The programmable money promise: potential advantages and opportunities at stake

Imagine a case where a payment sent by a buyer is credited to the seller’s account only after the goods are received, or government assistance for a skill development program is disbursed only after beneficiaries complete their training on an online portal. These are just a few possibilities that programmable money can bring to life.

Programmable money is a revolutionary concept poised to enhance monetary and financial systems by enabling seamless securities settlements, tokenised deposits, and regulatory compliance embedded within transactions.

Central banks worldwide are exploring their potential through pilots and adoption programs. For instance, the European Central Bank (ECB) is investigating the potential of a digital euro, which could incorporate programmable features for more controlled and purpose-specific transactions.

In this article, we’ll dive into the transformative promise of programmable money and the vast opportunities it unlocks.

Understanding programmable money and how it works

Programmable money can be understood as a monetary system that can be programmed with predefined rules and conditions, dictating the terms of its usage. According to JP Morgan, “programmable money takes things a step further by embedding rules directly within the store of value itself. These rules dictate or restrict the usage of money, introducing new levels of control and security.” This controlled usage differentiates it from other forms of digital monetary systems.

There are various conditions that can be attached to programmable money. Using contractual agreements, it is possible to even incorporate monetary policies into programmable money and create stability by making rule-based adjustments to interest and inflation rates etc. Or, in the retail context, parents can allocate a portion of their children’s pocket money to healthy snacks, to limit the consumption of junk food.

Structurally, programmable money can be viewed as an automated monetary system executed via a smart contract on a distributed ledger system, such as blockchain. It is integrated with decentralized applications running on network infrastructures in order to leverage services, such as NFT (non-fungible tokens), marketplaces and DeFi (decentralized finance) platforms. It also enables tokenization, that is, the representation of various assets on a distributed ledger using tokens. Oracles – intermediaries connecting contracts on a distributed ledger with external data sources – ensure that the integrated logic-based conditions of use are met.

A program of advantage

Embedding logic into the value of programmable money produces several advantages, ranging from better user experiences to more transparent, efficient, and accessible financial services to prevention of duplicate spending.

Here is a list of advantages and potential opportunities that programmable money brings:

Transparency and auditability

Programmable money improves transparency and auditability of transactions by providing a ledger of financial transactions and direct access to transaction history. Extensive monitoring functionality guards against money laundering and other nefarious financial activity, including the siphoning of money from government benefit programs by unscrupulous intermediaries.

Greater efficiency, cost optimization

The synchronization of contractual obligations and payment streamlines transactions across multiple tiers. The usage of automated smart contracts without intermediaries increases transaction efficiency and reduces both human effort and error. For instance, programmable money can help integrate payment and trade data into a single instrument, doing away with the two nonsense processes currently being used, and eliminating chances of discrepancy. Using smart contracts for currency conversion and transactions in cross-border payments can save significant costs and processing time.

Even corporate treasury management can benefit from programmable money, which connects payment, identity and real-time data to prevent mismanagement of company funds, reducing the need for manual monitoring.

Innovation and customization

Programmable money can support the creation of innovative financial instruments and decentralized applications, providing a foundation for new business models. In fact, programmable monetary platforms can be viewed as the “Airbnb of the financial sector”, as they facilitate direct connections between customers and providers – in this case, borrowers and lenders – free of intermediaries, red tape and other barriers.

Furthermore, compared to conventional currencies, programmable money allows much more customization to enable new investment strategies, innovative financial instruments, and better governance.

Lower counterparty risk

Smart contracts, programmed to execute subject to preconditions, without need for an intermediary, reduce counterparty risk. They can transform supply chain transaction settlement by ensuring all conditions of supply and payment are met. It also enables traceability that fosters better trust between parties, protection against fraud, and fewer disputes.

Ecosystem integration

By promoting data and value transfer between networks and platforms, programmable money fosters interoperability and an accessible, interconnected financial ecosystem. For example, it can connect healthcare participants to simplify medical payments and insurance claims, and also ensure responsible management of patient data.

Here is another use case for ecosystem integration: programmable money can be used to make payments for acquiring a share in tokenized high-value assets, such as artworks by famous painters, prized real estate, or even high-end sports cars; gamers can use it to purchase NFTs to buy or trade in-game collectibles. All of this strengthens the creator ecosystem by protecting intellectual property and ownership rights and facilitating the distribution of payments to content creators.

CBDCs: the big opportunity

One of the biggest opportunities for programmable money is the Central Bank Digital Currency (CBDC) – the digital form of a nation’s fiat currency that is regulated by its central bank.

Offering myriad advantages, including faster payments, cheaper cross-border transactions, and “no physical manufacturing,” CBDCs have attracted the interest of central banks worldwide: a survey of central banks by the Bank for International Settlements (BIS), showed that most saw value in having a retail CBDC and fast payments system, and also revealed that by 2030 there could be as many as 15 retail CBDCs and nine wholesale CBDCs in circulation.

Apart from all the programmable money advantages discussed earlier, CBDCs also enable financial inclusion. For example, the Bank of England (BoE) is exploring the possibility of issuing a digital pound (CBDC). According to a consultation paper by the BoE and HM Treasury, “financial inclusion is relatively high in the UK and the Government has already made good steps towards enhancing it. The digital pound could complement existing initiatives as another option for some financially excluded groups.”

Looking ahead

The future of programmable money is full of exciting possibilities: central banks may introduce programmable digital currencies to transform monetary policy; businesses and individuals could benefit from cost reduction and process optimization; and currency-based decentralized applications could provide banking and investment opportunities to underserved populations.

To capitalize on such opportunities, banks should closely watch this space and take proactive steps to position themselves as the partner of choice for facilitating the growth of programmable money and the distribution of CBDCs.

By Rajashekara V. MaiyaVice President, Global Head – Business Consulting, Infosys Finacle, and Raktim SinghSenior Industry Principal, Infosys Finacle

Sponsored by Infosys Finacle, part of EdgeVerve Systems, a wholly-owned subsidiary of Infosys.

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