1
Background and Motivation for the Study

This report is about identifying potential new features that will make use of 21st-century materials and technologies to deter 21st-century counterfeiting of banknotes. Deterring counterfeiting is important because the use of money to facilitate financial transactions is an essential element of the world’s economies. Ensuring the value and stability of the nation’s currency is critical to the maintenance of a healthy economy. Protecting confidence in the genuineness of the physical representation of that currency is an important aspect of that effort.

This chapter provides a discussion of some of the background and motivation for this study.1 It presents an introduction to the current state of counterfeiting and introduces an analysis of counterfeiting that informs the generation of new ideas for the next generations of U.S. banknotes. The committee found that developing a good understanding of these issues—see Box 1-1 on the committee’s work process—was an essential foundation (1) to its efforts to identify technologies, both existing and emerging, that pose the most significant counterfeiting threats to Federal Reserve notes (FRNs) (ideas that are developed further in Chapters 2 and 3) and (2) to its efforts to identify features, materials, and technologies to deter counterfeiting of FRNs (discussed in Chapters 4 and 5 and in Appendixes C and D). Chapter 6 discusses a proactive strategy for further developing new features for implementation.

1

See Appendix A for the study’s statement of task and a summary of the organization of this report, with a mapping onto the various elements of the task.



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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real 1 Background and Motivation for the Study This report is about identifying potential new features that will make use of 21st-century materials and technologies to deter 21st-century counterfeiting of banknotes. Deterring counterfeiting is important because the use of money to facilitate financial transactions is an essential element of the world’s economies. Ensuring the value and stability of the nation’s currency is critical to the maintenance of a healthy economy. Protecting confidence in the genuineness of the physical representation of that currency is an important aspect of that effort. This chapter provides a discussion of some of the background and motivation for this study.1 It presents an introduction to the current state of counterfeiting and introduces an analysis of counterfeiting that informs the generation of new ideas for the next generations of U.S. banknotes. The committee found that developing a good understanding of these issues—see Box 1-1 on the committee’s work process—was an essential foundation (1) to its efforts to identify technologies, both existing and emerging, that pose the most significant counterfeiting threats to Federal Reserve notes (FRNs) (ideas that are developed further in Chapters 2 and 3) and (2) to its efforts to identify features, materials, and technologies to deter counterfeiting of FRNs (discussed in Chapters 4 and 5 and in Appendixes C and D). Chapter 6 discusses a proactive strategy for further developing new features for implementation. 1 See Appendix A for the study’s statement of task and a summary of the organization of this report, with a mapping onto the various elements of the task.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real BOX 1-1 Committee Work Process: Identifying Novel Counterfeit-Deterrence Features As part of this study’s process of identifying and developing ideas for security features of Federal Reserve notes (FRNs), and in order to better understand the deterrence and authentication value of features used in current banknotes, the committee first carried out the following activities: Collected background material on the counterfeiting problem: its extent and location, types of counterfeiters and their methods, skill sets, and technologies; Gathered data and made judgments on how current features deter simulation by each class of counterfeiter and for each technology; and Forecasted technology trends in order to predict upcoming feature vulnerabilities. The committee then conducted the following tasks: Collected information on features, their use, and simulation; Examined current banknote features in some detail, both for U.S. and international currencies; Surveyed commercially available features used currently in currency and high-security documents and reviewed studies on their use and effectiveness (the sources used are referenced in footnotes throughout the report); Examined actual counterfeit notes, both for U.S. currency (during U.S. Secret Service site visits) and currency from other countries;1 Identified new feature concepts that span a wide range of technological readiness, from (intermediate-term) low-technology to (long-term) pie-in-the-sky;2 Applied criteria to refine the list;3 and Further explored the most promising ideas.4    1Inspecting U.S. banknote counterfeits provided the committee with important insights into which features are easily simulated and which are not. Because the counterfeit notes that the committee saw were in most cases passed and then ultimately detected, their makeup indicated which features are apparently important and which are generally ignored during note authentication. Observing passed counterfeits reinforced the committee’s sense of the need to design notes with counterfeit deterrence in mind. Inspecting passed non-U.S. counterfeits was helpful in understanding the effectiveness of a larger feature set than is present on FRNs.    2In particular, the long-term feature ideas were generated by committee brainstorming.    3The features chosen for inclusion in the report emerged from an evaluation scheme developed by the committee that rated the motivation for adopting each feature—why it is difficult to simulate and how recognizable it is expected to be.    4The features were subsequently grouped into intermediate term (anticipated to have less than a 7-year development time before incorporation into a banknote) and long term (longer than a 7-year development time).

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real THE EVOLUTION OF MONEY The physical representation of money has evolved over the centuries. The transformation from paper currency to electronic forms of money is clearly the latest chapter in this saga. The value of the transactions handled by electronic financial networks dwarfs the cash economies of the world.2 Thus, the counterfeiting of electronic forms of money and its use for criminal purposes is an urgent and strategic issue for modern law enforcement. However, it is not the focus of this report, which addresses the counterfeiting of physical currency, specifically, FRNs.3 The modern world is still far from being a cashless society. Regardless of their lack of intrinsic value, banknotes continue to be ubiquitous and useful for a number of reasons:4 Access. Many people do not have credit cards or checking accounts and only use cash transactions. Anonymity. Cash purchases preserve privacy and anonymity. Convenience. Cash enables rapid, low-technology sales transactions, which can take place without access to machine authentication or even electricity. Acceptability. Banknotes can serve as a universally accepted medium of exchange. The U.S. banknote is well accepted throughout the world because people understand that it is backed by confidence in U.S. economic power. Also, as a stable currency, it provides a measure of protection against inflation for people in countries with unstable currencies. At the beginning of the 21st century, in the same way that “$” is a global symbol for “money,” U.S. currency is considered to be a worldwide symbol of security and integrity. The unique combination of design, paper and inks, and printing technology makes a U.S. banknote unique and one of the most recognized symbols worldwide. Maintaining this symbol and what it stands for is among the duties of the U.S. Department of the Treasury’s Bureau of Engraving and Printing (BEP). In the early history of the United States, the design of paper currency changed many times. Since 1928, however, changes in the design have preserved the overall “architecture” of U.S. currency; that is, all U.S. currency in circulation has the same size and feel, and the historical figures and national symbols remain unchanged for each denomination. Appendix B describes the features on current U.S. notes, 2 National Research Council. 2005. Network Science. Washington, D.C.: The National Academies Press. 3 B. Grow. 2006. Gold rush. Business Week 3966:68-69. 4 Ultimately, banknote designers take these “requirements” into account when selecting the portfolio of features for a banknote.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real instituted in part to deter the creation of counterfeit notes. It is significant that while many changes have been instituted, there has never been a recall or demonetization of U.S. currency already in circulation. Despite being one of the most respected items in this culture, a banknote can also be one of the most mistreated. No other item of such value is routinely folded, crumpled, soiled, laundered, and otherwise ill-treated throughout its useful life. To survive such challenges, U.S. banknotes meet daunting physical requirements. They are manufactured reliably in large quantities and are durable over time. In addition, features are placed on banknotes to allow authentication, indicate their denomination, and deter counterfeiting.5 Recent issues of U.S. currency have included specific counterfeit-deterrent features to deter the threats from the advances in reprographic technologies mentioned in the following sections and discussed in more detail in Chapter 3. The current $1 note was issued in 1929, and its design has remained essentially unchanged since then. The $2 note in use today was introduced in 1976, and its design has remained unchanged as well. The $5, $10, $20, $50, and $100 bills were redesigned beginning in 1990 to include several new security features that vary depending on the denomination. Most notable among the features added to FRNs are the introduction of offset printing (of colors other than green and black), color-shifting ink, watermarks, and colored threads. These features have been added while the characteristic, highly recognizable appearance of U.S. currency has been retained. THE EVOLUTION OF COUNTERFEITING Counterfeiting has existed almost as long as there has been money.6 Though counterfeiting is predominantly a criminal activity, it has also been used by a number of countries as a weapon of war. Nations have a strong obligation to protect the integrity of their banknotes against attempts to make illegal copies. The deterrence of counterfeiting is an important element of government that is required to maintain confidence in a nation’s currency both domestically and internationally. Because any original banknote can be duplicated—provided the materials, equip- 5 The addition of new features begins with the New Currency Design Task Force, which has representatives from the U.S. Department of the Treasury, the Federal Reserve System, the U.S. Secret Service, and the BEP. The Task Force makes its recommendations to the Advanced Counterfeit Deterrence Steering Committee, also composed of representatives of the Treasury Department, Federal Reserve, Secret Service, and BEP. The Steering Committee then makes recommendations for the new design and security features to the Secretary of the Treasury, who has the statutory authority to approve such changes. 6 Counterfeiting of currency has existed in the United States from the birth of the country. For some brief notes on its history, see <http://www.secretservice.gov/counterfeit.shtml>. Accessed February 2007.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real ment, and expertise are accessible—responsible states endeavor to use materials and techniques that are not generally available and that present as many obstacles as possible to would-be counterfeiters. In the United States, the BEP and the U.S. Secret Service7 were established to combat pervasive counterfeiting during the Civil War. At that time, it was estimated that one-third to one-half of the currency in circulation was counterfeit. For hundreds of years, counterfeiting had required considerable artistic and technical skill, as well as substantial resources. Until recently, the primary counterfeiting threat arose from organized professional criminals and, in a few instances, from hostile states. These types of counterfeiters were relatively large enterprises that presented multiple opportunities for tracking by law enforcement. Because the production of realistic copies of a sophisticated banknote was quite an expensive proposition, the quality of the counterfeits oftentimes was not high, enabling the public to spot forgeries readily. This scenario began to change during the 1980s with the advent of advanced reprographic systems and the accessibility of highly capable and inexpensive graphics software tools running on readily available workstations and desktop computers. Counterfeiting of this type is not intended to duplicate the processes used to make genuine banknotes, but it instead simulates the result with much-less-expensive equipment. This type of counterfeiting no longer requires artisans to engrave intaglio plates, nor does it require a large investment. Advances have put the technical means to counterfeit in the hands of ordinary people who, if they so choose, can manufacture a few counterfeits on an irregular basis. The ubiquity of home computers means that casual computer users can now more easily make high-quality simulations of banknotes and their features. It is this trend that led to the most recent major redesigns of U.S. banknotes. As part of that process, the BEP has asked the National Research Council (NRC) to undertake several studies over the past 20 years to evaluate the emerging counterfeiting threat posed by advanced reprographic technology. Box 1-2 discusses some of the most important outcomes from those reports. COUNTERFEITING AT HOME AND ABROAD While U.S. dollars are recognized worldwide as legal tender, their distribution and use vary in some interesting ways. Currently, approximately $720 billion in U.S. banknotes are in worldwide circulation. This amount is increasing by about 6.5 percent per year.8 The rate of counterfeiting of U.S. banknotes is estimated to 7 Founded in 1865 to suppress the widespread counterfeiting of U.S. currency, the U.S. Secret Service maintains exclusive jurisdiction for investigations involving the counterfeiting of U.S. currency. 8 E. Foster, Federal Reserve Board. 2005. Presentation to this committee, May 24.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real BOX 1-2 Conclusions from Previous National Research Council Reports on Currency Three National Research Council reports on currency provide the following general conclusions regarding the changing counterfeiting threat: The potential threat to the United States currency from modern reprographic technology is great, due primarily to the expected increase in availability of high-quality color copier and scanner-printer combinations during the next five years.1 A broadening of the counterfeiting base made possible by the availability of commercial reprographic equipment can pose an intractable enforcement problem and cause serious erosion of confidence in United States currency.2 Rapid developments in reprographic technology could give rise to an unacceptable level of counterfeiting activity by making high-quality reprographic systems widely available.3 The increased availability of advanced color copiers and systems composed of a computer-scanner and printer makes widespread counterfeiting of U.S. banknotes a real and substantial threat. Ready access and ease of use could lead to abuse by “casual” counterfeiters. Copiers certainly pose a significant threat, but the most important threat in the foreseeable future … is color scanner-computer-printer systems, aided by the continuing evolution of more-sophisticated image-processing software. These systems also provide additional opportunities for professional counterfeiters.4 These studies identified potential counterfeiting threats posed by technologies that primarily replicate the visual appearance of banknotes. Until recently, most casual counterfeiters have focused on reproducing the visual appearance of a banknote while using primitive methods to replicate other features, such as the banknote’s tactile properties. However, emerging technology is being extended beyond the image-reproduction capability to the capacity for simulating or duplicating tactile and other nonvisual features. Also, new consumer products in crafting supplies, automotive touch-up paints, and nail polish are a few of the tools, along with new technologies, that can provide the counterfeiter with ways to replicate both the look and feel of the U.S. banknote.    1National Research Council. 1985. Advanced Reprographic Systems: Counterfeiting Threat Assessment and Deterrent Measures. Washington, D.C.: National Academy Press.    2National Research Council. 1985. Advanced Reprographic Systems: Counterfeiting Threat Assessment and Deterrent Measures. Washington, D.C.: National Academy Press.    3National Research Council. 1987. Counterfeit Threats and Deterrent Measures. Washington, D.C.: National Academy Press.    4National Research Council. 1993. Counterfeit Deterrent Features for the Next-Generation Currency Design. Washington, D.C.: National Academy Press. be 5 counterfeits per million notes circulating in 2002. As expected, however, more $100 notes than $1 notes are counterfeited; the number of $100 notes is higher than the average; it is estimated at 30 counterfeits per million.9 9 J. Haslop, De La Rue. 2005. Presentation to this committee, July 21.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real Approximately two-thirds of the value of U.S. currency in circulation and 70 percent of all $100 notes in circulation are estimated to reside overseas, in both dollarized and nondollarized countries.10 In many foreign countries, U.S. currency is accepted in transactions as a global currency; it can serve as a stockpile against political and economic uncertainty; and it can provide a stable, anonymous liquid asset to individuals and corporations. The remaining one-third of the value of U.S. currency is held domestically.11 In contrast to foreign holdings of U.S. currency, domestically held currency primarily circulates in the economy rather that being held long term. Counterfeits are discovered in two main ways: Counterfeiters are found through law enforcement procedures and their products are seized, usually in large quantities. Merchants, banks, or private citizens discover counterfeit notes after they have been passed into circulation. Given the global distribution pattern of U.S. banknotes, it is not surprising that the most-counterfeited U.S. note abroad is the $100 note. Because foreign cash handlers generally screen U.S. banknotes more carefully than do U.S. cash handlers, the annual dollar value of passed counterfeit notes reported abroad is constant and small, although a precise number is not reliably measured.12 The high scrutiny paid abroad to U.S. notes means a higher passing threshold, requiring a higher investment from the counterfeiter to produce a reasonably high-quality product. Typically this threshold necessitates traditional methods such as offset or intaglio printing, high-quality paper, and reasonable simulations of security features—and large operations. The U.S. anticounterfeiting strategy overseas, therefore, has successfully focused on enforcement. Seizures of counterfeit banknotes in foreign countries decreased from $350 million in 1995 to $20 million in 2005 as the U.S. Secret Service succeeded in shutting down large counterfeiting operations, particularly in Colombia (reportedly the source of 40 percent of counterfeit U.S. currency) and as diplomatic efforts curtailed operations in Bulgaria.13 Other large producers of counterfeit U.S. currency are known to be in countries including Mexico, Nigeria, and North Korea. 10 E. Foster, Federal Reserve Board. 2005. Presentation to this committee, May 24. Dollarized economies are those that have adopted the U.S. dollar as their official national currency. 11 L. DiNunzio and L. Clarke. 2004. The new color of money: Safer, smarter, more secure. Proceedings of SPIE [International Society for Optical Engineering], Optical Security and Counterfeit Deterrence Techniques V, R.L. van Renesse (ed.), Vol. 5310, pp. 425-439. 12 L. Felix, Bureau of Engraving and Printing. 2005. Presentation to this committee, May 24. 13 L. Felix, Bureau of Engraving and Printing. 2005. Presentation to this committee, May 24.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real TABLE 1-1 Amount of U.S. Banknote Counterfeiting (in U.S. dollars) in Fiscal Year 2005, by Type of Counterfeit Type of Counterfeit Total Amount ($) Domestic passed 56,228,478 Domestic seized 14,680,798 Foreign passed 4,797,377 Foreign seized 20,341,615 SOURCE: Data provided to this committee by the U.S. Secret Service. As compared with foreign counterfeiting of U.S. banknotes, domestic counterfeiting is considerably more opportunistic, is generally smaller in scale, and focuses on smaller bill denominations. In the United States, the $20 note is the most widely used note, primarily because it is the note most commonly distributed through automated teller machines, or ATMs. It is also the most counterfeited note domestically. According to data provided to the committee, counterfeit seizures in foreign countries outstrip the number of U.S. dollar notes passed in foreign countries by a factor of four (see Table 1-1). However, the reverse is true in the United States. Domestic counterfeits tend not to be stockpiled, and in the United States passed notes exceed seized notes by a factor of four. The committee also learned that a sizeable portion of counterfeits passed in the United States are produced abroad.14 Counterfeiting technology has been following digital reproduction technology trends. In 1995, for example, less than 1 percent of counterfeit notes detected in the United States were digitally produced. By 2005, that number had grown to nearly 35 percent worldwide and 54 percent (ink-jet printing and electrophotography) within the United States (see Table 1-1).15 At present, ink jet is the primary technology that can easily and cheaply simulate the look of a current Federal Reserve note. The widespread availability of a variety of ink-jet printers means that notes may be printed in widely dispersed locations on a very irregular schedule and may be almost impossible to track. Chapter 3 discusses the current and future technology threats to U.S. currency in more detail. The total dollar value of domestically passed notes is around $40 million to $50 million annually and has been approximately constant over time.16 Because Federal Reserve machine readers capture all counterfeits that pass through Federal Reserve banks, this number is a good lower bound of the counterfeiting activity 14 L. DiNunzio and L. Clarke. 2004. The new color of money: Safer, smarter, more secure. Proceedings of SPIE [International Society for Optical Engineering], Optical Security and Counterfeit Deterrence Techniques V, R.L. van Renesse (ed.), Vol. 5310, pp. 425-439. 15 L. Pagano, U.S. Secret Service. 2005. Presentation to this committee, May 24. 16 L. Felix, Bureau of Engraving and Printing. 2005. Presentation to this committee, May 24.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real in the United States. However, the estimate does not include counterfeit notes that are withdrawn from circulation by recipients who neither report them nor pass them on to others. An effective defense against counterfeiting requires an examination of technological advancements that can be employed by potential counterfeiters. It is clear that distributed, low-volume, casual counterfeiting poses a significant challenge to law enforcement. Indeed, much of the BEP’s rationale for upgrading the security features in U.S. banknotes has been based in the countering of this threat. The resulting proactive analysis has significantly influenced the design changes and incorporation of additional security features in U.S. banknotes during the past 20 years. The continual development of technologies that are exploited for counterfeiting make necessary a regular assessment of the current state and near-term outlook for these technologies and of the threats that they may pose in terms of providing capabilities for creating counterfeit FRNs. These trends also imply that more elaborate optical and substrate features will need to be incorporated in the FRNs of the future in order to stay ahead of counterfeiters. The increase in digital counterfeits has also increased the availability of point-of-use machine detection of counterfeits. This may someday be a viable means to detect both counterfeit notes and their sources in an era of greater and more widespread use of digital image technology. The counterfeiting threat is a system composed of several processes that combine to influence the amount of counterfeit notes in circulation. Understanding and addressing the growing complexity of technologies used to produce, to verify, and to counterfeit FRNs require an integrated model that permits a synthetic view and analysis of the application of new technology not only in the creation of counterfeit notes but also in their detection, their removal from circulation, and the identification of their sources. Developing a model, even a semi-quantitative one, for this system can highlight where to allocate resources and how to design notes with a combination of features to combat counterfeiting in an optimal manner. Chapter 2, “Understanding Counterfeiting,” presents the committee’s findings on counterfeiting statistics for U.S. FRNs, describes five classes of counterfeiters, and summarizes a flow model of counterfeiting that can be further developed to provide quantitative insight into the deterrence effectiveness of new and current features. THE IMPACT OF COUNTERFEITING Counterfeiting can have a number of kinds of impact on individuals, companies, financial institutions, and the nation that issues the currency. The most obvious impact might be expected to be economic. However, the total value of counterfeit notes passed (about $61 million in 2005) is less than 0.01 percent of

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real the value of currency in circulation and an even smaller portion of the total U.S. economy.17 Counterfeiting of banknotes is very small compared, for instance, with counterfeiting of credit cards or of branded goods. The counterfeited-products business engenders huge losses, ranging from 5 to 8 percent of worldwide sales of brand products, and credit card fraud accounted for more than $750 million in losses in the United States in 2004.18 Good design and strong enforcement policies have enabled U.S. currency to achieve one of the lowest rates of counterfeiting of any major currency. For all notes the rate is only 5 notes per million, but this rate is low owing in part to the large number of $1 notes in circulation. The number of $100 notes counterfeited runs at about 30 counterfeits per million. By comparison, the euro is estimated to be counterfeited at present at 65 notes per million, the British pound at 160 notes per million, and the Canadian dollar at 1,000 notes per million.19 Counterfeiting can have psychological effects and, as a result, governments (and their enemies) have long realized that counterfeiting is a national security issue. An example can be found in a British government attempt to destabilize the Continental government by counterfeiting U.S. currency during the Revolutionary War.20 Similarly, the Union government sent counterfeit Confederate dollars south during the Civil War,21 and during World War II, the German government manufactured a high-quality counterfeit of the British £5 note.22 A further illustration of the psychological impact of counterfeiting is provided by the Canadian experience of recent counterfeiting. The Bank of Canada reports that when the level of counterfeit Canadian $100 notes reached 300 notes per million, as many as 11 percent of merchants stopped accepting $100 notes.23 Cognizant of these threats, the United States and other countries have anticounterfeiting strategies intended to maintain consumer confidence in U.S. currency, just as some politically motivated counterfeiting is intended to undermine it. More subjective, but also a critical aspect for the United States, is the political 17 U.S. Department of the Treasury. 2003. The Use and Counterfeiting of United States Currency Abroad, Part 2. The second report to the Congress by the Secretary of the Treasury, in consultation with the Advanced Counterfeit Deterrence Steering Committee, pursuant to Section 807 of Public Law 104-132. Available at <http://www.federalreserve.gov/boarddocs/rptcongress/counterfeit2003.pdf>. Accessed April 2006. Note that the percentages of counterfeits will vary if reported as the percentage of banknotes or the percentage of monetary value. 18 Credit card fraud in the U.S. 2005. The Nilson Report, Vol. 830, p. 8. 19 J. Haslop, De La Rue. 2005. Presentation to this committee, July 21. 20 See, for example, <http://www.secretservice.gov>. Accessed February 2007. 21 G. Tremmel. 2003. Counterfeit Currency of the Confederate States of America. Jefferson, N.C.: McFarland. 22 Bank of England Fact Sheet. 2003. Available at <http://www.bankofengland.co.uk/banknotes/factnote.pdf>. Accessed February 2007. 23 J.F. Chant. 2004. Bank of Canada Review. Ottawa, Ontario: Bank of Canada. P. 43.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real advantage to issuing a global currency, along with the threat of that advantage being undermined if there is a perceived threat to the security of the U.S dollar. The loss of U.S. prestige and influence abroad owing to any lack of confidence in the dollar is not readily measurable, but it would nonetheless be severe. Although the total economic cost of counterfeiting is low, the personal cost to those left holding a worthless note may be high. When a counterfeit note is identified, it loses its value. When this cost accrues to an innocent party—usually a retailer or service provider—it is in the best interest of any government to protect its citizens from this threat. Laws of the United States prohibit the spending or possession of counterfeits and require the reporting of the receipt of a counterfeit banknote. Reported counterfeits generally produce a direct monetary loss to those who receive them because the fake bills must be surrendered to authorities without compensation.24 With no compensation incentive, a pattern of complacency may have emerged, with many people and businesses willingly absorbing the monetary loss of the value of the counterfeit rather than taking the trouble to report it. Many would choose to avoid what could be an intrusive and time-consuming interaction with authorities. The potential awkwardness of reporting a genuine note as a fake is also present. DETECTION OF COUNTERFEITS: THE EFFECTIVENESS OF FEATURES ON U.S. BANKNOTES The effectiveness of a banknote feature depends on the specific nature of a note’s use. Examples include different types of use by individuals wishing to complete a sale—including use by the blind—and transactions by means of machines designed to accept, dispense, or count banknotes. Banknote design is complicated by currency’s wide variety of uses. A given feature on a banknote may address just one or many of them. The wide range in types of use for FRNs is complicated further by the fact that these transactions may take place anywhere on the globe under a wide range of ambient lighting conditions. For any feature to be effective, it must work for the duration of the life of the note. A variety of durability tests are conducted by the BEP to ensure that banknotes have a reasonable circulation life. Tests include repeated crumpling and folding, soiling and occasional laundering of notes, as well as tests of their wet tensile strength, lightfastness, and chemical resistance to a variety of fluids. Interestingly, the durability of banknotes is itself a security feature. Experts report that counterfeit notes are often identified by their poor and uneven wear.25 24 Some home insurance policies insure against losses due to accepting counterfeit currency. 25 J. Haslop, De La Rue. 2005. Presentation to this committee, July 21.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real Human Detection of Counterfeits: Visual and Tactile Effectiveness The most striking visual feature of an FRN is the portrait on the front of the note. It is the largest single feature, and because it is a human face, many people find it easy to recognize small changes in its proportions or coloring. Each note also has one large, high-contrast numeral for use in low-light environments and by the visually impaired. However, this feature and others do not provide adequate differentiation for many visually impaired individuals and provide no method of differentiation for blind persons.26,27 Overt visual features on U.S. banknotes are designed to require only direct visual inspection for authentication. Many are also intended to be impossible to replicate using low-resolution computer technology. These include the watermark images, embedded plastic security strips, and color-shifting ink. Each of these features is denomination-specific; the watermarks repeat the portrait on each denomination, and the security strips are embedded in a different position and contain different text and graphics for each denomination. Perhaps more important than the effectiveness of individual features is the effectiveness of the combination of features on the entire note. The placement of features and how they interact, however, is difficult to gauge. For example, printing over the many visual security features in the paper substrate may make them less effective. Crowding the note with too many features may result in users not noticing any of them. The lack of comprehensive, scientifically rigorous quantitative information on the effectiveness of individual features makes feature selection difficult. Specifically, a variety of systematic and well-designed statistical tests would have been very useful in decision making regarding recent feature modification and implementation. The BEP conducted a focus-group study in 2001 and 2002 to determine how specific cash-handling audiences detect counterfeits in Series 1996 banknotes.28 In the course of this study, the bureau conducted interviews of a total of 1,423 people in six categories: consumers, bank tellers, cashiers, gaming industry employees, law enforcement officials, and teachers. It was found that 29 percent of the cash 26 National Research Council. 1995. Currency Features for Visually Impaired People. Washington, D.C.: National Academy Press. 27 Information at <http://www.ourmoneytoo.org/position.php> refers to strategies of individuals and coalitions for improving this aspect of U.S. banknotes. Accessed February 2007. 28 L. DiNunzio and S.E. Church. 2002. Evaluating public awareness of new currency design features. Proceedings of SPIE [International Society for Optical Engineering], Optical Security and Counterfeit Deterrence Techniques V, R.L. van Renesse (ed.), Vol. 4677, pp. 1-14. Also, H. Treinen. 2004. Banknote recognition: Public reception of double sided intaglio printed banknotes compared with single sided intaglio and offset counterfeited banknotes. Currency Conference, Rome, 2004. Personal communication.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real handlers interviewed had identified counterfeit notes; the major tip-off was that the note “looked suspicious,” followed closely by the fact that it “felt suspicious.” In order, the features that caused interviewees to look closer were these: color, waxy feel, paper feel, paper thickness, smudged ink, portrait quality, and security strip. Color is the first feature checked, according to the group members interviewed, and color is now easily duplicated by commonly available computer technology. Thus, the new series of notes may become less secure because cash handlers might stop looking for other features if the color appears to be “correct.” The BEP focus-group members reported that when they suspected a counterfeit, the features that they used for confirmation, in order, were these: watermark, starch content (indicated by use of a special pen), security strip, feel, color-shifting ink, fine lines, and shading in the denomination number. The features that this focus group was most aware of were, in order: watermark, security strip, color-shifting ink, fine lines, and microprinting. Although interesting and informative, focus-group data are not as useful as those obtained in controlled studies, and self-reported usage of features should be interpreted with caution. In more controlled studies on U.S. currency, researchers have observed that “experiments indicate that people are good at detecting counterfeits, that inkjet counterfeits are easier to detect than offset counterfeits, and that counterfeits of the newly designed bills are easier to detect than counterfeits of the older series. The design improvement was greatest with the $100 bills and, to a lesser extent, $50 bills.”29 A marked improvement was also noted in the recognition of the copper-to-green color-shifting ink now in use on the $10, $20, and $50 notes versus the original green-to-black ink on the $10 and $100 notes. However, a key observation made in the course of this study was that “judging the improvement of features was not the same as judging their absolute efficacy.”30 When asking participants in the study to look at single features on the notes, the researchers noticed a variation in perception between situations in which an entire note was presented and those in which the rest of the note was masked and only a single feature was visible. Experience and focus were also noted as key discriminators. Studies of banknote features on other nations’ currencies have confirmed the importance of subjective considerations, including the consistency of the feature 29 A.P. Hillstrom and I.H. Bernstein. 2002. Counterfeit detection for new and old currency designs. Proceedings of SPIE, Optical Security and Counterfeit Deterrence Techniques IV, R.L. van Renesse (ed.), Vol. 4677, pp. 65-80. 30 A.P. Hillstrom and I.H. Bernstein. 2002. Counterfeit detection for new and old currency designs. Proceedings of SPIE, Optical Security and Counterfeit Deterrence Techniques IV, R.L. van Renesse (ed.), Vol. 4677, pp. 65-80.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real TABLE 1-2 Committee’s Analysis of Banknote Features Used in Commercial Machine Authentication   Class of Machine Reader   Single-Note Denominator Single-Note Authenticator Desktop Counter High-Speed Counter-Sorter Feature Low End High End Optical spectrum   ● ● ● ● Magnetic properties   ● ● ● ● Paper fluorescence     ● ● ● Fluorescent strip     ● ● ● Color-shifting inks ● ● ●     NOTE: Features not used in commercial machine authentication include the watermark, micro-printing, portrait, freedom symbols, intaglio printing, color, digital counterfeit-deterrence system, metallic ink seals, and colored fibers. “●” indicates use in commercial machine authentication; “blank,” not used. from note to note and the complexity of the overall design.31,32 All of the studies cited observe that education of the public, with emphasis on cash handlers, plays a large role in the recognition of a genuine note. Machine Counting and Authentication In addition to the visually and tactilely detectable features of FRNs—a key line of defense against the passing of counterfeit notes—several machine-readable features are useful for both authentication and denomination. Machine reading of banknotes is a new technology; it was virtually nonexistent 15 years ago but now annually processes more than $64 billion in U.S. currency. The features of U.S. banknotes most used in current machine readers are the optical spectrum and image, magnetic inks, ultraviolet fluorescence, ultraviolet spectrum, and infrared ink pattern. Low-end readers may sense only a single feature, usually the infrared ink pattern; high-end readers may use 10 or more measurements to authenticate each note. Four classes of machine reader are shown in Table 1-2. Each of these machines relies on different sets of banknote features: 31 A.A. Andrade. 2004. Assessing the security of a hologram with the assistance of a multi-criteria decision analysis. Keesing Journal of Documents and Identity 9:10-14. 32 R.M. Klein, S. Gadbois, and J.J. Christie. 2004. Perception and detection of counterfeit currency in Canada: Note quality, training and security features. Proceedings of SPIE, Optical Security and Counterfeit Deterrence Techniques V, R.L. van Renesse (ed.), Vol. 5310, pp. 1-12.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real Single-note denominators. Commonly found in vending machines and change machines and at self-checkout stations, these typically use infrared, broad-wavelength optical, or magnetic sensors to detect denomination-specific features. Single-note authenticators. These typically include additional sensors for the detection of ultraviolet and fluorescent patterns and for the identification of individual features. Desktop counters. These are used to sort and count large numbers of notes at high speeds, up to thousands of notes per minute. They typically employ broad-wavelength optical imaging, ultraviolet spectrum, and magnetic signals. High-speed counter-sorters. These require features that give a strong signal that is not highly position dependent; thus, neither the ultraviolet and infrared ink features nor the gamut of overt features are generally sensed. Large-scale counter-sorters, used typically by banks, casinos, and high-volume businesses, employ detection technologies similar to those of desktop counters. Typically, manufacturers of machine readers report that low-quality counterfeits are identified by a low optical image quality, lack of magnetic and/or infrared ink, or incorrect paper fluorescence. It may require detailed magnetic signature sensing or ultraviolet spectrum sensing to detect high-quality counterfeits. Most overt counterfeit-deterrent features are not used by machine readers because, as explained below, they would be difficult for these machines to sense, locate, or verify. Typical machine readers use point sensors that scan a narrow band as the note moves through the reader; they do not scan the full width of the bill. To do so would require an array of, or rastered, point sensors, a design that would significantly increase cost owing to the instrumentation and data-processing requirements. The design compromise thus used in current machine readers makes small, distinct features such as security strips, which occur in different locations on each denomination, difficult to use because the sensor “window” might miss them. In addition, the large data set collected by scanning the complete note would require too much time to analyze. Because point sensors are used, image-recognition schemes, which require scanning a large area, are not practical. Finally, features that move when a note is redesigned may move out of the sensor window. For a high-speed counter, the signal strength from each note must be high enough to be sensed in 0.04 second. Several features can be useful for reading in this fraction of a second, including the magnetic ink signal, the pattern in infrared ink, and the ultraviolet spectrum and fluorescence of the paper. High color contrast, as in previous, all-intaglio note series, provides a strong optical signal; however,

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real artistically smooth shadings and the addition of multiple colors and features cause the optical contrast to decrease. In addition, for the purposes of machine readers, the signal from a feature must be highly reliable. Overall color, which changes with use, is an example of an unreliable signal. Machine readers feed notes in one of two directions. “Short-end-first” readers include nearly all single-note readers, as well as some large-scale counter-sorters. All other high-speed readers take notes “wide-end first.” The advantage of short-end-first readers is that sensing the length of the bill provides more information and a higher signal. Wide-end-first readers have the advantage in speed because they read a shorter path per bill. Certain features on current notes are easily read in either feed direction. These include the ultraviolet spectrum and fluorescence of the paper and the patterns in magnetic and optical ink in the printed image. An example of a feature that is not readable in both directions is the infrared ink pattern, which is a set of stripes parallel to the short edge of the note.33 A short-end-first reader senses an on-off pattern as the counter moves along the note, whereas a wide-end-first reader cannot sense the stripe pattern, but only whether the sensor is or is not within a stripe. CONCLUSIONS Although U.S. currency has one of the lowest rates of counterfeiting of any major currency, counterfeiting remains an economic, psychological, and political threat. Therefore, it is in the national interest to preserve the actual and perceived security of U.S. currency. Today, domestic counterfeiting—dominated by digital imaging technologies—focuses on the $20 note. Foreign counterfeiting centers on the $100 note produced by more traditional methods. It is likely that the increasing accessibility of advanced printing equipment, materials, and information will blur the distinctions between classes of counterfeiters. Security features that maintain the “look and feel” of historical U.S. banknotes have been added to today’s Federal Reserve notes. These new features—including security strips, watermarks, embedded fibers, and color-shifting ink, as well as microprinting, fine-line printing, and color printing—provide means for counterfeit deterrence and authentication as well as presenting difficulties for nonauthorized sources attempting to replicate the notes. 33 Staff members, Cummins-Allison Corporation, Mount Prospect, Ill. 2005. Discussions during a subcommittee visit, October 7.

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A Path to the Next Generation of U.S. Banknotes: Keeping Them Real The security features in current use are highly durable, low-cost, odorless,34 and environmentally sound. Many of the features are detectable by the unaided eye. The unique look and feel of the substrate itself is an important part of the FRN’s recognizability, so printing over much of it may be counterproductive. The use of machine readers for currency is increasing worldwide; the security features used by machine readers differ from those used by human cash handlers. Because the machine-readable features of currency are sometimes changed as currency design changes, the design of these machines must be modified with each currency design change. Additionally, the orientation of features may not necessarily work optimally with high-speed machine feeders; such incompatibility can limit the machine’s functionality. 34 It is interesting to note that banknotes are odorless once the ink has fully dried; however, some volatiles may be detected by scent in brand-new notes.