Automated paper currency recognition system can be a very good utility in banking systems and other field also. Fake notes in India in denominations of Rs.100, 500 and 1000 are being flooded into the system. Over the past few years, as results of the great technological advances in color printing, duplicating, and scanning, counterfeiting problems have become more and more serious. In this article, recognition of paper currency with the help of digital image processing techniques is described. Two characteristics of Indian paper currency is selected for counterfeit detection included identification mark and currency serial number. The identification mark also decides the currency denomination. The characteristics extraction is performed on the image of the currency and it is compared with the characteristics of the genuine currency. The Canny operator with gradient magnitude is used for characteristic extraction. . The currency will be verified by using image processing techniques. The approach consists of a number of components including image processing, edge detection, image segmentation, characteristic extraction, comparing images.