Basic principles of operation of CBDC cryptobanknotes – part 2

Payment expert and researcher, Andrei Lipkin, the originator of the term ‘Cryptobanknotes’, reveals more on the basic operation principles of cryptobanknotes and the anonymity and autonomy these notes entail.

In Part 1 Andrei explained that modernise our monetary systems and digitalise money (cash and non-cash versions) by simply adapting digital CBDCs to serve as a ‘third (digital) form of central bank money’ will not achieve the desired result. Current CBDCs experiments reveal that current CBDCs lack of anonymity and long-term or complete autonomy, they cannot scale, and the existing fiat money will negate any expected global benefits of digital CBDCs that can be achieved using smart contracts.

To ‘enable’ the global benefits of blockchain technology for the monetary system as a whole and eliminate the disadvantages of digital money, Andrei proposes the creation of the tandem ‘Digital CBDC + CBDC Cash’ that will allow central banks to achieve a balance between blockchain-based forms of money.

But let’s see what CBDC cryptobanknotes are.

CBDC cryptobanknotes (CBDC Cash) are produced using banknote production technologies and Blockchain digital technology.

CBDC cryptobanknotes have their own electronic wallet and interact with it using software, thanks to printed machine-readable codes containing public and private keys.

It is accessible, low-cost central bank cash, comparable to existing banknotes not only in production cost and ease of use but also in scalability of production.

Just as banknotes were originally backed by gold (Gold Standard), CBDC cryptobanknotes are fully backed by digital CBDCs, which are stored in each cryptobanknote's own electronic wallet, in an amount equal to the face value of that cryptobanknote (Blockchain Standard).

Depending on whether there is access to own electronic wallet, there are two types of cryptobanknotes:

1. CryptoNOTE is a type of cryptobanknote that has full access to its own electronic wallet. CryptoNOTEs are fully functional and can be used for both CBDC and any other digital money. CryptoNOTEs are used to obtain the highest denomination cash.

2. CryptoBILL is a type of cryptobanknote that does not have full access to its own electronic wallet. CryptoBILLs do not have full functionality, however, they have the longest lifespan and can be used as small denomination central bank cash.

There is no completely anonymous cryptocurrency. This is not due to the level of encryption or the anonymity of cryptocurrency transactions. This is due to the fact that when using any cryptocurrency, the user always leaves traces outside the cryptocurrency ecosystem.

Electronic wallets that participate in transactions have their own public address, which is not directly related to the person’s name. However, by tracking the public addresses of electronic wallets involved in a particular transaction, it is always possible to determine the owner of the electronic wallet at the very moment when digital money is withdrawn into the physical world.

Cryptobanknotes provide complete anonymity for financial transactions in CBDC/cryptocurrency, the same anonymity that traditional banknotes now have. Moreover, cryptobanknotes turn the use of any, even the most open digital currency, into a completely anonymous process.

When paying in cash with cryptobanknotes, there is no trace left on the Internet. An amount of CBDC/cryptocurrency equal to the denomination of the cryptobanknote always remains untouched in the cryptobanknote's electronic wallet. Access to the electronic wallet is not provided. No entries are made to the digital currency blockchain. Payment is made only with cryptobanknotes. A cryptobanknote passes from one hand to another. And this process can continue indefinitely until the cryptobanknote becomes unusable and is withdrawn from circulation, or until a digital payment occurs from the electronic wallet of the cryptobanknote.

Only at the moment of making a digital payment do electronic traces appear on the Internet. The rest of the life of a cryptobanknote is completely anonymous, just like the life of a regular banknote. Thanks to this, cryptobanknotes provide resistance to censorship of payments of any digital currency when paid in cash.

There are standalone digital CBDC solutions that allow payments to be made without access to the CBDC payment network blockchain. To operate such solutions, it is necessary to use payment terminals, smartphones, gadgets, and plastic cards.

In the event of a prolonged absence of electricity, when the banking network is de-energised and the batteries of smartphones, payment terminals and gadgets are completely discharged, a digital CBDC with such a battery-powered solution will completely cease to function. In this case, the operating time of the CBDC payment network will be equal to the battery charge retention time of the autonomous devices that are used to make payments.

Cryptobanknotes are the only possible way to create infinitely autonomous cash for any digital money:

1) Cryptobanknotes do not need access to the digital money blockchain to make sure that digital money is in an electronic wallet.

2) Cryptobanknotes do not require banking equipment, smartphones, gadgets, internet, or electricity to pay in cash.

3) Cryptobanknotes have the technological security required for cash:

• The technological process for the production of cryptobanknotes does not use electronic components, microcircuits, etc., which indicates a high degree of reliability of cryptobanknotes that do not depend on defects and breakdowns of the electronic element base;
• An important nuance is the fact that not every central bank, when producing its own cash, will trust chips produced in another country, for example, in China.
• Thanks to well-developed banknote production technologies, cryptobanknotes are sufficiently protected from any external influences:

1. From moisture and aggressive environments;
2. From exposure to electromagnetic pulses and fields;
3. From exposure to various types of radiation;
4. From mechanical influences and possible overloads.

4) To use cryptobanknotes, only visual control is sufficient:

The authenticity of each cryptobanknote is confirmed visually, thanks to the usual variety of printing degrees of protection.

The presence of digital money in the electronic wallet of each cryptobanknote is also confirmed visually, thanks to the integrity of the protection against unauthorised reading of the private key.

It is this infinite autonomy that allows cryptobanknotes to become a physical store of value for any digital money.

The tandem ‘Digital CBDC + CBDC Cash’ will not change the financial policy of the state but will create all the prerequisites for the Digital Evolution of the State Monetary System.

About Andrei Lipkin

Andrei Lipkin is a resident of Minsk, Belarus. After successfully completing his studies at BSUIR, he moved into banknote and security document design at the State Special Printing House of Belarus. Lipkin introduced numerous innovations into the documents issued by the various Ministries of the Republic of Belarus and developed innovative, state-of-the-art security features and designs. After over 20 years in government employment, Lipkin left to work on his own.

During independent work, Lipkin developed proven methods to adapt familiar financial documents to the digital realm.