As central bank digital currencies (CBDC) become reality and the use of cryptocurrencies for payments becomes more mainstream, how will these new digital monies be made available to everyone, everywhere, at all times? The physical nature of banknotes presents problems in the digital age. To bridge the physical-digital gap, developers are working to create hybrid banknotes.

Three types of hybrid banknotes

In an article on Yahoo! Finance, Franklin Noll, PhD, recognized authority on the history of money, including banknotes and cryptocurrency, explains that there are currently three types of hybrid banknotes being developed: smart banknotes, cryptoNotes, and crypto-bills.

smart banknote is a traditional banknote that communicates with 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 in electronic ink on the note. To transfer the value of the smart banknote to his bank account, the holder:

  1. Touches the note to his smartphone and transfers the value over a network.
  2. 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 put it back into circulation. Alternatively, the user can recharge it himself by transferring $10 back on to the bill. At this point, the value icon would reappear, indicating the smart banknote bears its face value. 

cryptonote is a hybrid banknote that bears the public and private keys to access a cryptocurrency account. Cryptonotes can pass from 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 the foil patch would be a QR code containing the private key. There would also be a visible QR code representing the public key. If the foil patch is intact, it indicates that no one has accessed the private key, the banknote would retain its monetary value. To pay using a cryptonote, the user:

  1. Scratches off the foil patch to reveal the private key. 
  2. Uses their smartphone to scans the QR codes for both the public and private keys, accessing the corresponding wallet. 
  3. The funds can then be transferred to complete the purchase.

After the foil patch and the value are removed from the note, the cryptonote can no longer be used.  In this case, there is also physical damage (scratching) to the note, so it cannot be reissued. The missing foil patch also makes it clear that the note no longer has value.

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. To transfer the value, the holder:

  1. Takes the crypto-bill to the issuer or its representative to have the value represented on the note transferred. This step does not involve the actual note but only the cryptocurrency accounts that hold the backing value for all crypto-bills.
  2. The note can be reissued repeatedly and can circulate until it wears out.

A crypto-bill would look very similar to existing banknotes but would require a QR code, bearing a public key. No RFID 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; no access to an electronic network is necessary.

Looking to the near future

Bridging the gap between traditional banknotes and crypto currency via the use of hybrid banknotes is a development worth following in the near future. It is yet another example of merging “old school” cash with cutting-edge digital technology. If consumers everywhere could use hybrid banknotes on a daily basis, it could indeed be a game-changer for modern society.

Sources:

Our Bitcoin News

Yahoo! Finance, “Hybrid Banknotes Can Bridge Cash and Crypto,” by Frank Noll, PhD

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