I think that the way it works is that the note contains the private key for a bitcoin wallet which contains the amount of bitcoin shown on the note's face value. By touching the bitcoin banknote to an NFC phone it will confirm that the funds are still in the wallet.
Thus they can be exchanged like cash, transferring control of the private keys (wallet), instead sending a transaction from one set of private keys (wallet) to another which is the normal method of exchanging cryptocurrency.
RE: Bitcoin Banknotes will defeat government's war on cash
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Bitcoin Banknotes will defeat government's war on cash
This is very interesting and is the first application that I know of that makes the private key concept accessible.
"By touching the bitcoin banknote to an NFC phone it will confirm that the funds are still in the wallet." That, however, is much more difficult than using cash. I can't imagine having to verify legitimacy of a paper bill like that every time I receive one.
Also, if the private key is stored on the bitcoin banknote, what prevents a previous owner from copying the key and then re-using it later (days, weeks, months)?
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You make good points.
It is a bit of a pain having to verify each note is still good, although arguably one should do this with fiat to avoid forgeries.
I don't know how or if this system can prevent the private key being copied when it is obviously needed to spend the bitcoin in the note in the online on-chain world.
It may be possible to create a situation where the private key is locked into the note and is only accessible by the NFC enabled phone app that allows it to be spent on-chain.
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