What is programmable money?
Programmable money is a type of digital currency that can be made to follow specific instructions through computer programs. Money can be set to do certain things automatically when certain conditions are met, without needing manual intervention.
Programmable money combines the storage of digital value with the ability to control that value programmatically within the same system. Certain governments are implementing this paradigm to transfer benefits and encourage financial inclusion. Funds can be programmed to allocate money to specific projects, control value based on time or place, or be released or transferred when certain conditions are met.
Such money is revolutionising finance by using logic-based rules, which make financial services more transparent and efficient. Certain governments are implementing this paradigm to transfer benefits and encourage financial inclusion. Funds can be programmed to allocate money to specific projects, control value based on time or place, or be released or transferred when certain conditions are met.
The Rise of Programmable Currency
- Few central banks are exploring the launch of sovereign digital currencies, or CBDCs, to mirror traditional cash to cater to a tokenized economy and also gain the flexibility to transfer benefits and promote accessibility while reducing the cost of cash.
Cryptocurrencies or any on-chain tokens launched by private players that are natively based on blockchain technology are amenable to programmable money and use the capacity of smart contracts to implement this capability.
Why is it needed?
Programmable money is essential because it operates on networks that establish trust without relying on a trusted third party. By doing so, it brings about efficiency by cutting out intermediaries in transactions. This eliminates the need for intermediaries. For instance, instead of a bank providing escrow services, a smart contract can now securely hold money for a sale and release it only when specific conditions are met. With advanced smart contracts, it can replicate complex financial products at a fraction of the usual cost.
On the other hand, the need to digitize the economy, ensure effective transmission of monetary policies, and guard against potential threats from other CBDCs leading to currency substitution are the main driving forces behind Central Bank Digital Currencies (CBDCs).
What technology do we need to drive it?
The technology behind programmable money relies on cryptographic functions and distributed ledger technology (DLT). DLT depends on validating nodes that ensure the network's validity. The more validating nodes, the more decentralised the network becomes. These nodes validate transactions and maintain network security, receiving compensation through transaction fees or newly created tokens.
What does programmable money promise us?
- Frictionless Payments: Programmable currency, with embedded logic, allows companies to manage complex supply chains; this offers the potential for instantaneous payment upon product receipt. The same concept can also be used in a machine-to-machine economy and can spawn myriad business models in this area.
- Transparency and Auditability: Programmable money creates transparent transaction records and transaction histories. These foster trust among stakeholders and assist in anti-money laundering drives.
- Enhanced Efficiency: Programmable money streamlines transactional processes by validating contractual milestones with timely payments, thereby speeding up business and payment settlements.
- New Business Models: Smart contracts, one of the bedrocks of programmable money, lead the way to create and manage novel financial instruments using decentralised applications.
What are the use cases for it?
1.Loyalty and Reward Programmes: Loyalty systems through seamless, traceable, programmable loyalty tokens.
2.Supply Chain Transactions: Transaction settlements by triggering payments upon meeting specific conditions, improving traceability, and eliminating dispute resolution hassles
3.Healthcare: simplifying medical payments, automating insurance claims
4.Corporate Treasuries: Improve the efficiency of treasury management by aligning payments with real-time data.
5.Energy and Utilities: Transforming energy or utility billing and payment/settlement processes. This can also facilitate peer-to-peer energy trading with automated payments.
6.Exploring Potential Use Cases: Innovative use cases are emerging in the areas of finance, e-governance, supply chain management, and many more.
Success Story
European Bank Loyalty Coin
A European bank has innovatively crafted a loyalty coin on blockchain, and this integration facilitates seamless on-chain coin movements with off-chain products and services, streamlining reward and payment ecosystems.
Source:
- SAP BrandVoice: Expanding The Adoption Of Intelligent Technology To Catalyze Growth (forbes.com)
- https://www.intellecteu.com/blog/leading-the-way-fintech-innovations-in-programmable-money
- https://www.federalreserve.gov/econres/notes/feds-notes/what-is-programmable-money-20210623.html