The Monetary Authority of Singapore (MAS) is progressing research in digital money, including central bank digital currencies (CBDCs), and its use cases. A recent white paper, produced in cooperation with the Bank of Italy, Bank of Korea, and the International Monetary Fund, delves into possible business and operating models to explore the potential of purpose-bound money (PBM), while ensuring that “programmability does not come at the expense of digital money’s ability to serve as a medium of exchange.”
According to the paper, PBM has two primary components: a wrapper and a store of value. The wrapper, implemented as smart contract code, delineates the criteria for the underlying digital money’s usage. With a wrapper, PBMs can be programmed to release and transfer digital currency when specific conditions are met. This setup offers convenience and flexibility in usage, but the concept remains limited to intended purposes.
One of the main benefits of PBM is the privacy it offers, addressing concerns many banks have around CBDCs. The paper suggests that a PBM wrapper could be designed by a private sector entity while using a CBDC issued by a central bank as the underlying digital money. This would enable both public and private sectors to utilize digital currencies, though constraints should be set by policymakers regarding use cases and who can issue and distribute the currencies.
As more research is conducted into CBDCs globally, the banks behind the white paper believe a “common framework” is necessary to guarantee interoperability with current financial infrastructures and to interact with various types of digital money. Sopnendu Mohanty, Chief FinTech Officer at MAS, mentioned the importance of collaboration among industry players and policymakers to achieve advances in settlement efficiency, merchant acquisition, and user experience when it comes to digital money.
In addition to PBM, other methods to install programming include programmable payments, which can set recurring payments or daily spending limits via an application programming interface (API), and programmable money that combines programming and store of value capabilities. Programmable money is advantageous as it offers self-contained, conditional logic, which can be transferred on a peer-to-peer basis between parties.
As adoption of CBDCs, tokenized bank liabilities, and stablecoin designs expand globally, interoperability becomes a crucial aspect of the digital currency landscape. Both fintech and tech firms, such as Amazon, are currently testing PBM and online retail payments, highlighting the increasing potential and demand for digital currency options.
Source: Blockworks
