Tandem «Digital CBDC + CBDC Cash» — the digital evolution of the monetary system – part 1

Payment expert and researcher, Andrei Lipkin, the originator of the term ‘Cryptobanknotes’, reveals everything you need to know about these CBDC-ready notes in terms of benefits, challenges, and innovation.

We live at the intersection of the industrial and digital eras. Everything around us is rapidly transforming, acquiring digital features. Money was no exception, and, thanks to digital technologies, a blockchain-based form of money appeared: cryptocurrencies/stablecoins.

Realising that without a digital payment network, it will be impossible to exist in a digital future, central banks have begun developing their own digital CBDCs. And, indeed, in the future, programmable digital CBDCs will be an excellent replacement for the cashless payment system. However, this is absolutely not enough for a digital upgrade of the existing 50-year-old fiat monetary system as a whole.

Central bank money has a dual nature and consists of two forms: non-cash and cash.

The dual nature of money in the industrial era allowed the tandem of ‘Non-cash and Cash’, like Yin and Yang, to become a single whole. What was impossible with one form of money was easily solved with another form of money. This allowed them to successfully complement each other and become the basis for the fiat monetary system.

Central banks have a responsibility to take this nuance into account and digitally modernise both forms of money simultaneously.

Simply adapting digital CBDCs to serve as a ‘third (digital) form of central bank money’ will not achieve the desired result:

1. The advantages of digital CBDCs (reducing the cost and increasing the speed of digital transactions, accessibility of international payments, etc.) will only work within the CBDC payment network.

2. Digital CBDCs will suffer from numerous digital money ‘diseases’:

• Lack of anonymity;

• Lack of long-term or complete autonomy;

• Insufficient scalability, etc.

3. Existing fiat money will negate any expected global benefits of digital CBDCs that can be achieved using smart contracts:

• Regulation of interest rates below zero;

• Automatic maintenance of a given level of deflation/inflation of the national currency, etc.

To ‘enable’ the global benefits of blockchain technology for the monetary system as a whole and eliminate the disadvantages of digital money, it is necessary to recall the dual nature of money and link blockchain-based central bank digital money (digital CBDC) and blockchain-based central bank cash (CBDC Cash).

The creation of the tandem ‘Digital CBDC + CBDC Cash’ will allow central banks to achieve a balance between blockchain-based forms of money. The incredible symbiosis of digital and cash forms of blockchain-based money will allow them to successfully replace outdated fiat money. Only thanks to this will the digital Evolution of the Monetary System occur.

A hybrid banknote is an ideal payment instrument for a digital monetary system that combines the advantages of digital money and banknotes. The hybrid note uses established and trusted cash payment technology to provide the cutting-edge benefits of digital money. A hybrid note functions like a banknote but has the ability to access a digital payment network to transfer value. A hybrid banknote will combine the best of both worlds, serving as cash and enabling digital use. Hybrid banknotes will gradually replace existing banknotes and will co-exist with modern digital payment networks.

Hybrid banknotes are divided into two types:

1. Smart banknotes are hybrid banknotes that can carry out a digital transaction by interacting with the payment network using RFID chips.

Smart banknotes can display the presence/absence of digital money in their own electronic wallet on a small ultra-flexible screen embedded in a polymer base, or on a full-length ultra-flexible screen that will be used instead of the polymer base of a smart banknote, or using a specific image formed by electronic ink or special paint on a smart banknote.

Today, smart banknotes are still on the technological horison. Their full implementation will require advances in technologies for the production of substrates and paints, as well as microcircuits and components.

2. Cryptobanknotes are hybrid banknotes that can carry out a digital transaction without directly interacting with the payment network.

Cryptobanknotes use only currently known and widely used banknote production technologies. Cryptobanknotes have their own electronic wallet and interact with it using software, thanks to machine-readable codes printed on the cryptobanknote.

The simplicity and accessibility of cryptobanknote production technologies allow them to become the first generation of hybrid banknotes today.

Cryptobanknotes, thanks to the incredible symbiosis with digital money, will not only solve their pressing problems but will also provide fantastic assistance to the issuer of digital money and the population in the transition to using digital payment networks:

• Increased use of the digital payment network. Cryptobanknotes are a physical store of value for any digital money and are seen as a security measure in times of economic uncertainty.

• Legal tender of the central bank. CBDC cryptobanknotes are central bank legal tender, a universal means of repaying debts.

• Seamless access to the CBDC payment network. CBDC cryptobanknotes fully replicate the openness of central bank cash and guarantee seamless access to the CBDC payment network.

• Access to financial services. Cryptobanknotes provide financial inclusion to a large number of people who, for various reasons, are unbanked, distrustful of digital financial technology, or dependent on cash for daily payments, but can periodically make digital payments using cryptobanknotes.

• Implementation of CBDC. Electronic transactions using CBDC cryptobanknotes will make digital payments more convenient for the general public and encourage the adoption of the CBDC payment network.

• Psychological compatibility. Cryptobanknotes ensure psychological compatibility and adaptation of the population between innovative digital financial technologies and centuries-old traditional banknotes.

• Popularisation of the digital payment network. Cryptobanknotes leverage the popularity of cash as a generational phenomenon to popularise the digital payment network.

• Expansion of the digital payment network. Cryptobanknotes will not only significantly increase the number of new users of the digital payment network but will also expand the geography of its use.

• Ensuring the full operation of the payment network. Cryptobanknotes ensure full circulation of the digital payment network at anytime and anywhere, online and offline, including any type of digital transactions, as well as any type of cash payments.

• Using a payment network without Internet access. Cryptobanknotes will ensure complete autonomy of the digital payment network when paying in cash.

• Use of the payment network during natural disasters. Cryptobanknotes will ensure the functioning of the digital payment network during any natural or man-made disasters, pandemics, during military operations (even in the case of the use of electromagnetic weapons), and despite the malicious actions of hackers.

• Maintaining the operation of the CBDC payment network. CBDC cryptobanknotes will keep the CBDC payment network running in cash mode indefinitely, even if the central bank's CBDC servers are destroyed.

• Anonymity of payments. Cryptobanknotes will ensure complete anonymity of payments when paying in cash.

• Censorship resistance. Cryptobanknotes will ensure payment resistance to censorship when paying in cash.

• Implementation of central bank policies. CBDC cryptobanknotes will enable new central bank policies, such as breaking zero interest rates, automatically maintaining a given level of deflation/inflation of the national currency or other innovative policies that will require smart contracts.

• Protecting central bank cash. CBDC cryptobanknotes are an evolution of the security of central bank cash. CBDC cryptobanknotes successfully solve centuries-old problems and risks associated with the use of cash:

1. Counterfeiting;
2. Theft;
3. Robbery;
4. Capture by the enemy;
5. Money laundering, etc.

Thanks to instant verification of legitimacy, it will be possible to cancel or invalidate CBDC cryptobanknotes known to be involved in criminal activities.

• Central bank cash management. CBDC cryptobanknotes are a unique statistical tool that allows real-time analysis, planning, optimisation, and management of central bank cash circulation.

• Central bank financial sanctions instrument. CBDC cryptobanknotes are an effective tool for central bank financial sanctions. Thanks to smart contracts, it will be possible to prohibit the use of central bank money (not only digital but also cash) throughout the entire territory of any other state that is subject to financial and economic sanctions.

• A tool for solving environmental problems of digital money. Cryptobanknotes are an effective tool for solving the main environmental problems of digital money, especially cryptocurrencies based on the Proof-of-Work algorithm. Cryptobanknotes are an effective energy-saving tool that will make a significant contribution to reducing global CO₂ emissions and will help the payment network get rid of the huge amount of e-waste that constantly arises from the operation of large quantities of electronic equipment.

• Reducing volatility and increasing the investment attractiveness of cryptocurrencies. A large volume of cash circulation of cryptobanknotes will reduce the volatility of the cryptocurrency. This is due to the increase in the inertia of trading operations carried out simultaneously by a large number of users of cryptobanknotes, which, in turn, will reduce the likelihood of simultaneous sale/purchase of a significant amount of cryptocurrency, which entails changes in the cryptocurrency rate. Cryptobanknotes will make cryptocurrencies more attractive to users and investors.

• Strengthening digital currencies. The fantastic symbiosis of cryptobanknotes with all types of digital money (cryptocurrencies, stablecoins, and CBDCs) will create all the prerequisites for strengthening the role of this digital money as a global reserve currency.

Don’t miss out on our next instalment where Andrei will explain the basic operation principles of cryptobanknotes, will share the types of cryptobanknotes, and reveal how anonymity and autonomy works with cryptobanknotes.

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.