Should the Federal Reserve issue digital currencies? -Part 5

These systems have trade-offs in terms of access, privacy, and security levels. At a certain cost, no system can have universal access, perfect security, and complete privacy at the same time. Expanding access to a system is accompanied by either reduced security or reduced privacy.

The trade-off between access and security depends in part on who is responsible for fraudulent transactions and incorrect records. In an account-based system, this responsibility falls on the account provider or the party responsible for verifying the initiating payment message. This arrangement aligns with the motivations of account providers or system operators to try to control the risk of fraudulent transactions. In the token system, the responsibility falls on the recipient, who faces the risk of receiving counterfeit tokens or tokens that have been consumed. The risk of counterfeiting is determined by the relative costs of verifying and counterfeiting tokens. Take cash as an example. Because of its easy-to-identify security features, verification is cheap and instant—so that physical exchange automatically becomes a sign of the authenticity of accepted tokens. In open systems such as Bitcoin, the use of cryptography makes the cost of verifying the authenticity of tokens very low. The open system tracks the creation of tokens through a record called the blockchain, thereby preventing counterfeiting, which is stored in a ledger distributed throughout the computer network. In order for the token to become valuable, the cost of changing the ledger must be prohibitively high.