Recently proposed by Singapore in collaboration with fintech heavy hitters, PBM can be a powerful tool for promoting accountability and efficiency, writes Anndy Lian. But it’s not without risks.
The rise of digital assets has transformed how we handle financial transactions and engage with the global economy. From central bank digital currencies to stablecoins and tokenized bank liabilities, these digital representations of value offer the promise of faster, more inclusive, and more valuable transactions. However, to fully realize their benefits, we need to go beyond the capabilities of existing electronic payment systems.
One of the key advantages of digital money is its programmability, which allows for automated transactions, predefined conditions and streamlined financial processes. But there is an ongoing debate about how programmability affects money as a medium of exchange — a topic that is now resurfacing with the recent white paper on “purpose-bound money” published by the Monetary Authority of Singapore in collaboration with the International Monetary Fund, Amazon, DBS Bank, JPMorgan’s Onyx, Bank of Korea and others. Striking a balance is crucial to ensure programmability doesn’t compromise the fungibility and liquidity of digital money.
What is ‘purpose-bound money’?
Purpose-bound money, or PBM for short, introduces a unique concept that enables money to be directed toward specific purposes without directly programming the money itself. It achieves this through a standardized protocol that works with different ledger technologies and forms of money. Utilizing a wrapper implemented as smart contract code, it defines conditions for usage while preserving the underlying digital money’s integrity. This design allows for the deployment of digital money for various purposes without compromising its inherent properties.
It combines programmable payment and programmable money, providing a versatile framework for different use cases. Programmable payment executes payments based on predefined conditions, while programmable money embeds rules within the store of value itself. PBM strikes a delicate balance between the two, enabling directed usage without fragmenting liquidity or compromising money’s fungibility. It fosters interoperability within the financial infrastructure through a standardized protocol for interacting with different forms of digital money.
There are two main components: the wrapper implemented as smart contract code and the underlying digital money serving as collateral. The creator defines the logic, mints tokens and distributes them. The holders can redeem non-expired tokens, while redeemers receive the underlying digital money when tokens are transferred. The lifecycle includes stages such as issuance, distribution, transfer, redemption and expiration. Tokens are created and distributed based on programmed rules, and when conditions are fulfilled, they can be redeemed, transferring the underlying digital money to the recipient. Expired tokens can be destroyed or paused indefinitely.
Introducing new payment instruments brings changes in user experiences, requiring adjustment and familiarization. Different users may perceive these changes differently, with some embracing them positively and others finding them disruptive. To address this challenge, it’s crucial to consider the digital readiness of stakeholders when designing the PBM scheme. The user experience should be intuitive and accessible, especially for vulnerable populations. A simplified user experience can initially abstract away the complexities of managing keys to access digital money or PBMs. On top of that, it can be designed to be compatible with existing payment systems, reducing barriers in fiat settlement and merchant acceptance.
Given the reliance on smart contract code, establishing a robust governance framework becomes crucial to ensuring code safety during the software deployment process. Trusted entities can be engaged to verify the logic, assess vulnerabilities, and provide standardized oracle data. Independent audits are highly recommended to proactively mitigate potential security risks, such as malicious code. In distributed ledger-based networks, trusted third-party organizations can function as “oracles,” offering reliable external data inputs.
Potential use cases
PBM has a number of uses in different fields, delivering innovative solutions to problems and enhancing the efficiency of digital transactions.
In the realm of pre-paid packages, PBM can enable businesses to collect upfront fees before providing goods or services. By incorporating payment conditions, companies can ensure that a vendor has fulfilled its obligations before accessing the pre-committed funds. For online commerce, it offers a reliable alternative for secure online shopping. It reassures both merchants and consumers that funds will only be transferred once service obligations are met. This mitigates the risks associated with non-delivery or non-payment, fostering trust and facilitating smooth transactions.
In contractual agreements, it can be further utilized to establish payment structures based on terms outlined in property sale agreements. Funds can be released at different stages of property development or sales processes upon achieving specific milestones. This ensures controlled payments linked to the completion of significant stages.
PBM holds significant promise in areas like trade finance and commercial leases. Instead of traditional security deposits, PBM can be used to ensure full deposit recovery at the end of a lease. In case of disputes, it can be put on hold until resolution, offering a fair and transparent mechanism for conflict resolution. In trade finance, PBM can serve as a powerful tool for automating payments upon the fulfillment of service obligations, functioning as transferable negotiable instruments, streamlining trade processes, reducing paperwork, and enhancing overall efficiency.
Purpose-bound money can also contribute to donations by bringing greater transparency and accountability to the process. By ensuring that funds reach the intended beneficiaries and are used as intended, PBMs inspire confidence in donors and promote philanthropic activities. Moreover, by embedding policy requirements, automated compliance checks for cross-border payments become possible. This reduces costs, increases efficiency, and promotes regulatory and policy interoperability, ultimately facilitating smoother and more streamlined cross-border transactions.
PBM introduces a programmable approach to digital transactions, providing versatile solutions across various sectors. Its applications encompass all kinds of pre-paid packages, online commerce, contractual agreements, donations, and cross-border payments. Through these applications, PBM enhances efficiency, transparency and trust within the digital asset ecosystem.
As the digital money space continues to grow and evolve, the area is ripe for future research and development. Account abstraction and utilizing smart contract wallets or similar mechanisms can significantly improve user experience and security. Implementing features like account recovery, transaction limits and account freezing can also simplify user interactions without requiring an understanding of the underlying technology.
Additionally, research can explore the use of PBMs with offline payment options, without the need for a smartphone, ensuring financial inclusion and participation without the need for network connectivity. Implementing a name-addressing service can also enhance the user experience by providing a meaningful identifier mapping to a wallet address, ensuring transfers reach the intended recipients without relying solely on bank account numbers.
Risks and disadvantages
The nature of such money offers a system that promotes accountability and safeguards against fund misuse. However, it’s important to recognize that this approach also has implications for the flexibility of funds. While it ensures that funds are allocated for their intended purposes, it can limit the ability of individuals and businesses to reallocate or redirect funds when circumstances change or unexpected needs arise. The strict structure may pose challenges for managing the flow of funds and potentially affecting financial flexibility.
Implementing such systems is a complex endeavor that requires substantial technological infrastructure and integration. Organizations must establish robust systems to effectively track and manage funds according to their designated purposes. This implementation process demands expertise in financial management, technology integration, and compliance, making it resource-intensive. Smaller businesses or non-profit organizations with limited resources may face difficulties in adopting and managing it due to these technical complexities.
Proper management and oversight are essential for maintaining trust and transparency. Failure to execute with care could result in mismanagement, which undermines the integrity of the system and erodes stakeholder trust. To prevent such issues, organizations implementing should establish strong governance mechanisms, implement rigorous monitoring and reporting systems, and ensure responsible fund allocation.
PMB relies heavily on technology infrastructure, including digital platforms and payment systems, to facilitate transactions and track funds. While technological advancements have made digital transactions more accessible, they also introduce a level of dependency and risks. Organizations relying on it must ensure the availability, reliability and security of the underlying technology. Disruptions, technical glitches or cyber-attacks can impede access to PBM funds, leading to delays or difficulties in utilizing the allocated funds effectively.
Operating within existing legal and regulatory frameworks governing financial transactions, PBM must comply with regulations such as anti-money laundering (AML) and know-your-customer (KYC) requirements. Navigating these regulatory landscapes, particularly in cross-border transactions, can be complex. Organizations implementing that must ensure adherence to guidelines and fulfill reporting obligations. Staying updated with evolving regulations and maintaining compliance may require significant resources and effort.
To assess the suitability of adoption, organizations and individuals should carefully evaluate their specific needs, circumstances, and risk tolerance. Adequate planning, implementation, and ongoing monitoring are essential to address these challenges and maximize the benefits that purpose-bound money can offer.
This “new money” introduces a new paradigm for programmability within the digital asset ecosystem. By leveraging a wrapper that defines usage conditions and existing digital money, it enables directed usage without compromising the fungibility or medium of exchange function. This framework provides a standardized protocol for interacting with different forms of digital money, fostering interoperability within the financial infrastructure.
Policymakers should carefully consider the implementation of PBM-based solutions, addressing factors such as the authority responsible for issuing and distributing digital currencies and the establishment of clear usage conditions. Prioritizing user readiness, especially among vulnerable populations, is crucial to providing a simplified and intuitive user experience. Ensuring compatibility with existing payment systems, addressing concerns, and managing disruptions are vital for a smooth transition to PBM.
Deploying requires robust governance mechanisms and security measures. Independent audits, engagement with trusted entities, and standardized oracle data play a crucial role in ensuring code safety and mitigating security risks. Ongoing research and development are necessary to refine the user experience, explore new use cases, and unlock the full potential of fostering economic value and financial inclusion.
Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.
Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.
An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.