The nature of payments is changing: programmable money

In the vast expanse of financial innovation, where the boundaries between tradition and transformation blur, one concept emerges with the power to reshape the very essence of money itself: programmable money. Imagine a world where money is not just a static medium of exchange, but a dynamic entity capable of encoding rules, executing commands and adapting to the needs of its users. This is the realm of programmable currencies, where the traditional confines of finance are challenged and new possibilities unfold at the intersection of technology, economics and governance. The distinction between programmable payments and programmable money delves into the essence of what can be coded, and so automated. In programmable payments, the focus lies on orchestrating the movement of value or assets through the implementation of smart contracts, typically powered by distributed ledger technology (DLTs). Conversely, programmable money involves encoding the very nature or value of the asset itself. However, it is important to note that not all forms of value or assets can be subject to such programming. For instance, physical cash and digital commercial bank money currently lack the technical infrastructure necessary for programmability.

Yet, within the realm of digital currencies or assets transacted on blockchains or DLTs, smart contracts find their place. This is particularly evident in the tokenization of commercial bank money. Unlike stablecoins, tokenized commercial bank money represents the familiar funds held within traditional bank accounts, offering a bridge between conventional finance and the digital landscape. Tokenized deposits are different from stablecoins because they are basically the same money that you hold in your bank account today but, by tokenizing this money, it can be transacted on a blockchain infrastructure - not the case today with traditional payment systems and underlying operations. And it would appear that the adoption of digital payments (and therefore programmable money) maybe closer than many believe. In March 2024, trading volumes for stablecoins surged to $2.18trillion in just one month - an asset class which, according to CoinGecko, is only worth a little over $160billion. The biggest stablecoin is Tether’s USDT and it accounted for a significant 70% of this volume, equating to over $1.5trillion of turnover in a month - which is more than typically the Hong Kong Dollar or the Swedish Krona turnover in the same period of time. However, a report from Visa claims the majority of stablecoin transactions are not genuine users. In April 2024, whilst there were $2.2 trillion worth of transactions, only $149 billion originated from “organic payments activity”. But the report was from Visa, which surely must be concerned about the rise of stablecoins? Historically, the large debit/credit card firms claimed that stablecoins lacked the ability to scale and handle the volume of transactions firms such as Visa and Mastercard handled. However, if stablecoins continue processing transactions worth $2.2trillion a month (i.e. $26.4 trillion p.a.) this would be almost 80% more than the $14.8trillion worth of payments Visa processed in 2023!

Turnover of a selection of 10 of the world’s most actively traded currencies

% of payments Statistic

Source: Teamblockchain

So, why do we need programmable money? In essence, the rise of programmable money in the form of commercially issued stablecoins, central bank digital currencies (CBDCs) and tokenized deposits prompts deep reflection on its underlying motivations and potential implications, especially within the intricate landscape of the financial industry. At its core, programmability offers a tantalising prospect for simplifying compliance processes, envisioning a future where regulatory principles are encoded directly into the fabric of money itself. This innovative approach could fundamentally reshape how compliance, consumer protection and anti-money laundering measures are enacted - potentially pre-empting the need for reactionary regulatory interventions. Yet, this brave new frontier inevitably beckons critical questions about the evolving regulatory landscape and the nuanced interplay between technology and governance. Beyond regulatory considerations, the allure of programmable money lies in its promise to revolutionize value propositions for both retail and business users of payments. By presenting programmable payments and money as a bespoke menu of options, financial institutions aim to cater to diverse preferences and requirements. Delving deeper into the retail realm, the quest for data privacy and identity verification emerges as a paramount concern, particularly in scenarios involving the distribution of welfare benefits. Thus, the quest for a resilient framework to securely identify individuals, businesses and assets in the digital realm becomes imperative - all whilst safeguarding the sacred tenets of privacy.

Already, HSBC has created a blockchain-powered platform, FX Everywhere, which has proved to be so successful that the platform is also being used by Wells Fargo. In addition, SWIFT has “promised it can handle digi-bucks and tokenized assets without new infrastructure.” Meanwhile, JP Morgan has developed Partior, a tokenized deposit platform designed for cross border payments and correspondent banks, stating that: “We believe that the market will likely move away from e-money tokens toward tokenized commercial bank deposits as the preferred form of on- chain money.” In the wholesale market, the allure of programmable money is equally compelling, particularly in the domain of liquidity management and making international payments. Exposed during the tumultuous events of the 2007/2008 financial crisis, the challenges of optimizing intraday liquidity and forecasting accurately loom large. Here, programmable money holds the promise of unlocking new frontiers in liquidity management, potentially offering a lifeline to financial institutions navigating treacherous waters. And for central banks, programmable CBDCs herald a new era of monetary policy implementation and experimentation. From applying interest rates to incentivising spending through time-bound money (i.e. use it or lose it), the possibilities are as vast as they are intriguing. Yet, amidst the excitement, there looms a fundamental tension between the centralized aspirations of central banks and the decentralized ethos underpinning emerging decentralized finance (DeFi) platforms.

As we seemingly move ever closer to having the option of digital payments the required infrastructure is being crated and existing payment systems are being analysed to ensure programable money can be introduced. Indeed, the bank of England Bank of England have been testing existing Point of Sales machines able to understand if they are able to process a Digital Pound. In a report the Bank of England concluded:
 -“ Existing POS terminals in the UK could, in principle, be used to initiate digital pound payments.
- Those terminals do not appear to require modification in order to make digital pound payments.
- The experiment also concluded that it is technically feasible to implement offline payments functionality at points of sale using existing POS terminals. But this functionality might require that an offline payments application be deployed to those terminals in order to store offline balances. Therefore, while existing POS terminals may not need to be modified to make online digital pound payments, they might need to be modified for offline payments."

So, what is required in order to witness programmable money becoming more widespread? As we traverse the realm of programmable payments and delve into the evolving landscape of programmable money, we encounter a realm of increasingly adaptable payment solutions. These innovations not only streamline payment processes but also introduce programmable features that offer enhanced flexibility and control. Stablecoins take this evolution a step further by enabling programmability within the money itself, empowering users with improved fraud controls and a spectrum of flexible choices. And, with CBDCs emerging on the horizon, questions naturally arise regarding their programmability and the extent of user involvement in shaping their functionalities. Ethical considerations figure prominently in the design phase of CBDCs, prompting careful reflection on the implications of programmability and in particular the importance of privacy. Indeed, the Bank of England stated in its report in January 2024: “The Bank is committed to exploring technological options that would prevent the Bank from accessing any personal data through the core infrastructure.” Furthermore, the Bank of England has opted against incorporating programmability into a UK CBDC.

From a pragmatic standpoint, an holistic assessment of the UK's digital readiness becomes imperative; this entails ensuring ubiquitous network connectivity, robust data infrastructure and stringent verification mechanisms to underpin the digital economy. Additionally, fostering digital inclusion and equipping UK citizens with the requisite skills are essential for leveraging these innovations effectively. The Payments Association has produced a report and is committed to champion the UK economy on its journey towards embracing the transformative landscape of programmable digital money. In navigating this complex terrain, one thing remains abundantly clear: the future of programmable money is both tantalizing and fraught with complexity. As we chart this uncharted territory, thoughtful consideration of its purpose, implications and ethical dimensions is imperative to ensure that innovation serves as a force for good in shaping the future of finance.