In the ancient times there was this concept of currency backed by gold. I believe I'm referring to this:
http://en.wikipedia.org/wiki/Gold_standard
The problem with this system is the fact that regular audit is needed to verify that the supposed gold really exists.
With the help of Bitcoin, a much better version of such paper money is possible.
The money issuer stores bitcoins and prints paper money so that each note has:
1. a bitcoin address that holds the bitcoins backing the particular note
2. an expiration date
Bitcoin address is needed so that everyone can see that the issuer really has the coins backing its paper. Expiration date is needed so that destroyed notes could be recovered by the issuer. Users would have to renew their paper notes before they expire.
Every year the issuer proves that it still has the bitcoins it says it has. This can be done by using the associated private keys to sign messages. Every note can then be verified by anyone online to see if it is still backed by the issuer.
Any takers?
