The Promise of Programmable Money: Potential Benefits and Odds 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 support for a skills development program is disbursed only after beneficiaries complete their training on an online portal. These are just some of the possibilities that programmable money can bring to life.

Programmable money is a revolutionary concept that aims to improve monetary and financial systems

Programmable money is a revolutionary concept that will improve monetary and financial systems by enabling seamless securities transactions, tokenization of deposits, and regulatory compliance in transactions.

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

In this article, we dive into the transformative promise of programmable money and the enormous opportunities it presents.

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, which dictate the terms of its use. According to JP Morgan, “programmable money goes a step further by embedding rules directly into the store of value itself. These rules dictate or restrict the use of money, introducing new levels of control and security.” This controlled use sets it apart from other forms of digital monetary systems.

There are several conditions that can be attached to programmable money. Using contractual agreements, it is even possible to embed monetary policy 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 part of their children’s pocket money to healthy snacks, to limit junk food consumption.

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 to leverage services such as NFT (non-fungible tokens), marketplaces, and DeFi (decentralized finance) platforms. It also enables tokenization, which is the representation of various assets on a distributed ledger using tokens. Oracles – intermediaries that connect contracts on a distributed ledger to external data sources – ensure that the integrated logic-based usage conditions are met.

A program of benefit

Building logic into the value of programmable money provides several benefits, ranging from improved user experiences to more transparent, efficient and accessible financial services and the prevention of double spending.

Below is a list of the benefits and potential opportunities that programmable money brings:

Transparency and verifiability

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

Greater efficiency, cost optimization

Synchronizing contractual obligations and payments streamlines transactions across multiple levels. Using automated smart contracts without intermediaries increases transaction efficiency and reduces both human effort and errors. For example, programmable money can help integrate payment and trading data into a single instrument, eliminating the two different processes currently in use and eliminating the possibility of discrepancy. Using smart contracts for currency conversion and cross-border payment transactions can save significant costs and processing time.

Even corporate finance management can benefit from programmable money, which connects payments, identities and real-time data to prevent mismanagement of corporate funds and reduce the need for manual auditing.

Innovation and customization

Programmable money can support the creation of innovative financial instruments and decentralized applications, thus providing a basis for new business models. Programmable money platforms can even be seen as the “Airbnb of the financial sector”, as they facilitate direct connections between customers and providers – in this case borrowers and lenders – without intermediaries, bureaucracy and other barriers.

In addition, compared to conventional currencies, programmable money offers much more possibilities for customization, enabling new investment strategies, innovative financial instruments and better governance.

Lower counterparty risk

Smart contracts, programmed to execute under conditions without the need for an intermediary, reduce counterparty risk. They can transform the handling of supply chain transactions by ensuring that all delivery and payment terms are met. They also enable traceability that increases trust between parties, protects against fraud and reduces disputes.

Ecosystem integration

By facilitating data and value transfer across networks and platforms, programmable money promotes interoperability and an accessible, interconnected financial ecosystem. For example, it can connect healthcare participants to simplify medical payments and insurance claims, as well as ensure responsible management of patient data.

Here’s another use case for ecosystem integration: Programmable money can be used to make payments to acquire a stake in high-value tokenized assets, such as artwork by famous painters, prized real estate, or even luxury 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 Central Bank Digital Currency (CBDC) – the digital form of a country’s fiat currency that is regulated by its central bank.

CBDCs offer numerous benefits, including faster payments, cheaper cross-border transactions and “no physical production”. They have attracted the interest of central banks around the world: a survey of central banks by the Bank for International Settlements (BIS) found that most saw value in a retail CBDC and a fast payments system. It also found that as many as 15 retail CBDCs and nine wholesale CBDCs could be in circulation by 2030.

In addition to all the previously discussed benefits of programmable money, 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 from the BoE and HM Treasury, “financial inclusion is relatively high in the UK and the government has already taken good steps to improve this. 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 can introduce programmable digital currencies to transform monetary policy; businesses and individuals can benefit from cost reduction and process optimization; and currency-based, decentralized applications can provide banking and investment opportunities to underserved populations.

To capitalize on such opportunities, banks must keep a close eye on 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 means of Rajashekara V. MaiyaVice President, Global Head – Business Consulting, Infosys Finacle and Raktim SinghSenior Industrial Director, Infosys Finacle

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

Financle is a leader in providing digital banking solutions to banks worldwide. With a comprehensive suite of innovative products and services, banks can improve customer experience, increase operational efficiency and achieve sustainable growth.

From core banking and payments to wealth management and digital engagement, leading banks trust Finacle to deliver transformative banking experiences in over 100 countries.

For more information, visit Infosys Finacle.