#SmartBanknotes: A Proposal for Bank Notes that Bridge the Gap Between Physical and #ElectronicMoney

8/2/2019 #SmartBanknotes: A Proposal for Bank Notes that Bridge the Gap Between Physical and #ElectronicMoney

1/5Electronic copy available at: http://ssrn.com/abstract=1687368Electronic copy available at: http://ssrn.com/abstract=1687368Electronic copy available at: http://ssrn.com/abstract=1687368Electronic copy available at: http://ssrn.com/abstract=1687368Electronic copy available at: http://ssrn.com/abstract=1687368

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Smart Banknotes

A proposal for bank notes that bridge the gap between physical and

electronic money.

By Ignacio Mas

text:

Cash imposes large costs on society, yet it is hard to envision

moving to an entirely cashless society. If we cannot get rid of cash,

then we need to change it in a way that makes it less costly for all to

handle.

A new kind of smart banknote could be created that can be

activated or deactivated electronically; you would transfer value

between a banknote and your bank account, right from your mobile

handset. Deactivated cash could be transported cheaply; stores could

make their accumulated cash balances vanish at will by simply

deactivating it; and bank customers would be able to convert their bank

account into cash or vice versa anywhere, anytime.

With these new smart banknotes, mobile banking could flourish in

developing countries without requiring complex and costly cash agent

networks. In this fashion, the mobile handset can truly integrate the

capabilities of an Internet banking terminal and an ATM.

A large portion of the population depends on cash as a form of

saving and as a means of exchange, but there are three big problems

with it:


2/5Electronic copy available at: http://ssrn.com/abstract=1687368Electronic copy available at: http://ssrn.com/abstract=1687368Electronic copy available at: http://ssrn.com/abstract=1687368Electronic copy available at: http://ssrn.com/abstract=1687368Electronic copy available at: http://ssrn.com/abstract=1687368

Cash is not easily used for remote payments, such as sending

money to your college kid in another state.

It is difficult for people to hang on to small cash balances

beyond pure pocket money. As a store of value, physical cash creates

problems of self-discipline and security.

It is unsafe to transport and travel with cash.

Cash handling also imposes a large cost on banks, and this high

cost critically constrains the ability of banks to increase the

capillarity of their distribution networks (through branches or ATMs).

Banks transfer the cost onto customers by requiring them to travel to

more distant cash aggregation centers. This may not be much of a

problem in developed countries where banks have deployed a dense

network of branches and ATMs to cater to their customers cash needs,

but this infrastructure is largely lacking in slums and rural areas in

developing countries.

Despite these problems, cash has benefits that electronic money

cannot deliver: It is universally accepted. Transactions are quick. The

bills are of fixed denomination (unlike payment cards, which are linked

to variable account values), making them very useful for limiting the

amount of money you risk spending (or losing) when you take a trip to

the casino, for instance, or out on a late-night jog. And of course

cash can be used anonymously, while electronic payments always leave a

trail.

The advantages of electronic money are virtually the flip side of

the advantages of cash: E-money consists of storable and readable

information, and its transactions are transparent and traceable. While

electronic money will inexorably displace cash, electronic money and

cash will need to coexist at least into the medium term. Thats


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particularly true in developing countries, where there is a tiny

installed base of acceptance devices.

If we cant get rid of cash, then we need to change it in a way

that makes it less costly for all. It is figuring out the interface

between these two forms of moneycashing into and cashing out of

electronic moneythat will be the key.

Bridging the Gap between Cash and Cashless Systems

Imagine a new generation of bills embedded with a radio-enabled

chip that could communicate at close range with a mobile phone or a

point-of-sale (POS) device. The chip could essentially turn the bill

on or off, and that bills state would somehow be visible to the

user (e.g., its color might disappear when the bill is off and

reappear in full splendor when it is on).

Cash could then be transported at low cost in its deactivated

form. In order to be used, bills wouldneed to be activated by

electronically transferring value to them from a bank account. Users

could do that by passing their bills over their radio-equipped mobile

phone or at an enabled POS terminal, and agreeing to a transfer of

value from their bank account to the bill. Like any debit transaction,

this would be authorized and recorded in real time by the users bank.

The process could also be reversed: Bills could be deactivated by

having their value transferred back (i.e., credited) to their bank

account. There would be a security protocol ensuring that, when one

source of value is credited (e.g., activating my cash bill), another

one must be debited (e.g., my bank account).

In this fashion, the mobile phone truly becomes an ATM. People

would be able to instantly deposit money into their accounts and create

immediate liquidity from their bank accounts, without requiring any


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banking infrastructure in their neighborhood. Bills would be like

prepaid cards that have value loaded and expended, but unlike prepaid

cards they would remain of a fixed denomination. In their active state,

they would be tradable without requiring a card reader. In their

deactivated state, they could be distributed very cheaply, and stacks

of deactivated bills could be purchased for pennies at the supermarket.

With these smart banknotes, monetary authorities could reduce

the security costs of producing and distributing cash because it could

be handled in its deactivated form through normal distribution

channels. The chip would offer a higher level of security on the bills,

as it would be able to hold an encrypted unique serial number. The

validity of bills could be established unequivocally in real time.

Implementing this scheme would require central banks to issue

these new smart banknotes. There is a long tradition of embedding new

technology into bills, such as anti-counterfeiting holograms, so this

scheme would fit in the natural evolution of physical currency. The

issuance of new bills can also be gradual; new and old bills could

coexist.

Security standards will be needed to ensure that activation or

deactivation of the smart banknotes would be through authorized devices

and authorized accounts. In addition, the scheme would require a

deployed base of cash-activating devices (mobile phones or POS

terminals), with real-time connectivity to banks for banking

transactions, RFID capabilities to interact with cash bills, and loaded

with the bill management application.

So far, all attempts to eradicate cash by replacing it with

electronic forms of money have failed. People dont want to entirely

let go of the physicality of cash. Moving toward the much-vaunted

cashless societyis often invoked as a social-engineering task. While


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technology can be an instrument to change society, it seems

unreasonable to change society so that we can adopt technology. So

lets change our banknotes instead.

In fact, this scheme is in the historical tradition of issuing

pieces of metal as coins by the act of stamping a wedge (Latin:cuneus,

from which the word coin is derived) on them. The wedge activated

them in the sense of certifying their value.

Ignacio Mas is deputy director in the Financial Services for the Poor

team at the Bill & Melinda Gates Foundation, www.gatesfoundation.org.

The author would like to thank Paul Makin and Andrew Whitcombe of

Consult Hyperion for their work in assessing the technical feasibility

of the smart banknotes described here. They in fact came up with the

term smart banknote.

#SmartBanknotes: A Proposal for Bank Notes that Bridge the Gap Between Physical and #ElectronicMoney

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Transcript of #SmartBanknotes: A Proposal for Bank Notes that Bridge the Gap Between Physical and #ElectronicMoney