What is Programmable Money?

The term ‘programmable money’ is increasingly bandied about in articles, but what is it? It is largely considered in the context of B2B transactions. Perhaps a few simplistic examples of how it might work best illustrate why it is becoming a ‘thing’.

Imagine you are exporting a product and payment is denominated in your currency. The contract says payment is due when the product is delivered. For this to work, a digital currency (a smart contract that describes what happens and when) and the Internet of Things (IOT) are needed so that a delivery notification is automatically sent. In this case no Letter of Credit is needed as payment is instant on product receipt.

Or imagine you are buying land in an auction. No need to take a certified cheque with you. Instead, earmark funds for the auction in an account or accounts. These funds are only released, by smart contract, when the bidder has won. The transaction is recorded on Distributed Ledger Technology (DLT) with the government land registry.

Or a bank. Rather than provide companies with a line of credit, directly lend to supply chain suppliers based on pending and expected orders, freeing up liquidity and keeping business moving.

Today programmable money is limited by the lack of global standards and regulations in place in local and international law. The technology is working in a number of regulated environments where a small number of regulated entities partner together to execute transactions, but the technology needs to be proven at scale.

Although talk of programmable money is frequently linked to cryptocurrencies, tokenisation is perhaps more important since it is already implemented by global card networks. Tokenisation allows control over spending to be implemented, which is not the case for cryptocurrencies.

CBDCs could play an important role in unleashing the full potential of programmable money since price stability and trust are core to making this work.

In addition, as an example of control, it will be possible to build in Anti Money Laundering (AML) logic to mitigate against fraud.

Explaining tokenisation

Modern shopping can lead to complex transactions. Imagine a consumer who wants to make a purchase using a shop’s app, paying for it with loyalty rewards. They then want to pick the item up from the shop. To do this securely a great deal of data needs to be moved around to protect the consumer from fraud and maintain their privacy. This is done by something called tokenisation, based on algorithmically generated numbers.

Tokenisation replaces the cardholder’s 16-digit Visa account number with a secure identifier. The secure identifier is the token, and it is this which is transmitted, ensuring the criminal does not know the account number. Technology helps protect businesses from data breaches so that they can manage better their Payment Card Industry Data Security Standards (PCI DSS) security compliance requirements.

Tokenisation is also used by businesses to secure customer data in loyalty reward programmes, to hold card details on file and enable subscription payments for unique and repeat purchases and to allow ‘one click’ online checkouts, avoiding having to enter account details and personal information every time customers make a purchase.

Tokenisation is well established and widely used. It is also the basis for one of the options for retail CBDCs. A token identifies the original unit of digital currency issued by the central bank and it is the token that is tracked and recorded on the ledger, whether distributed or centralised.

The identity of the owner of the token is only known where that token is linked to an account or other identifier in the payment system.

Non-fungible tokens for digital assets

Non-fungible tokens (NFTs) have been born out of the digital revolution. A token can be applied to anything, for example a bank account or a digital currency. At the moment NFTs are in the news for their application to digital assets. For example, Twitter founder Jack Dorsey sold his first ever tweet as an NFT for over US$2.9 million.

‘Non-fungible’ means that the token cannot be substituted. What it represents is unique, unlike money or a bitcoin. The originality and scarcity of what the token represents is an important part of determining the value, whether a Monet picture or a digital art. When it comes to digital assets, the underlying content tends not to be unique and quite what you actually own can get complicated.

Tokenisation can occur on any blockchain but NFTs are mainly part of the Ethereum blockchain. This is separate from its Ether cryptocurrency, although NFTs are predominantly traded using Ethers. Ownership is recorded on the blockchain as a permanent public record that also serves as a certificate of authenticity. Theoretically it can’t be tampered with. NFTs are only traded using cryptocurrency.

The legal status of NFTs, particularly for digital assets, is unclear. When you buy an NFT for a digital asset you are not buying the underlying asset but a cryptographically signed ‘receipt’ that proves you own that particular digital asset in the blockchain. Simplistically you are buying a pass and a map to where that digital asset is. The copyright of that asset remains with the pre-existing copyright owner unless a binding agreement has been entered into separately. The NFT owner may not even have the right to display the asset on other products, websites or platforms.

As discussed by the CEO of Standard Chartered Bank in a recent webinar, perhaps the real revolution is that, theoretically, NFTs allow mass ownership of physical assets that previously were hard or extremely complex to divide up – a Monet painting, the cargo of a ship, a tower block.

At the moment, the law and regulations needed to enable this are not in place particularly for international transactions, but work is going on to make it possible in terms of the smart contracts, exchanges and underlying technology needed.