There are some services out there that attempt to create a physical medium for btc (bitbills, causasiaus coins, etc), but they all have certain flaws:

1)  No way to ensure that the issuer really did delete the private keys, and that when there are enough of the bills/coins floating around the issuer pulls a mybitcoin.com and away go all the btc

2)  There's still risk of counterfeit/tampering despite security features.

But i'd like to put together a more democratic idea, one that does in fact rely on trust/reputation.

One of the big principles of Bitcoin is this idea that its potentially anonymous, peer to peer, and no need for an intermediary and irreversible etc.  But while this is great for storing, and transacting large amounts of btc, and in situations where you can sit around a bit and wait for some confirmations, you can't buy gas like that.  You can't pick up a big bite and a big gulp at 7-11.  It won't work for the drive thru fast food joint.

So here is what I suggest:

A feature (possibly in the mainline client) that allows a user to print BitNotes.  I know there's already some good progs out there that enable a paper wallet.  I think we can build on this.

You see the problem with a paper wallet is that its just the physical version of digital bitcoin transacting.  Were you to hand it to some one, they still need to wait to ensure you aren't 2x spend attacking them. 

The solution is to have the client print out  QR code that has more than just the privkey needed to spend the note.  It needs to have some kind of digital signature that establishes some form of identity and credibility.  It should also have a receiving address for the "change." 

So here's how it would work: I can walk into the gas station, hand them a 20 btc note.  Walk out, pump my gas, and have the change sent back to embedded address.  But why would the clerk open the pump before getting confirms?

When the clerk scans my note, it automatically originates a transaction sending the btc to the gas station receiving address (eg the privkey is visible and scan able right on the note).  The note contains some kind of additional digital cert, which is either managed by a CA that tied me to a real life identity, or otherwise has escrow being held against me. 

If i pull a 2x spend attack on the gas station they lose out on 20 btc, but my digital certificate would be revoked, or tainted some how.  Or, my 100 btc in escrow would be drawn on.

Why it works:

No one really needs anonymity to spend smallish amounts of money.  Ironically when using small amounts of currency we do have anonymity.  But just try moving more than $10K USD into or out of a Bank.  We lose it when dealing in large amounts.  But again, the need for privacy is only for things such as my total balance, or for things I want to buy on the DL (porn, hookers, drugs, whatever). 

There's got to be a P2P way to do this such that any one can print a stack of qr codes of 1, 5, 10, 20 or so BTC notes.  Again, these would be "notes" as they would be passed on as promises of BTC for casual commerce.  The are intended to be scanned and tossed in the recycle bin.  Not used over and over, which is why the privkey is left in the clear. 

But inside the QR code along with this privkey, it could be PGP signed, so the gas station owner's terminal could query a 3rd party public keyserver and verify that the note was printed by me.  The keyserver could keep track of how many successful notes i passed vs any that got reversed cuz i 2x spent the coins just before walking into the store.

There would still be fraud potential, but it would be greatly minimized.  It would still beat the snot out of credit cards.  What we do it cost something to establish a personal cert.  Maybe it takes some cpu muscle to build this special public/private key reputation.  Maybe the 3rd party charges $100 per keypair.  It would be a one time investment to allow us to start passing these notes, and merchants would feel fine up to at least $100.

Thoughts?  Any ideas how likely this is to work in practice?