Radio frequency identification (RFID) technology uses wireless radio communications to uniquely identify objects or people and is one of the fastest-growing automatic data collection technologies.

RFID creates an automatic way to collect information about a product, place, time, or transaction quickly, easily, and without human error. It provides a contactless data link without need for line of sight—for example, articles inside a cardboard box or concerns about harsh or dirty environments that restrict other auto ID technologies such as bar codes.

In recent years, according to The Economist, manufacturers have been drooling over the possibility of tagging banknotes. The advantages are a combination of authentication, anticounterfeiting, and tracking.

The guts of a typical RFID tag are a microchip and an antenna (often a coil of wire). These may be sandwiched in an encapsulating plastic. There is no battery. When a tag is "interrogated" by a reading machine operating at the right RF, the antenna picks up a small amount of electromagnetic energy it uses to power the chip. The tag then broadcasts data in the chip back to the reader.

A new generation of RFID tags produced by companies such as Texas Instruments in America, Hitachi in Japan, and Infineon Technologies in Germany has broken through barriers of size (less than 1 millimeter across and ½ millimeter thick), cost, flexibility, and durability to a point where such tags can embed inside sheets of paper, such as banknotes.

The distance from tagged banknotes that chips could read would depend on the exact specifications of the chips. It would probably be somewhere between 10 centimeters and a meter.

One form of the technology can read 30 notes a second, although the tags have to be at least 2 centimeters apart to reduce interference. Initially, therefore, bundles of notes would not be readable, but notes issuing from cash machines or passing from customers to tills would.

At 20–30 cents per chip, the technology remains relatively expensive, and there is concern as to the likelihood of reaching an international agreement on a cryptographic security standard.

Banks seem interested, though. The European Central Bank (ECB) is working with "technology partners" to embed the tags into Euro notes by 2005—as a means of foiling counterfeiters. The ECB will only say of the project, "We don’t want to talk about this."

Accurate knowledge and monitoring of the population of banknotes could be a powerful tool. Mining data on how different banknotes move through the economy would make it easy to spot suspicious transactions.