Understanding Programmable Payments, Programmable Money and Purpose-Bound Money

Most use cases of programmability fall within this category of programmable payments. A common example is conditional payments, or payments which are executed when conditions are fulfilled. In the analog world, post-dated checks can be viewed as a form of conditional payment, with the check valid on or after the value date and for a pre-defined period. This condition is evaluated when the check is processed. In the digital world, programmable payments are typically implemented using blockchain technology, where smart contracts automatically execute payments or actions when certain criteria are met.

A clear and immediate use case of programmable payments is in automated treasury management. Standing instructions are basic tools already available to help treasurers achieve their target balance for an account, sweeping out funds in excess of the target balance. Programmable payments enable much more complex logic in achieving this, evaluating balances of multiple accounts in different currencies and FX rate, before making transfers in the most optimal manner. Coupled with the real-time 24/7 payment capability of JPM Coin System, treasurers would be able to use programmable payments in aiding treasury management, moving away from a model of cash forecasting to a model of just-in-time cash management that can respond programmatically and instantly to changing real-world conditions.

Conditional payments can also make transactions safer without the costly operational overheads associated with escrow arrangements. For example, a buyer can have funds reserved and released to the seller only upon receipt of goods. There are different options for achieving this, such as having the buyer confirm receipt, using data from a trusted third-party logistics provider on confirmation of delivery, or even through the use of Internet of Things (IoT) devices that track location to indicate when goods are delivered to a specific geolocation.

The same concept can be applied to digital financial assets. With digital assets, evidence of delivery will be in a digital form. Funds can be reserved and released only upon successful delivery of the digital assets. This is a form of Delivery-versus-Payment settlement where settlement risks are minimized through synchronization of the funds and assets transfers.

Programmable money, on the other hand, 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 controls and security. Unlike programmable payments, programmable money is self-contained, encapsulating both the programming logic and the store of value. This means that when programmable money is transferred, it carries the rules and logic with it.

The rigidity of having rules bounded to the value itself limits the use cases of programmable money, confining its use mostly to the application of universal rules that are foundational and not use case-specific.

Purpose bound money (PBM) provides the flexibility of defining a use-case’s specific rules, while ensuring the tight coupling of rules with the underlying value. Technically, it can be viewed as wrapping rules around a value token, creating a new transferrable token that contains both the rules wrapper and the underlying value token. This provides both the flexibility of programmable payments in that different wrappers can be built for different scenarios or use-cases, and the certainty of programmable money in that the rules are bounded to the underlying store of value in this new transferrable token.

PBM is most useful when the rules need to be consistently applied across transactions within the confines of a specific domain. In a hypothetical scenario, a bank issues deposit tokens which can be held by clients from other banks, enabling global circulation. In this scenario, we assume that there are 10 jurisdictions and 10 distributor banks. Each jurisdiction has its own set of rules, such as currency controls and sanctions list. Similarly, each distributor bank has its own further set of rules, such as different control mechanisms and even reward mechanisms.

These rules cannot be implemented as “programmable payments,” as they are intrinsic to money movement and not one-off conditionals. They can potentially be implemented as “programmable money,” but will likely be impractical from a governance and technical perspective. From a governance perspective, the original issuing bank would need to consolidate rules across 100 permutations (10 banks X 10 jurisdictions), impose all of them, and also maintain and update them periodically. From a technical perspective, there would be high processing costs associated with the implementation of these rules.

The concept of PBM suggests that the issuer issues a deposit token with basic universal rules. Additional rules are wrapped around it when entering a jurisdiction and unwrapped when leaving one. Within the jurisdiction, the same rules apply for all transfers, so transfers take place using the wrapped token comprising both the underlying deposit token and the jurisdiction-specific rules.

The diagram below provides a representation of a deposit token moving across different jurisdictions, and having different jurisdiction-specific rules wrapped around it.

A distributor bank can further wrap its own bank-specific rules for transfers within their customers in the specific jurisdiction, resulting in a token that adheres to all the rules of the distributor bank and the jurisdiction it exists in. The concept of PBM changes the way we think about programmability rules and how they can be implemented, creating new possibilities on how we can more effectively manage rules as digital currencies enter into greater use, and offering new ways to more efficiently support different use cases.

Programmable payments, programmable money and purpose-bound money are reshaping digital money, offering greater flexibility, automation and control in financial transactions. These concepts will drive innovation, efficiency and security in the digital economy, propelling us into a new era of financial possibilities and transforming the way we perceive and utilize money. Explore the future of finance with blockchain deposit accounts on the JPM Coin System network that will support programmable payments and programmable money use cases.

By Wee Kee Toh

Head of Business Architecture,
Onyx by J.P. Morgan