As central bank digital currencies (CBDC) become reality and the use of cryptocurrencies for payments becomes more mainstream, how do we make sure these new digital monies are available to everyone, everywhere, at all times? To date, the only payment technology that can do this is cash.
The pure physicality of banknotes presents problems in the digital age. International remittances are slow, holding banknotes can be costly and problematic, and cash can impede central bank monetary policy (such as by breaking the zero lower bound in interest rates).
Franklin Noll, PhD, is a recognized authority on the history of money, including banknotes and cryptocurrency. He has extensively written and spoken upon these topics, and he is the president of Noll Historical Consulting.
It seems only logical that an ideal payment instrument would combine the advantages of banknotes and digital currencies. A hybrid banknote would use a universally accepted and robust payment technology – cash – to deliver the cutting-edge benefits of digital money. A hybrid banknote – for instance, a bill with a chip embedded – could routinely function as a banknote does currently, but have the ability to access an electronic network to transfer value.
Fulfill pressing needs
A hybrid banknote would act as a transitional device between cash and digital monies such as CBDCs. It would gradually replace current banknotes and exist alongside current smartphone technology until no longer needed.
For people who want or need to use cash because they just prefer banknotes or they do not have a bank account, a hybrid banknote will allow them to continue using cash. It will also give users the option to use a hybrid banknote’s electronic capabilities. At the same time, a hybrid banknote will fulfill the promise made by central banks that cash will exist alongside CBDCs.
Further, the continued use of banknotes will prevent the disintermediation of the cash industry. And hybrid banknotes will facilitate the application of new central bank policies that would require money with smart contracts.
Hybrid banknotes would also provide for offline, anonymous transactions. However, when connected to an electronic network, anonymity would be determined by the design of the digital side of the hybrid banknote.
Hybrid banknotes types
There are currently three types of hybrid banknotes being worked on by developers, including myself and designer Andrei Lipkin: smart banknotes, cryptoNotes and crypto bills.
A smart banknote is a traditional banknote that talks to an electronic network via one or more RFID chips. Using a smartphone, a point of sale device, or other reader, its value can be moved back and forth on an electronic network. The status of the smart banknote, whether it contains its face value or not is indicated by an icon formed by electronic ink on the note.
Imagine a $10 US smart banknote. It would circulate hand to hand, being used in transactions or vending machines. No access to an electronic network is necessary. Everyone would know this $10 bill contains its value because the value icon is visible on the note.
Perhaps the smart banknote user then needs to transfer the $10 to their bank account, and so on. The user touches the note to his or her phone and transfers the value over a network. The value icon then disappears, indicating the smart banknote no longer has value.
The user can then turn the smart $10 bill into a bank that will recharge the note and reintroduce it into circulation. Or, users can recharge it themselves by transferring $10 back on to the bill. At this point, the value icon would appear, indicating the smart banknote bears its face value. Then the smart $10 can continue circulating hand to hand.
A cryptonote is a hybrid banknote that bears the public and private keys to access a cryptocurrency account. Cryptonotes can pass hand to hand until a user wants to transfer the value of the note electronically.
A £10 note, for example, would bear all the attributes it now has, but a removable silver foil patch would be added. Underneath would be the private key in QR form. The note would also have a visible QR code that would be the public key. Everyone would know this £10 contains its value because the foil patch is intact, evidence that no one has accessed the private key necessary to transfer its value electronically.
When cryptonote users need to complete an electronic transaction, they scratch off the foil patch to reveal the private key. Then, using their phone, the user scans the QR codes for the public and private keys, accessing the corresponding wallet. The £10 can then be transferred.
Now, with the foil patch and the value removed from the note, the cryptonote can no longer be used. And, because of the physical damage to the note, it cannot be reissued. The lost foil patch also makes it evident to everyone that the note no longer has value.
A crypto-bill is a hybrid banknote that bears only the public key of the cryptocurrency holdings of the issuer. The private keys to individual accounts are held by the note issuer. Crypto-bills can pass hand-to-hand until a user wants to transfer the value of the note to an electronic account. The note must then be taken to the issuer or its representative to have the value represented by the note transferred. This action does not involve the actual note but only the cryptocurrency accounts holding the backing value for all crypto-bills. As a result, the note can be reissued repeatedly and can circulate until worn out.
A crypto-bill would look very similar to existing banknotes. However, the note would require a QR code, bearing a public key, but no chips or removable foil patches are needed.
Like a current banknote, the crypto-bill would repeatedly pass hand to hand and be used in transactions or vending machines. No access to an electronic network is necessary. As with current banknotes, there is no need to determine whether the note actually holds value because that is irrelevant. A crypto-bill, like a current dollar, euro or pound, is simply a token for its underlying currency. As a result, users are only concerned with the authenticity of the note as they are with current banknotes.
Transcending the division between banknotes and digital money through a hybrid banknote will bring many advantages to central banks and cryptocurrency advocates. Such banknotes will use a universally accepted and robust payment technology, cash, to deliver the cutting-edge benefits of digital money, passing hand to hand until used to access an electronic network to transfer value.