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Addressing your concerns in order...
a.) Frankly, I didn't remember using the word "terrorist" in that second paragraph. I'm not crazy about its use now either, but perhaps it seemed less severe/more relevant in 2003.
b.) As far as I can tell, your proposal of having a MD5 hash is simply to show that the machine readable element is valid. That seems like a lot of work for something that doesn't achieve much.
c.) I guess I did glance over migration period problems. (I would have sworn I mentioned something about it--for instance, once a person knows what a new $100 bill looks like, they might accept them, but they will not necessarily know what they should be looking for in order to know the document is good.)
If anything if you were to revisit and take this paper to the next step in the future just giving you or anyone else following in this direction another point of view on the subject.
Though I still believe in the MD5 hash personally since this could give a degree of larger authenticity on machine readers that would not have a picture display to compare the person to a photo on file.