Paper Money

Currency experts say cryptonotes are in our future

A future Federal Reserve note could feature an embedded radio-frequency identification microchip, appearing as a design element similar in appearance to the Liberty torch on the current $10 denomination.

Images courtesy of United States Mint.

A paper by Franklin Noll, president of Noll Historical Consulting and an expert on American monetary history, and Andrei Lipkin, a Belarussian consultant on bank notes and cryptocurrency, who originated the term “cryptobanknotes” in 2017, takes a close look at bank notes and how they relate to cryptocurrencies.

Their conclusion is that the forms of currency are not mutually exclusive. “Smart Banknotes and Cryptobanknotes: Hybrid Banknotes for Central Bank Digital Currencies and Cryptocurrency Payments” is a paper that will be presented at the Seventh Joint Bank of Canada and Payments Canada Symposium on Sept. 16.

The premise is that cash as we know it will not be around forever, but neither will it go away quickly. Bank notes will be around for the foreseeable future, and what is needed is a transitional device to ease the transition from 19th century cash to the digital currency of the future.

The answer is a hybrid bank note — a physical note on paper or polymer that can transfer its value over an electronic network. It would have all the characteristics of a traditional note so it could be used in traditional cash transactions, but when needed, its owner can use the electronic network to transfer the face value off the note.

Two basic forms are envisioned, a smart bank note and a cryptobanknote. Smart notes are further explained here. (I will address cryptonotes next week).

The paper defines a smart bank note as being like a traditional bank note in that it bears intaglio and offset printing on paper or polymer, and like a traditional bank note it can work offline, hand to hand without a network or electricity. The difference from traditional bank notes is that there is the option of using it to transmit its value over an electronic network, letting it act as an electronic payment vehicle.

The smart note would communicate with a network via an embedded radio-frequency identification microchip. When desired, the note’s value can be transferred off the note, for example, by smart phone or point of sale device. Using the same devices, the value of the smart bank note can also be transferred back from a network onto an “empty” or valueless smart banknote. The status of the smart bank note, whether it contains its face value or is empty, is indicated by a tactile and visible icon made of electronic ink.

This icon could involve an existing design feature or a new one integrated into an existing design. An example authors Noll and Lipkin give is a $10 U.S. smart bank note. The chip, or status icon could be the current Statue of Liberty torch on the bill’s face. If the user wants to make an electronic transaction — say, to their bank account, a relative, or at a place that does not accept cash, the note is touched to a phone and the value is transferred over the network. Since the note is now “empty” of value, the Statue of Liberty torch icon disappears, showing visually and by touch that the smart banknote no longer has value.

To put the value back onto the note, the user can turn it in to a bank or merchant that will recharge it and put it back into circulation. Or, the user can personally do the same thing. Either way, the Statue of Liberty torch would reappear, showing that the note has regained its value, and it can continue circulating hand-to-hand.

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