calling these systems and blockchain-based systems "token-based," further obscures the diverse technological underpinnings of each form of electronic recordkeeping. The third issue is that digital tokens are fundamentally just pieces of information in both cryptocurrency and central banking. When talking about tokens in cryptocurrency, we may not necessarily associate a value with them — in a public system such as Ethereum, for example, anyone wishing to do so can accounts with tokens a new smart contract defining tokens that may have no explicit use and, consequently, have no transactional value.
Using tokens to securely transmit account data Connect platforms can use Stripe.
Certain tokens may even be specifically designed and deployed without any payments or financial use case in mind. This notion, however, has changed in recent years with discussions on the tokenization, which typically refers to the digitization of an asset representing value often via issuance of a token a blockchain which represents a claim to the assetsuch as cash and securities.
Using tokens to securely transmit account data
In order to analyze the implications of accounts with tokens tokenized digital financial markets, it will be important to understand what people are referring to when they talk about tokenization. Finally, many CBDC reports focus on either conceptual, policy topics or technical issues. However, the intersection of analytical concepts and technical implementation is necessary to avoid further confusion over what is a token, what can it do, how it can support a digital currency, and what it means in the context of a CBDC.
Clarity on the terms can help further the conversation on digital currencies, including CBDCs. This shared understanding is particularly important as some jurisdictions race to the design and implementation of a CBDC—some of which are based on "tokens," others based on "accounts," and yet others using a combination of the two.
As jurisdictions consider legal frameworks and oversight regimes around the issuance accounts with tokens use of digital currencies, the need for clear use of words and clear definitions become even more important.
Concluding thoughts By highlighting how the terms "tokens" and "accounts" are used by the cryptocurrency community and accounts with tokens central banking community, this note seeks to inventory the subtly and sometimes obviously different ways these common terms are being used by different people to reference different concepts.
Acknowledgement of how these terms are being used in different communities may help identify areas where misalignment could create issues for legal frameworks and oversight regimes for digital currencies and so-called tokenized financial markets. Central banks researching CBDC will need to engage numerous stakeholders in the debate around its design and, ultimately, whether it should be pursued.
- Tokens vs. Accounts: Why the Distinction Matters | St. Louis Fed
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Those stakeholders include the general public, legislative bodies, the private sector, and other central banks and the official sector. For these conversations to be successful, it is imperative that everyone speaks the same language, or, at the very least, enters the conversation with a common understanding of each perspective. The views expressed in this paper are solely those of the authors and should not be interpreted as reflecting the views of the Board of Governors or the staff of the Federal Reserve System.
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