Though Bitcoin finds itself ahead of the financial innovations of our times, it is not part of the cashless society agenda. Correspondingly, its purpose is not to replace the concept of paper money or the physicality assets, but to change their underlying backing. Instead of having paper money that’s backed by a nation’s debt, in the future we might make day to day purchases with pieces of paper that can be redeemed for BTC at the nearest exchange.
Turning bitcoin into a bearer asset is essential for the expansion of the currency’s use as medium of exchange and unit of account. By virtue of cryptographic innovations and lessons that we have learned from centuries of issuing banknotes, we can successfully make bitcoins more liquid, more private, and less reliant on an internet connection or network interactions.
Cash is the most private and fungible form of money that we have. It can change owners without leaving any kind of trace and it’s the ultimate instrument for preserving the economic rights of the individual. While transacting on Bitcoin’s base layer leaves permanent records and sending Lightning transactions generates cryptographic proofs that get verified by participants routing transactions, cash leaves no permanent trace and can’t be identified.
But in order for bitcoin to work as paper money, it needs to fulfil these criteria:
- the bill must contain distinct elements that make it unfalsifiable, while counterfeit money should easily get detected;
- the bill shouldn’t contain the private key like in the case of paper wallets. Instead, it should have a distinct cryptographic proof (such as an Open Time Stamp) to prove the issuance by a certain entity (exchange, government, or any other issuer). Based on this unique identifier, the issuing entity must enable bearers to redeem the bitcoins;
- the bill must be provably backed by an equivalent amount of bitcoin. One bill equals one distinct UTXO. To guarantee that the corresponding amount was not redeemed at a bank/exchange, a scannable public key should get printed on the piece of paper;
- in the event that the bill gets irreversibly lost or destroyed, it should be easily replaceable by the issuer. This can be established by setting a custom to replace the bills every 5-10 years – everyone should have enough time to trade their banknotes, and after an arbitrary deadline the old paper money should get replaced;
- the verification should include the entire bitcoin reserves which back the paper notes. This would make sure that there is no arbitrary printing outside the existence of reserves.
Historically and traditionally, paper money requires an issuer that can be held accountable. Though bitcoin is a permissionless and decentralized currency which can be held for an unlimited amount of time, the transition to paper money can’t be practical without breaking some of these rules. Just like sidechains and second layers, there will be trade-offs. In the case of paper money, users will appreciate the untraceable privacy and the ability to make bitcoin payments without using the internet.
Correspondingly, bitcoin paper money can get issued by exchanges, banks, or governments. The subsequent trading should be frictionless, instant and voluntary. And just like in the case of Liquid peg-outs or Tether withdrawals, the party which redeems the bitcoins must undergo a more thorough identity verification process (and the redeemers will most likely be businesses, organizations, and other legal entities that want to hold real bitcoins instead).
When merchants receive a bitcoin cash (pun intended) payment, they will make use of a free open source application which verifies the UTXO, the greater funds which backs the banknotes, the unique serial number of the bill, and the unique design elements which guarantee authenticity.
The verification shouldn’t take longer than a quick scan – and the message on the screen should describe the status of the verification. Certainly, it’s not as frictionless as cash and still requires an internet connection on the side of the merchant (for further verification, the payer should also run the same software to avoid fraud attempts). But it’s still a great way in which bitcoin can be used under the shape of paper money.
Previous proposals for bitcoin paper money
Other similar proposals go back to August 2010, when Bitcoin developer Gavin Andresen described how “printing bitcoins” would work (though he described the creation of paper wallets).
In 2013, Sergio Damian Lerner (who later went on to design the RSK sidechain) described a more advanced and technical system which he called BitBanknotes. And the proposal for bitcoin cash (pun intended) seems to be recurrent during bull markets, as Andreas Antonopoulos tweeted a picture of the $5 bill with a “5 mBTC tag” when the price of bitcoin hit $5000 in October 2017.
More recently, Charlie Lee suggested that El Salvador should print paper currency backed by corresponding bitcoin amounts. Though newer bitcoiners acted on gut instinct and vehemently rejected the idea, applied cryptography expert and early Bitcoin Core developer Peter Todd confirmed that the idea is possible by virtue of cryptographic proofs (having worked on Open Timetamps and Proofmarshall, he is definitely one of the most knowledgeable people on the matter).
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