The billions of dollars gambled every day on bitcoin lunch the blockchain technology at the top of everybody's agenda. Unfortunately the FOMO, "Fear of Missing out", created a lot of noise around the subject and sometimes makes communications difficult. Some words and expressions lost their obvious meaning in what is called a "lexical shift ". "Digital token", "tokenization" are very loosely used. Central bank accounts are called "digital currency". Are these accounts "digital currency" just because they are processed using digital devices? When the Fed was created, processing was performed using mechanical calculators. These accounts were not called "mechanical money" for this reason. Are Mayer Amschel Rothschild's ledgers supposed to be called "manual money"?

For this reason, we have to clarify the use of the terms in this analysis.

Definition of terms

1. Currency - Base money in the form of central bank reserve accounts (ledger money), notes, and coins.
2. Monetary base - The total amount of currency created by a country's central bank.
3. Central Bank Digital Currency (CBDC) - The third form of base money issued in digital form.
4. Digital token - A string of bits. It can be represented as a base 2, 4, 10, 16 number of any other base, ASCII, EBCDIC, or any text representation or an image.
5. Digital payment systems - Payments supported by digital processing. Not to be confused with digital money
6. Double-spending - Using the representation of a value in more than one transaction. This can be done by copying a digital token, counterfeiting a banknote, or overdrawing an account.
7. Double-spending prevention - Detect the double-spending and invalidate a transaction. This can be performed before or after the transaction.
8. Anonymous bank accounts - Also referred to as a “numbered account,” is a bank account where the identity of the account holder is replaced with a multi-digit number or code.
9. Secured deposit box - A container or space secured with a key or number combination. It can be a bank safe deposit box, a train station luggage storage box, a storage room, or any place that can be accessed only by the person in the possession of the lock key or number combination.

New terms introduced in this paper:

10. Transferable Digital Note or TDN - The association between a long, unique, and impossible to guess digital token in ASCII representation and a value denominated in the country currency unit of account.
11. TDN Signature - The long, unique, and impossible to guess digital token in the above definition. It is the TDN means of payment. It can be represented as ASCII text or bar code. TDN and TDN Signature are used interchangeably.
12. Guarantor - Performs operations related to TDN payments and guarantees the validity of these payments.
13. TDNSYS - The system used by the guarantor to support TDN Operations.

This analysis proposes a payment system based on Transferable Digital Notes (TDNs). If the Guarantor is a central bank the TDN is Central Bank Digital Currency (CBDC), the third form of base money. When issued by a financial institution as means of payment, they can be used in one operation consisting of issuance to the payer, transfer to the payee, and redemption by the payee. If TDNs become wildly accepted, the same TDN may be used in more than one financial transaction as they are payable to the bearer, and the Guarantor is in the possession of the deposits for a long period of time. Similarly to cash, the payer and the payee participating in the transaction do not have accounts with the Guarantor.

The most difficult aspect of digital token-based payment is double-spending prevention. TDNSYS offers a simple and easy-to-implement solution.

CBDC requirements

1. The central bank shall design and deploy CBDC.
2. CBDC shall be base money issued in digital form, digital tokens.
3. CBDC shall have properties similar to paper notes and central bank reserve accounts.
4. CBDC should be resistant to counterfeiting.
5. CBDC shall not replace paper notes and reserve accounts base money.
6. The central bank shall have full control over the system supporting the CBDC operations.
7. CBDC deployment shall not have any negative impact on the financial, economic, political, and social structures.
8. CBDC shall obey all the existing legislation.
9. CBDC shall not use technology that is not mature enough and has not been already proven as reliable in existing financial systems.
10. The central bank shall issue digital tokens associated with a value denominated in the country's legal tender.
11. The central bank shall prevent the digital tokens double-spending.

For the rest of this analysis, we shall discuss TDNSYS as used to implement US Central Bank Digital Currency (CBDC)

Currency payments

The actors participating in a payment transaction are the payer, the payee, and the central bank. A transaction consists of three steps: initiation, validation/recording, and acceptance. If all steps are successfully executed the transaction is completed. To reverse the transaction the payer and the payee have to agree to change roles and execute the transaction again. In some situations, for a nominal account-based transaction, the central bank may reverse the transaction. An example is when a payer's account is overdrawn.

Identifying the steps in a payment transaction will help us define the steps in a TDN Payment Transaction and a solution to the double-spending problem.

1. Cash-based:
   1. The central bank makes available the notes and coins and the criteria to validate their authenticity.
   2. The payer initiates the transaction by handing the notes and/or coins to the payee.
   3. The payee checks if the notes and/or coins are not counterfeited and accepts the payment.
2. Account-based (nominal or anonymous)
   1. The payer initiates the transaction by requesting the transfer and identifying himself/herself as the Owner of the account.
   2. The central bank validates the identity of the payer, debits the payer's account, and credits the payee account.
   3. The payee accepts the transaction.
NOTE: For blockchain/DLT the central bank is a multitude of computers on the Internet performing mining and updating a distributed public ledger.
3. Anonymous bank accounts or Secured deposit boxes (hypothetical)
   1. The central bank administers the account and the secured deposit box and releases the content to the person in possession of the account number or key.
   2. The payer initiates the transaction by handing the account number (a digital token) or the means of access to the secured deposit box to the payee.
   3. The payee requests from the central bank a new account number or changes the lock of the secured deposit box to prevent the payer from accessing the money transferred and after that he/she accepts the payment.
4. Transferable Digital Notes (TDN) (proposed)
   1. The central bank issues and distributes through member banks digital tokens associated with a monetary value (in the same way as the cash is issued and distributed) and keeps track of their status (valid or invalid). Upon request reissues a TDN by invalidating it, and issuing a new TDN of the same value to the requester (in this situation the payee).
   2. The payer initiates the transaction by handing a TDN to the payee as a printed barcode or using a digital device.
   3. The payee requests from the central bank the re-issuance of the digital token to prevent the payer to use the TDN again, and after that accepts the payment.

It should be noticed that only for an account-based transaction the payer has to identify himself/herself as the Owner of the account to be debited. This can be done with the usual means of personal identification, like documents or/and biometrics, or using a personal identification number (PIN) or password associated with the account number. In the second situation, the payer does not reveal his/her identity. For blockchain transactions, the account number is the public of a PKI Keys Pair. The identification is done using the private key.

In the (C) and (D) transactions it is the payee who is responsible for the double-spending prevention and the transaction is completed only after the payer does not have access to the money transferred.

Digital identification is related not only to payment transactions. It has to be approached as a separate subject matter.

Properties and Behavior of the Currency

The purpose of this analysis is to identify the properties and behavior of the existing forms of currency and evaluate how they apply to TDNs based payments. The specifications for the TDNSYS are defined based on this evaluation.

Forms of currency
(i) Reserve accounts - identified by (i)
(ii) Paper notes and coins - identified by (ii)
TDNs - proposed- identified by (iii)
Accounting
(i) All transactions are recorded in account ledgers.
(ii) Records are kept for all the notes and coins in circulation, in storage, printed, destroyed, etc. Each note has a unique serial number.
(iii)All digital tokens, associated values, validity, put into and removed from circulation dates, etc are recorded in a repository.
Entering circulation
(i) The central bank member banks' reserve accounts are credited.
(ii) Printed by the government printing office and physically transferred to the central bank member banks. Paper money and coins can be in storage at the printing office, mint, or the central bank. In this situation, they are not considered base money.
(iii)Generated by the central bank's TDNSYS system and transferred to the member banks over public or private digital networks.
Distribution to the public
(i) Does not apply. Note: Opening central bank accounts to the general public is considered CBDC and the distribution process is not defined yet.
(ii) Retail banks make cash available to the public.
(iii)Same as cash.
Ownership
(i) The central bank member bank associated with the reserve account.
(ii) The entity in the physical possession of the notes or coins.
(iii)The entity in the possession of the digital token.
Ownership ambiguity
(i) Ownership is never ambiguous.
(ii) The note or coin is not in the physical possession of an entity (ex. lost).
(iii)More than one entity is in the possession of the same digital token. It can be said that in this situation the TDN was compromised.
Validation
(i) The central bank guarantees that the balance of a reserve account is accurate.
(ii) Verification of the note or coin security features.
(iii)Inquiry about the status of a digital token from the central bank's TDNSYS over a digital network.
Ownership transfer
(i) Performed by debiting and crediting accounts.
(ii) The notes and coins are transferred in person from the payer to the payee.
(iii)The digital token is passed in person or through digital means from the payer to the payee.
Double-spending prevention
(i) The central bank systems check if the funds are available in the payer's account.
(ii) The notes and coins are checked for authenticity by the parties involved in the transaction. This may be superficial or extensive.
(iii)The payee requests ownership from the central bank's TDNSYS over a digital network. The central bank's TDNSYS system invalidates the digital token transacted and returns to the Payee a new digital token for the same value.
Removing from circulation
(i) Reserve account is debited by the central bank.
(ii) Notes and coins are destroyed or stored for re-issuance when deposited into reserve accounts.
(iii)Digital tokens are marked as invalid in the central bank's TDNSYS system when deposited by member banks in their reserve accounts.
Trust between parties
(i) This is not an issue.
(ii) A minimum amount of trust must exist between the parties involved in the transaction.
(iii)Sane as cash.
Security
(i) The central bank's IT system security.
(ii) It is the responsibility of the Owner.
(iii)Same as cash. One specific aspect is that when the digital token is printed, the Owner must make sure nobody in the vicinity can photograph the printout.

Based on this comparison we can identify the token-based CBDC functional requirements. These requirements reflect the similarity with the existing forms of base money. We call this CBDC Transferable Digital Notes or TDN. The TDN signature is the digital token associated with the TDN value. TDN and TDN Signature terms can be used interchangeably. The system processing the TDNs is called TDNSYS.

Token-based CBDC functional requirements

1. The central bank creates unique, impossible-to-guess digital tokens.
2. Each digital token is associated with a value denominated in the country's legal tender. This association is called a Transferable Digital Note or TDN.
3. The value associated with a TDN can be any number units or fractions of the country's legal tender.
4. The retail banks can request TDNs from the central bank against their reserve accounts and make them available to the general public.
5. The central bank records all the information of TDNs in a registry.
6. Each entry in the repository contains at least the TDN signature (the large impossible-to-guess number), the value associated with the TDN, and the status of the TDN (valid - active or canceled - invalid), creation date, cancellation date, and any other information considered relevant.
7. The central bank may require information about the owner of a TDN to be recorded in the repository to prevent fraud and money laundering.
8. The entity in the possession of the TDN is responsible for making sure there are no copies of the TDN in someone else’s possession. This is similar to paper notes ownership security.
9. If more than one entity is in the possession of the same TDN it is said that the TDN is compromised or that the ownership of the TDN is ambiguous. In this situation, the first entity requesting the ownership will have full control of the TDN.
10. The TDNs can be transferred in the same ways as any digital data. TDNs can be printed as a barcode and the printout physically transferred.
11. Immediately after the transfer, the new owner may request ownership of the TDN from the central bank's TDNSYS. By requesting the ownership the new owner assures that he/she is in the only entity with access to the TDN and double-spending is impossible.
12. Upon request of ownership of a TDN, TDNSYS will invalidate it, create a new TDN associated with the same value and release the TDN to the requester.
13. The transfer of a TDN is anonymous. To prevent fraud, in some situations, the central bank may request identification from the new owner before the ownership transfer.

Based on this analysis we can identify the Transferable Digital Notes (TDN) payment system, specifications.

Conclusion

All findings in this paper were very easy to identify because they are obvious when comparing the behavior of a digital token with the behavior of cash or accounts. The simplest way to conduct transactions with a TDN is to transfer it printed as a bar code. This is exactly like conducting transactions with paper money.

Trust must exist between the parties involved in a TDN or cash transaction. The only difference is that the New Owner has to prevent the previous owner from spending the TDN again by requesting Reissuance from TDNSYS. This operation is also called Ownership Request.

It is very easy to design and implement a prototype TDNSYS and execute different scenarios. It is desirable to design a logical-time controlled, event-driven simulation, and execute batches of transactions for different use cases. This type of simulation generates a vast amount of data. To analyze this data it is necessary to design analytical tools or it may be possible to tailor of the shelf packages.

TDN transactions are anonymous but the TDNSYS specifications include provisions for signed TDNs (see specification #3. There are advantages of using TDNs protected with a PKI Keys Pair. Because all the TDNs protected and all other TDNs involved in the same transactions can be retrieved along with the Digital Signatures if they are set. This allows the creation of a report similar to a bank or credit card statement.see Signed TDNs

TDN specifications cover only the bases of CBDC. This simplicity does not restrict but encourages the design and implementation of payment systems based on TDNs. If more than one country implements TDN based CBDC exchanges can be designed for converting TDNs of different denominations.

Based on this analysis it can be concluded that from the technical aspect, using TDNs as currency is a viable solution to CBDC deployment.

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