Smart banknotes, dumb banknotes or no banknotes?

My good friend Chris Skinner comments on a report from Switzerland-based SIX on the likely trajectory of digital money. They identify the most likely scenario as “Digital Rules — But Cash Persists in a Fragmented World”, which they describe thus: Digital payments have substantially increased in convenience compared to cash as digital user interfaces expand into ever more human activities. At the same time, cash continues to be perceived and widely used as a ‘store of value’.

The use of a cash as as store of value in Switzerland reminded me of something that Larry White, someone who I always take very seriously in any such discussion, said a while back in the Cato Journal. Larry was writing about ceaselessness and he said that “some other writers and officials… do seek a cashless society… they want an audit trail for the law enforcement and tax authorities”. I think I’m probably in this category. While I appreciate the arguments of Larry and others about anonymity, I do not agree with them. This is because I do not see that the only two options as being anonymous physical cash or unconditionally traceable digital money. We have a wide variety of tools available to us to construct the next generation of digital money and some form of pseudonymous alternative is probably best for society as a whole.

Anyway, back to Switzerland. In his article, Larry noted that the Swiss National Bank (SNB) is “the most important central bank still bucking the trend”. It has said that it has no plans to withdraw its 1,000 Swiss Franc (CHF)  note. The highest-denomination banknote in the world, this is an inordinately profitable commodity. It costs about 40 centimes to make, generating a 250-fold seigniorage return.

I also read with interest the comments earlier in the year by SNB Vice Chairman Fritz Zurbruegg on the news that they are to continue production. Herr Zurbruegg said that there were “no indications” that criminals use the CHF 1,000 note more than any other note. So what are these notes used for? When I read the Swiss National Bank’s payment survey for 2017, the most recent at the time, I noted that is said that the 200-franc and 1000-franc notes accounted for a combined 23% of the total number
of Swiss banknotes in circulation, with 61 million and
50 million units respectively. These banknotes had a combined value of CHF 62 billion, or 76% of the value
of all banknotes in circulation.

Where are these banknotes? Apparently, three-quarters of Swiss households keep less than 1,000 Swiss Francs as a store of value, so obviously they aren’t using the CHF 1,000 that much. In fact, of the cash that is held as store of value, less than 5% is CHF 1,000 notes.

(The report goes on to say that “it should be borne in mind that respondents’ answers on this sensitive topic are likely to be not wholly reliable due to both security and discretion considerations”, which may point us in the direction of the actual use of the notes. It also notes the particular importance of the SFR 1,000 note in livestock trading. Presumably Swiss farmers find the payment facilities provided by the nation’s financial institutions to be inconvenient in some way.)

Still the main point is that less than a quarter of Swiss household have even one CHF 1,000, which given that they account for a substantial portion of the cash in circulation suggests a long tail: there are a few households with a lot of them.

Interestingly, in his comments on the continued production of the SFR 1,000, Herr Zurbruegg went on to say that should these notes be used for tax evasion, then “this is an issue for the legislators and authorities to prevent”. But as Cash & Payment News Volume 2, Number 3 (March 2019) goes on to observe about this perspective, in other industries the manufacturers are not allowed to wash their hands of the negative side-effects of their products (cars have to meet safety standards, for example). On the contrary, it is the manufacturers who are required to pay in some way for the potentail harrm that their product may cause.

The idea of making the producers of high-value notes (central banks) pay some sort of tax to compensate society for the damage done by those notes does, I’ll  admit, seem a little far-fetched. But the alternative, which is to considerably reduce the value of the highest-denomination notes, does not. Why not get rid of the US$100 (of which there are more “in circulation” than $1 bills) and the £50, for example. After all Denmark ignored a request by the European Central Bank and moved to ban 500-euro notes, as the country toughens it defenses against money launderers. Yay! Go Denmark! There really is no excuse for printing such high value notes in the modern world. Perhaps it was once a reasonable aspiration to displace the $100 bills stuffed into drug dealers’ mattresses with €500 bills and thus redirect the proceeds of crime (the seigniorage earned on those bills) from the Fed to the ECB, but no more.

(The head of Switzerland’s financial regulator, FINMA, is on record as saying that the Swiss financial system is susceptible to money laundering with the number of cases rising over the past five years, warns the head of Switzerland’s financial regulatory body, FINMA.)

So if the Swiss did decide to replace cash with a digital currency, then what digital currency should it be? Andréa Maechler, a member of the Swiss central bank’s board of governors, has already said that “private-sector digital currencies are better and less risky than nationally-issued versions”. So, Libra?

Interestingly the SIX report talks about the idea of smart banknotes with chips in them, an idea that was discussed by my colleagues at Consult Hyperion may years ago. Some of you may remember Paul Makin’s super presentation about “E-ink and smart banknotes” at the 13th Digital Money Forum in London back in March 2010. The presentation was based on some work that Consult Hyperion had been doing with the Bill & Melinda Gates Foundation all those years ago. At that time, we were thinking of a smart banknote as comprising four main technological components:

  • The note itself, made out of a plastic polymer rather than paper. This makes it durable and waterproof, important if it is to contain electronics.
  • The electronic ink display on the note. Electronic ink, as you’ll recall, only uses power when it is changing, so once the banknote display has been written then it will stay displaying the same thing until it changed.
  • The chip inside the banknote. Why do we need a chip inside the banknote? Well, we want the banknote to be secure: we don’t want it to be counterfeited or altered. And we need the banknote to be able to communicate intelligently with terminals.
  • The antenna connected to the chip. We wanted our smart banknote to be as convenient as a contactless card!

How would such a note be used? Well, we imagined that you would have a banknote that says “£10” on it. You to the coffee shop and spend £1.50 on a coffee. You tap the note on the till to pay, and the display now changes to say “£8.50”. When you get to work, your friend reminds you that you owe him £8 from the pub. You give him the note and he gives you a 50p coin in change. Your friend can absolutely trust that the value represented by the note is indeed £8.50 because the tamper-resistant chip and the cryptography it deploys make it impossible to counterfeit!

It was interesting to see these ideas come back after a decade! SIX say that “traditional cash infrastructure risks disruption from smart banknotes infrastructure” and they even go on to talk about a “smart Libra banknote”. Frankly, I doubt either of these propositions because, as far as I recall, the main reason for looking at the idea of smart banknotes in Africa many years ago was to provide for security for populations without mobile phones. I am not sure if that makes sense any more in Africa, but it certainly doesn’t in Switzerland where three-quarters of the population use smartphones, half of online purchases are made using bank transfers and (according to JP Morgan) “digital wallets are used to pay for 20 percent of online transactions, and the method is expected to grow to take a 24 percent share of the market by 2021… and local payment brands, including Twint and its domestic rival SwissWallet, are also popular”.

I don’t understand why anyone uses banknotes there, dumb or smart.

The Birchers. An Everyday Story of Payment Folk. Part 97: Cheques, Mate

For inexplicable reasons, and in response to events too boring to relate, an insurance company sends us a cheque for 20-something quids. I don’t know why. I’ve never paid them with a cheque so far as I am aware. They know my bank account details and they know that I live in Woking, not 1972.

I put the cheque in my bag, meaning to pay it in next time I go to a bank branch, which might be any time in the next three to five years. I forget all about it.

For no reason, I was walking past a bank branch today when I remembered the cheque. So I went to one of the pay-in-a-cheque machines. But them I remembered I didn’t have my debit card with me, because I live in the modern world and use my phone to pay for things.

While I’m standing around looking confused, a helpful Barclays assistant person asks me what the problem is. I explain. He shows me that you can manually enter the sort code and account number and then feed the cheque. So I do this. Then as I’m walking out, I remember that I’ve got another cheque for a tenner or so which was a refund for buying something online that I returned.

But now there’s someone using the machine, but I can see that the counter position is open. So I go to the nice woman at the counter and ask if I can pay in this cheque manually as I know the sort code and account number. She asks if I have the Barclays Bank app on my phone, which of course I do, and I use it all the time. Well, she tells me, you can pay in cheques using the app now.


She directs me to the relevant menu, which I tell her does not have anything about cheques it, and wouldn’t you know it, now it does. Hurrah! My app has sprouted a new “Pay in a cheque” button! So I pressed it, took pictures of my cheque and that’s that. I’ll let you know how it goes.

Barclays App

It’s like living in Count Zero or something. I just checked, and the cheque was credited to my account same day. I am so happy! When someone sends me a cheque, it’s like they’ve set me homework. But no more! At last Fintech is making my life better. Joy unbounded.

Some off-the-cuff comments on in-the-cuff payments

It’s amazing what sort of things trendy youngsters in the payments space are getting up to these days. Only today, I read that the UK-based DressCode has released “the ultimate in geek chic“, which turns out to be a shirt with a pocket in the cuff to hold a contactless chip for payments.

The ultimate in geek chic? Sorry dudes. I had a Thomas Pink “Commuter” shirt back in 2006! The Commuter shirt had two features that I really liked at the time. It had a channel running up the inside to carry earphone cables tucked away out of sight. These connected through a hole in a side pocket so that you could keep your iPod snug and out of the way while strolling through London’s fashionable West End listening to the mighty Hawkwind. The shirt also had that second pocket in the cuff to hold a contactless card.

It was designed really for Oyster cards, but we put Visa cards in the pocket to make purchases using standard POS terminals with contactless interfaces. As I recall, we bought a few of them as presents for some of our favourite customers as well! Anyway, I went upstairs and got it out of the wardrobe to model it for you:


The point I used to make was that contactless was about more than the interface, it was about form factors and that it would lead to innovation and I used the shirt to show an example of innovation beyond the card itself. Although the shirt was fun and helped to make an interesting demo about contactless payments in conference presentations, I thought it had two design flaws.

First of all, the pocket was behind the cuff on the top of the wrist. This meant you had to lay the back of your forearm across the contactless POS terminal or Oyster card reader. The pocket really should have been on the underneath of the forearm near the wrist to make paying a more natural action.

The second problem was that if you were wearing a suit and coat, it was hard to get the card close enough for the reader. I remember thinking at the time that I wished that the pocket was in my suit rather than in my shirt.

Naturally, being a consultant rather than an entrepreneurial business go-getter my thoughts went no further. I was surprised to see that only eight years later some entrepreneurial Aussies went and did just as I’d thought about, and put the payment card pocket in the suit! I found out that the dynamic and chic (I assume) menswear specialists M.J. Bale and Visa had teamed up to create a suit with a contactless payment chip and antenna woven into the sleeve! Apparently the “power suit will let men pay ‘invisibly’ wherever Visa payWave is accepted”. I expect they were planning something for the ladies too but it’s not mentioned in the article.


Anyway, how fun. These days of course I wouldn’t use either the cable run (because I have AirPods – in fact I have AirPods2 which are absolutely awesome) or the card (because I have a smartphone and that’s what I use to pay). Nevertheless, I wish DressCode all the best with their chic project.