Transferable Digital Notes Project

About Money

About Money

In the countries with a healthy economy and financial system and a stable political environment the money is fiat currency in the form of coins and paper bills put and removed from circulation by the Central Bank under the government control. Due to the credit process the money supply can expand or contract. This process is also controlled by the Central Bank. Without getting into details it should be understood that 'expand or contract' does not mean that paper appears or disappears from circulation.

There is a lot of discussion about creating new forms of money in some digital form to replace state issued currencies. This shows a total lack of understanding of modern economics applying to all developed countries. The legal tender of a country or union of countries must be controlled by a central, governmental authority.

An example of creating new money is the adoption of the Euro by the European Community member countries, replacing the national currencies. In this process the National Central Banks were replaced with the European Central Bank (ECB). This process continues as new EU member countries adopt the Euro.

In this analysis we have to take into consideration that there are no cryptocurrencies in circulation contrary to all the noise around Bitcoin and alike.

Money exists in two forms:

  • Central Bank Notes and Coins
  • Central Bank accounts

The two forms can be converted through:

  • Cash deposits to an account
  • Cash withdraws from an account

There are two forms of money transfers/payments:

  • Debiting and crediting two accounts
  • Transferring notes and/or coins between two entities

This is easy to understand. Everybody has paper money in his/her wallet and money in an account with a financial institution. We deposit and withdraw cash, make payments (transfer money to and from accounts) using checks or cards, give and receive cash.

The account based money and transactions are highly computerized (we can also say digitized). The processes and procedures did not change dramatically during the computerization process. The technology brought speed, security and reliability to the financial systems but the basic double-entry accounting is not much different then when it was invented.

There are situation when account based transactions are advertised as digital money. This is not the case, it is totally deceiving.

The process of converting paper money to some digital form is much more difficult. There are two options:

  • Hardware/software based
  • Software/network based

The first option consists of some device that transfers money to another device. The only connection is between the two devices. There is no connection to the internet or any other network. This option is not viable with the currently existing technology.

The second option is based on software installed on devices connected to the internet or some other network. The parties involved in the transaction transfer a digital token representing an amount of money. The digital token is a very large unique number. The problem with transferring digital tokens is that they can be copied and transferred more than one time. This problem is coded double spending.

The replacement of paper money with digital equivalents depends on finding a solution to the double spending problem.

The great majority of existing solutions is based on a distributed system independent of the Central Bank. This solution breaks the basic rule of money, the Central Bank and government control.

A different solution is based on Central Bank accounts. This solution does not create a new form of money and may have unintended consequences for the financial system of the country. In large economies this solution is not viable.

As a conclusion a replacement of paper money should be a digital token that cannot be used for more than one transfer. This token should have the same properties and behavior as paper money. The difference between the two is that using a digital token requires a digital device with special software and a connection to the Internet or other network. Considering the wide adoption of information technology this is less and less of a problem.

The cash and token transfers process must be identical.
A cash transaction has two steps:

  • Validation
  • Ownership transfer
For paper money the first step consists in establishing that the note is not counterfeited. This step can be forfeited, performed by the payee or by a professional in a financial institution. The ownership transfer consists of the payee taking possession of the note.

For digital tokens the validation is perform by sending the token to the Central Bank and receiving a 'valid' or 'invalid' response. If the token is valid the payee takes possession of the digital token and requests the ownership transfer from the Central Bank in order to prevent double spending. The ownership transfer must be anonymous - It must not involve any user accounts or cryptography operations.

Digital tokens acceptance and circulation
If the Central Bank starts issuing digital tokens as legal tender they will not be a replacement for paper money. The two forms of currency will coexist. With the increase acceptance of technology the paper will become obsolete and only the digital tokens will remain in circulation in the same way the gold and silver coins were replaced by paper money.

Recording money transfers

It is interesting to see how the money transfers from an account to another are recorded in comparison to TDNs transfers.