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Cryptocurrency News Articles
Programmable Money: A Revolutionary Concept Poised to Enhance Monetary and Financial Systems
Sep 23, 2024 at 07:01 am
Programmable money is a revolutionary concept poised to enhance monetary and financial systems by enabling seamless securities settlements, tokenised deposits
Programmable money is a revolutionary concept poised to enhance monetary and financial systems by enabling seamless securities settlements, tokenised deposits, and regulatory compliance embedded within transactions. Central banks worldwide are exploring its potential through pilots and adoption programmes. For instance, the European Central Bank (ECB) is investigating the potential of a digital euro, which could incorporate programmable features for more controlled and purpose-specific transactions.
In this article, we’ll dive into the transformative promise of programmable money and the vast opportunities it unlocks.
Understanding programmable money and how it works There are various conditions that can be attached to programmable money. Using contractual agreements, it is even possible to incorporate monetary policies 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 a portion of their children’s pocket money to healthy snacks, to limit the consumption of junk food.
Programmable money can be understood as a monetary system that can be programmed with predefined rules and conditions, dictating the terms of its usage. According to JP Morgan, “programmable money takes things a step further by embedding rules directly within the store of value itself. These rules dictate or restrict the usage of money, introducing new levels of control and security.” This controlled usage differentiates it from other forms of digital monetary systems.
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 decentralised applications running on network infrastructures in order to leverage services, such as NFT (non-fungible tokens), marketplaces and DeFi (decentralised finance) platforms. It also enables tokenisation, that is, the representation of various assets on a distributed ledger using tokens. Oracles – intermediaries connecting contracts on a distributed ledger with external data sources – ensure that the integrated logic-based conditions of use are met.
A programme of advantage Embedding logic into the value of programmable money produces several advantages, ranging from better user experiences to more transparent, efficient, and accessible financial services to prevention of duplicate spending.
Here is a list of advantages and potential opportunities that programmable money brings:
Transparency and auditability Programmable money improves transparency and auditability of transactions by providing a ledger of financial transactions and direct access to transaction history. Extensive monitoring functionality guards against money laundering and other nefarious financial activity, including the siphoning of money from government benefit programs by unscrupulous intermediaries.
Greater efficiency, cost optimisation The synchronisation of contractual obligations and payment streamlines transactions across multiple tiers. The usage of automated smart contracts without intermediaries increases transaction efficiency and reduces both human effort and error. For instance, programmable money can help integrate payment and trade data into a single instrument, doing away with the two disparate processes currently being used, and eliminating chances of discrepancy. Using smart contracts for currency conversion and transactions in cross-border payments can save significant costs and processing time.
Even corporate treasury management can benefit from programmable money, which connects payment, identity and real-time data to prevent mismanagement of company funds, reducing the need for manual monitoring.
Innovation and customisation Programmable money can support the creation of innovative financial instruments and decentralised applications, providing a foundation for new business models. In fact, programmable monetary platforms can be viewed as the “Airbnb of the financial sector”, as they facilitate direct connections between customers and providers – in this case, borrowers and lenders – free of intermediaries, red tape and other barriers.
Furthermore, compared to conventional currencies, programmable money allows much more customization to enable new investment strategies, innovative financial instruments, and better governance.
Lower counterparty risk Smart contracts, programmed to execute subject to preconditions, without need for an intermediary, reduce counterparty risk. They can transform supply chain transaction settlement by ensuring all conditions of supply and payment are met. It also enables traceability that fosters better trust between parties, protection against fraud, and fewer disputes.
Ecosystem integration By promoting data and value transfer between networks and platforms, programmable money fosters interoperability and an accessible, interconnected financial ecosystem. For example, it can connect healthcare participants to simplify medical payments and insurance claims, and also ensure responsible management of patient data.
Here is another use case for ecosystem integration: programmable money can be used to make payments for acquiring a share in tokenised high-value assets, such as artworks by famous painters, prized real estate, or even high-end 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 the Central Bank Digital Currency (CBDC) – the digital form of a nation’s fiat currency that is regulated by its central bank.
Offering myriad advantages, including faster payments, cheaper cross-border transactions, and “no physical manufacturing”, CBDCs have attracted the interest of central banks worldwide: a survey of central banks by the Bank for International Settlements (BIS), showed that
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