A crazy idea that I just had (but perhaps it's not crazy and/or not new):

Banknotes (say, one dollar bills) could be given a value in BTC and used to pay in BTC. Anti-counterfeiting is already implemented, courtesy of the state.

Take one dollar, choose a value of X BTC, send X BTC to an operator with the serial number of the banknote. The serial number goes to a database, and the operator will pay X BTC to the bearer of the dollar bill with that serial number.

Developing validation smartphone apps is easy.

Of course the problem is that the operator may take the money and go, or refuse to pay.

Anybody can think of a solution, perhaps involving a distributed database and a "distributed operator"? Can the Bitcoin network itself function as distributed operator?

Yes, if you like, dollars colored with a value in Bitcoin. Any ideas on how to solve the trust problem?

This idea is launching in the next few days. We hope to set a standard so anyone can act as a 3rd party, such as coffee shops, bars, and trusted individuals. So you might not trust a guy living in Iowa to redeem btc, but if the local coffee shop was 3rd party, you can always use it to get a coffee.

Its what you described, but instead of the merchant requiring an active database of bills, all he does is post a public key, and anyone can send money to a bill under his public key. Bob's Bar and Grill doesn't need to have a database of dollar bills, or worry about disputes. Either the bill is in the blockchain, or it isn't.

+ Bob's Bar and Grill (Public Key)
  - A12345678B ($1 USD bill)
  - C47891235F ($1 USD bill)

+ Alice's Coffee shoppe (Public Key)
  - F78426288B ($1 USD bill)
  - E29887103A ($1 USD bill)


A bit technical, and looking for a way to make it easy to understand.

Thanks for the interest, will post here on launch!

You can consider laminating the bills with writing and/or a QR-code printed on the laminate.

Very interesting idea

Potential killer app that can tip adoption decisively