We are heading for a cashless world. At some point, we will say goodbye to all those pieces of paper and polymer and switch to an electronic alternative. The only problem with these statements is that people have been saying them since the late 1960s.
It’s now 60 years later, and cash is still here. I predict that it will be around for another generation. But, I also believe that electronic payments using mobile devices is the more efficient, inevitable future.
So, how do we ease the transition from nineteenth-century cash to twenty-first-century smart-phone crypto over the next decades? The answer is the smart banknote.
What is a smart banknote?
Basically, a smart banknote is a traditional banknote on a paper or polymer substrate that has the added ability to communicate with an electronic network.
Like current banknotes, a smart banknote can work completely offline, without a network or electricity. It is denominated and has all the physical properties of a traditional banknote in size, feel, appearance, etc.
But, this hybrid banknote also bears a chip and electronic ink. These attributes allow the smart banknote to interface with an electronic network and record the value of the note (the result of the electronic transaction) on its surface, making this information visible offline.
Imagine a $10 bill bearing a chip and an icon that displays whether the bill still retains its value or that the value was transferred out of it on a network. This smart $10 bill would circulate hand to hand like current $10s, with everyone knowing whether it had value or not.
But a user could connect it to a payment network to make electronic payments or transfers. And, an “empty” $10 bill could be recharged via a network and then go on to circulate offline.
Smart banknotes would gradually replace current banknotes and exist alongside current smart-phone technology until no longer needed. Again, the smart banknote is a transitional payment device.
So why do we need a smart banknote?
As stated above, a smart banknote is needed to bridge the gap between a traditional banknote and a purely electronic currency. This is especially important with the roll-out of central bank digital currencies (CBDCs) and the advantages they bring in efficiency and policy making.
A smart banknote can overcome the obstacles to implementing a CBDC by combining the advantages of cash and crypto. Here’s how:
The unbanked. There are many people who do not have the bank accounts that would be needed to access an electronic network and use crypto/CBDC on a regular basis. They depend on cash for their daily transactions but could periodically use a smart banknote’s electronic capabilities perhaps at a retailer or public kiosk.
No internet access. There are places and times when there is no internet access, or even electricity, rendering electronic money and payment methods useless. Designed to work totally offline, a smart banknote would fill the gap.
The cash industry. There are many industries and people employed in the manufacture, transportation, safekeeping, and cycling of cash. Making this sector obsolete would have a great economic impact and cause significant pushback against crypto. Smart banknote production and issuance would maintain this industry as it adapts to cashless payments.
Popular payment practices. People are used to cash, and many people prefer using cash over existing electronic payment methods. This may be a generational phenomenon. But everyone knows how to budget with cash and how to keep it safe. No private keys are needed.
Cash usage is increasing. Despite the predictions of the imminent death of cash, its usage is actually increasing. The possession of physical banknotes is seen as a measure of security during times of economic uncertainty.
The idea of smart banknotes isn’t new
The concept of a smart banknote is not all that revolutionary. The idea of a hybrid banknote has actually been around almost as long as Bitcoin. By 2010, thinking about putting electronic features on banknotes was already underway along with the idea of using such a note to act as a transition between traditional banknotes and cryptocurrencies.
Such a perspective was developed in work performed for the Bill & Melinda Gates Foundation by Ignacio Mas and Consult Hyperion, represented by Paul Makin and Andrew Whitcombe, who are credited with creating the term “smart banknote.”
Since 2010, various companies have experimented with the smart banknote concept. However, these were actually attempts at transferable paper wallets of bitcoin (BTC) rather than a hybrid traditional currency denominated in dollars, euros, or pounds.
I feel that now is the time to take the radical ideas of a decade ago — like bitcoin — and to develop a smart banknote that can take us into the cashless future.