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

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

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Smart Banknotes: A Proposal for Bank Notes that Bridge the Gap Between Physical and Electronic Money

Ignacio Mas

The Futurist, Vol. 5, No. 1, January-February 2011

Abstract:
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. We consider the possibility of creating a new kind of banknote that can be activated or deactivated electronically by transferring value between a banknote and your bank account, right from your mobile handset. Cash could be transported cheaply in its deactivated form using normal retail distribution channels; 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. Mobile banking could flourish in developing countries without requiring the development of complex, costly cash agent networks. In this fashion, the mobile handset can truly integrate the capabilities of an internet banking terminal and an ATM.

Number of Pages in PDF File: 5

Keywords: electronic money, digital money, branchless banking, mobile banking
Smart Banknotes: A Proposal for Bank Notes that Bridge the Gap Between Physical and Electronic Money

Ignacio Mas

The Futurist, Vol. 5, No. 1, January-February 2011

Abstract:
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. We consider the possibility of creating a new kind of banknote that can be activated or deactivated electronically by transferring value between a banknote and your bank account, right from your mobile handset. Cash could be transported cheaply in its deactivated form using normal retail distribution channels; 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. Mobile banking could flourish in developing countries without requiring the development of complex, costly cash agent networks. In this fashion, the mobile handset can truly integrate the capabilities of an internet banking terminal and an ATM.

Number of Pages in PDF File: 5

Keywords: electronic money, digital money, branchless banking, mobile banking

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Published by: Alexander Ainslie (AAinslie) on Mar 07, 2012
Copyright:Attribution Non-commercial

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Electronic copy available at: http://ssrn.com/abstract=1687368
Electronic copy available at: http://ssrn.com/abstract=1687368
Electronic copy available at: http://ssrn.com/abstract=1687368
Electronic copy available at: http://ssrn.com/abstract=1687368
Electronic copy available at: http://ssrn.com/abstract=1687368
 1
guest FUTURIST Trend, economicsMONEYSmart BanknotesA proposal for bank notes that bridge the gap between physical andelectronic money.By Ignacio Mastext:Cash imposes large costs on society, yet it is hard to envisionmoving 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 tohandle.A new kind of
“smart
banknote
could be created that can beactivated or deactivated electronically; you would transfer valuebetween a banknote and your bank account, right from your mobilehandset. Deactivated cash could be transported cheaply; stores couldmake their accumulated cash balances vanish at will by simplydeactivating it; and bank customers would be able to convert their bankaccount into cash or vice versa anywhere, anytime.With these new smart banknotes, mobile banking could flourish indeveloping countries without requiring complex and costly cash agentnetworks. In this fashion, the mobile handset can truly integrate thecapabilities of an Internet banking terminal and an ATM.A large portion of the population depends on cash as a form ofsaving and as a means of exchange, but there are three big problemswith it:
 
Electronic copy available at: http://ssrn.com/abstract=1687368
Electronic copy available at: http://ssrn.com/abstract=1687368
Electronic copy available at: http://ssrn.com/abstract=1687368
Electronic copy available at: http://ssrn.com/abstract=1687368
Electronic copy available at: http://ssrn.com/abstract=1687368
 2
Cash is not easily used for remote payments, such as sendingmoney to your college kid in another state.
It is difficult for people to hang on to small cash balancesbeyond pure pocket money. As a store of value, physical cash createsproblems 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 highcost critically constrains the ability of banks to increase thecapillarity of their distribution networks (through branches or ATMs).Banks transfer the cost onto customers by requiring them to travel tomore distant cash aggregation centers. This may not be much of aproblem 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 indeveloping countries.Despite these problems, cash has benefits that electronic moneycannot deliver: It is universally accepted. Transactions are quick. Thebills are of fixed denomination (unlike payment cards, which are linkedto variable account values), making them very useful for limiting theamount of money you risk spending (or losing) when you take a trip tothe casino, for instance, or out on a late-night jog. And of coursecash can be used anonymously, while electronic payments always leave atrail.The advantages of electronic money are virtually the flip side ofthe advantages of cash: E-money consists of storable and readableinformation, and its transactions are transparent and traceable. Whileelectronic money will inexorably displace cash, electronic money and
cash will need to coexist at least into the medium term. That’s
 
 3
particularly true in developing countries, where there is a tinyinstalled base of acceptance devices.If
we can’t 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 interfacebetween these two forms of money
 — 
cashing into and cashing out ofelectronic money
 — 
that will be the key.Bridging the Gap between Cash and Cashless SystemsImagine a new generation of bills embedded with a radio-enabledchip that could communicate at close range with a mobile phone or apoint-of-sale (POS) device. The chip could essentially turn the bill
“on” or “off,” and that
bill
’s state
would somehow be visible to theuser (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 deactivatedform. In order to be used, bills would
need to be “activated” by
electronically transferring value to them from a bank account. Userscould do that by passing their bills over their radio-equipped mobilephone or at an enabled POS terminal, and agreeing to a transfer ofvalue from their bank account to the bill. Like any debit transaction,
this would be authorized and recorded in real time by the user’s bank.
The process could also be reversed: Bills could be deactivated byhaving their value transferred back (i.e., credited) to their bankaccount. There would be a security protocol ensuring that, when onesource of value is credited (e.g., activating my cash bill), anotherone must be debited (e.g., my bank account).In this fashion, the mobile phone truly becomes an ATM. Peoplewould be able to instantly deposit money into their accounts and createimmediate liquidity from their bank accounts, without requiring any

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