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

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. This paper by Ignacio Mas considers 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.