Programmable Money & Central Bank Digital Currencies:
The biggest trick of modern society is to name and compile different instruments with different credit ratings and ‘money’. This is an interesting trick and very useful in some situations, such as when companies ask each other and make payments.
It is much more convenient to say “Send me some money” than to say “Can you ask your bank to reduce your debt so that my bank will increase my debt?” But using these more precise words, we can hear that no individual asset or instrument comes and goes, but that there are some coordinated accounting adjustments that change the appearance of an asset.
Combining these different instruments and grouping them into a single instrument called ‘money’ had enormous positive consequences: it reduced friction and created a common language used around the world to facilitate trade.
But calling everything ‘money’ sometimes doesn’t make sense when we start thinking about money more deeply. So it’s helpful to think about two things:
1. the good me
2. The recording media
Let’s first think about the function of the instrument itself. The “good” is processed (I use this word with caution, because in some contexts the word good is often used to mean something that is not real money – stocks, bonds, etc., but not in this context). The asset itself is the IOU or redemption promise issued by an issuer: a central bank, commercial bank, electronic wallet, or another agent. This involves an inherent risk: the risk that the issuer is unable or unwilling to pay.
These promises are different – the means are different; money is different.
In the case of your commercial bank, the promise is that it will (normally) pay according to your instructions to the payee accounts you specify, your local supermarket, or your supplier abroad.
In the case of a central bank, they usually don’t talk to anyone about what happens if you knock on their door with a pile of bills. Maybe they give personal notes in exchange for old ones. There is certainly no obligation to make payments on your behalf or return a valuable portion of your balance to you, and certainly no gold.
Using some of these instruments as bargaining power, the government made debt payments, including taxes, useful.
The monetary instrument is thus characterized by the issuer and its promise. And the asset’s value is affected by the creditworthiness of the issuer and the user’s trust in it.
The recording media
The recording medium is where cash/merchandise/invoices are recorded. It can be registered on paper and distributed physically; can be included on paper in centrally managed magazines; can be inserted into databases controlled unilaterally by the publisher; it can be in private blocks managed by well-known and authorized participants, or it could be in public blocks where record-holders have no connection with the publisher.
And of course, the recording medium makes a big difference.
Think of two banks, the Byzantine bank and the Whizzy bank. Byzantine books for customer accounting, Whizzy uses databases. Suppose Byzantine and Whizzy are the same: they have the same balance sheet, they are the same, they have the same customers, they are both connected to the global financial system, they are financially sound and they have the same credit ratings… the only difference is how they record customer accounts.
Which bank do you prefer to deposit at? Byzantine can probably handle 1 transaction per second, but Whizzy can handle thousands of transactions per second. Whizzy probably also has a smartphone app.
Although the instruments are similar in terms of credit risk, you would probably prefer a Whizzy IOU to a Byzantine.
And we know this intuitively from real life. For household values, we may prefer one bank over another due to user experience.
Therefore: the medium makes the difference in usability and gain.
Programmable money and CBDC
By separating the instrument from the recording medium, we can therefore think about it more clearly.
Programmable money is money that can be included in rules that restrict money for general use in certain ways, sending or storing it only to a limited number of recipients until a certain time or condition has passed. was found. It seems ironic that the ability to limit money makes it more useful, but it’s true.
Constraints are the building blocks of various transactions. For example, bilateral atomic exchange of one currency for another may consist in preventing the exchange of money until another condition is satisfied (the other payment point).
Programmable money depends on the recording medium, not the publisher. And (you guessed it) blockchains are a great way to raise money because blockchains allow for programming.
Yes, yes, you don’t need the blockchain. You can do this in other ways. In fact, banks create, as much as possible the planned money, a time deposit claim. It is generic money that is programmed in such a way that it can only be spent after the due date (eg 6 months). But until the advent of blocs, technology limited us to schemes unilaterally created by individual banks on their own terms.
This slows down the pace of financial innovation, the speed at which money can become more useful to users. With blockchains, a wider range of parties can program money, which can unlock more innovation. If you’re not convinced, look at the innovations taking place in Defi (decentralized funding).
Therefore, the withdrawal method determines the programmability of the currency, regardless of the issuer or instrument. You can have programmable central bank money, programmable commercial bank money, programmable electronic money (also called stable currency), any type of programmable money. All of these tools can exist in non-programmable form – inert and contained in databases – or in programmable form.
It’s important not to confuse retail CBDC with programmable cash! The CBDC is an existing credit risk instrument: it is an IOU of a central bank, the least risky money issuer in its own currency. It is for home use, although it is registered in a new way (via computer) rather than printed and physically distributed like banknotes.
And CBDC may not be programmable, depending on how it’s captured. This can be more useful if it is programmable, given the new possibilities that programmability can offer.