Programmable money has become one of the latest buzzwords as people talk about the rise of cryptocurrencies that are actually used for payments – like privately issued stablecoins – or currencies. central bank numerals like a digital dollar or euro.
But in reality, the technology really boils down to something that the crypto and blockchain industry has been talking about for several years: smart contracts.
They can be incredibly useful when it comes to payments, with potential uses as broad as automating payroll or paying collision claims as soon as fault has been determined – or even immediately on a no-fault policy.
Decentralized finance, or DeFi, is built around techniques like this, such as issuing a loan when collateral is locked in an account, then liquidating that collateral when its value reaches a certain level. The same could apply to a credit and income-based auto loan: meet the terms and it’s approved. Miss a certain number of payments and your car will be repossessed. Bring the Internet of Things into the equation and a self-driving car could go straight to the dealership.
Which raises an inevitable question: how much of this can’t be done by existing systems?
Well, the part about the contracts – the programs – being written on an immutable blockchain. Once it’s agreed, it can’t be changed, which has advantages – no chargebacks, for example – but also disadvantages. Write a bad contract and the funds are blocked forever.
Public vs. Private
Things become more difficult when the “money” part of programmable currency is legal tender, such as a digital yuan or digital dollar. This is why the privacy offered to users is becoming an increasingly important issue. Part of that is tracking what the consumer does with their money – but between debit and credit cards and marketing databases, privacy laws and regulations are all that controls what companies private or government agencies know about you.
But this level of control still requires mandates and cooperation from banks and corporations. If programmable money is issued directly by a government rather than through banks and financial institutions, it’s reasonable to fear that it won’t need warrants or cooperation if it really wants to watch. Programmable Money could be programmed to signal how it’s being used, or shut off if it enters a certain digital wallet.
Libertarian-oriented crypto industry participants at the Canadian truck convoy protests earlier this year were alerted to a big problem: crypto exchange executives at companies like Coinbase and Kraken warned customers that if they were to freeze funds – like banks – they would, suggesting that anyone affected take their pseudonymous bitcoins and other tokens into private digital wallets.
And as for the restrictions – well, gift cards that limit what you can or can’t buy have been around for over a decade. Some rewards cards can only be used for travel – airlines, hotels, luggage purchases, restaurants.
As stablecoin issuers like Tether (USDT) and Circle (USDC) have demonstrated in token hacks, they can simply freeze coins at any time. And again, with a government-issued, blockchain-based CBDC, the fundamental difference is that by design the government wouldn’t need to go through the courts or corporations – technically, though probably not. legally.
Which goes back to the main objective of the anonymous designer of bitcoin integrated into the first cryptocurrency: the absence of trust. This means that peer-to-peer payments are possible without the need for the trust provided by a third party like a bank.
But the thing about programmable money is that you have to trust the programmer, whether public or private.
For all the PYMNTS crypto coverage, subscribe daily Crypto Newsletter.
New PYMNTS Study: How Consumers Use Digital Banks
A PYMNTS survey of 2,124 US consumers shows that while two-thirds of consumers have used FinTechs for some aspect of banking, only 9.3% call them their primary bank.
We are always looking for partnership opportunities with innovators and disruptors.