Programmable or 'purpose-bound' money is coming, probably as a feature in central bank digital currencies
Governments may dictate where or when you use it, but it's not a gift card
Interview As the tide of enthusiasm for cryptocurrency ebbs, new forms of digital currency are emerging, including something called purpose bound money (PBM) – digibucks that can only be spent in certain ways coded into them by their issuers, or would only change hands under certain conditions.
The core idea of PBM is that its issuer can stipulate what the digicash is used for, who it can be transferred to, daily spending limits, and even give it a use-by date. The number of constraints imposed on the instruments can be many or none.
Amazon, for example, has imagined PBMs could mean “payments to register once conditions like payment on delivery are met."
Another example of PBM was shown at this year's Singapore Fintech Festival. Attendees who set up a wallet were issued digital vouchers that could be redeemed for items like food at around 200 merchants.
If that sounds a lot like a gift card or voucher, you're not alone in noting the similarities between PBM and such instruments.
PBM could also be used to speed cross-border payments, because money designated only for use for one transaction could include metadata that helps to automate compliance checks.
"Historically we have a payment instrument and we have trade documents which are two separate processes, and then we come to have a full operational team looking at this," Standard Chartered's head of digital assets, Steven Hu, told The Reg. If payment and trade information were combined into a single instrument , it would "present an opportunity to transform the way that trade financing is being done today," he adds.
How does it work?
Like a piece of candy, a PBM consists of two main components: a "wrapper," and the content inside. In the case of PBM, the wrapper defines the intended use and must be removed to access the value underneath.
That wrapper comes in the form of a smart contract, a concept popularized in blockchain circles. that applies "if-this-then-that" logic to progress transactions.
The Monetary Authority of Singapore (MAS), the nation’s central bank, believes PBM could be applied to many forms of digital currencies.
"Central bank digital currencies (CBDCs), tokenized bank liabilities and potentially well-regulated stablecoins, together with a set of well-designed smart contracts, could serve as the medium of exchange for this new digital asset ecosystem," opined the Monetary Authority of Singapore (MAS) in a June white paper [PDF] about PBM.
It's not a new concept and Singapore is far from being the first to test or implement it. China's digital yuan can already be programmed to expire and a Chinese foreign exchange regulator recently expressed a desire for more programmable features. Sweden's Riksbank has tested [PDF] conditional payment as a feature into its CBDC, as have the banks of other countries.
MAS’s chief fintech officer Sopnendu Mohanty [PDF] says that Singapore has been working to "uncover potential use cases for a programmable digital [Singapore dollar] and the infrastructure required." It launched a public-private effort to do so, called Project Orchid, in 2021.
What about fungibility and privacy?
Nitin Gaur, managing director at State Street Digital and industry podcaster, told The Register that while gift cards work within the closed system of a business, something like a purpose-bound CBDC is issued by a sovereign government.
"The government can control the purpose of it, and that's one of its intentions," Gaur told The Reg, suggesting that the most likely use of PBM is government disbursements.
"It's a good use case," he adds.
But, Gaur explains, restricting the use of money causes it to lose some of its fungibility. This is why he believes PBM won’t make a splash in capital markets.
The other concern he sees is whether people will tolerate a potential lack of privacy on how they spend their money.
Indeed, there are many concerns on what happens if programmable money becomes mainstream that come from both conspiracy theorists and cryptocurrency stalwarts alike.
Furthermore, some cultures are cautious of monetary privacy risks. Sometimes that attitude is driven by government officials, and other times it comes from the populace itself – as with Nigeria's failed adoption of the eNaira central bank digital currency.
Privacy risks and fungibility aside, Gaur says the most interesting use case for PBM is its ability to include demurrage – a penalizing interest rate that makes an asset less valuable over time. Demurrage can de-incentivize the hoarding of money, which could come in handy when funds are distributed to a populace as an economic stimulus.
"It's like the government saying I won't control how you use it, but you have to use it," says Gaur.
- Britcoin or Britcon? Bank of England grilled on Digital Pound privacy concerns
- US senators warn China's Digital Yuan could compromise Olympic athletes
- Singapore, Amazon lead push for 'purpose bound' digital money
- Nigeria's central bank digital currency is 'same Naira, more possibilities' – if you count government snooping
MAS has its own ideas about use cases, which include things like contractual agreements, commercial leases, e-commerce, and philanthropy.
For instance, a buyer pays for goods, but the merchant doesn't get the money until the goods are delivered. Or a security deposit is made on a property lease and kept in that form until it is returned. If there is any dispute over damages to the home, the money is held over until that dispute is settled. Or a financial donation to a soup kitchen for supplies may only be spent on groceries.
A pitstop on the way to CBDCs
While PBM has many potential uses and could be built into any tokenized cash, the instruments appear likely to become implemented alongside central bank digital currencies (CBDCs).
"Project Orchid and its experiments are a step forward in advancing the global learning on the possibility of programmable money and payments. Rather than building a CBDC ledger first, the project has taken a user-driven approach instead," says MAS’s Mohanty in a 2022 report [PDF].
The Reg asked Gaur if this means CBDCs will mostly be programmable. His answer was that binding CBDCs to specific purposes is not the intention of such digital currencies.
"They are asking: can we explore the optionality to one day implement in CDBCs?" he opined Gaur. "This is a way to build in functionality, so you don't have to go in and redesign in the future."
The sentiment is global. The European Data Protection Supervisor (EDPS) has called programmable money an "important design choice." Plus, it's a feature already available in other systems.
"We can already program our payments throughout bank accounts," EDPS pointed out last March.
The International Monetary Fund IMF has started to sketch out desirable features of PBM. In a November 2023 blog post, the org says programmable money could increase the efficiency and effectiveness of implementing capital-flow management measures.
And if it's already coming, it's guaranteed that industry will want in on designing it.
In a recent op-ed, Amazon director of product management and payment Sujit Misra suggested that merchants can currently play a "decisive role" in designing features that promote adoption and create consumer confidence in this new form of money. ®