The Smart Money

Programmable payments & the future of finance

What if your refrigerator recognized on its own that it needed restocking and took it upon itself to order and pay for more food when the time came? Thanks to the convergence of the IoT and blockchain technology, that’s one of the potential use cases for programmable payments. Made using smart contracts on the blockchain, these payments are automatically executed once a pre-programmed set of circumstances occurs. Smart wallets can be used to set restrictions on the authorizations of these payments. The applications for these programmable payments are just being discovered, but it’s a brave new financial world.

“Money is electronic today, but what is missing is programmability,” said Naveen Mallela, head of coin systems for JPMorgan. “That is the holy grail.”

CBDCs

With programmable payments, money is effectively set aside for a specific purpose. It’s only released when specific conditions are met. As many countries explore issuing their own central bank digital currencies, they can set up certain triggers in the smart wallets holding those CBDCs.

For example, governments could put CBDC tokens in special wallets earmarked for specific subsidies or rebate programs, like buying an environmentally friendly heat pump. Buy the heat pump, upload your proof of purchase, and the money instantly goes into the wallet.

Governments could issue stimulus or universal basic income payments directly into citizens’ smart wallets. Any restrictions like income level could be programmed right into the smart contract, making sure different people receive the appropriate payment amount.

By limiting the amount of money a wallet can hold, can be sent in a single transaction, and implementing other security features, governments could combat money laundering.

The possibilities are exciting, but it may be some time before they’re fully realized.

“To move money at scale, commercial bank money or central bank money and central bank digital currencies aren’t quite there yet,” Mallela told American Banker.

Programmable Money

While programmable payments set restrictions by requiring certain conditions be met, programmable money takes things a step further. It has logic embedded into its value, with rules governing how it can be spent. Even when someone else comes into possession of the money, the same rules apply. Programmable money could be coded to gain or lose value over time, for example.

The advantages to programmable money are transparency, another aid in fighting money laundering. The money comes with a complete ledger of how, when, and by whom it was spent.

“’Programmable money’ provides an unprecedented degree of customization compared to conventional currencies, allowing for the development of investment strategies, programmable financial instruments, and participation in governance,” Infosys senior product leader Raktim Singh wrote in Finextra.

Restricting spending to a specific purpose, programmable money can ensure funds go to exactly what they’re intended for and nothing else. This can be especially useful for loyalty programs that allow tokens to be spent only at a certain business, or for companies doling out per diem for business travelers rather than just handing them cash and hoping they bring back receipts. On a governmental level, it could function like digital food stamps, ensuring it only pays for specific products.

In Use

JPMorgan Chase offers programmable payments through Onyx, the world’s first bank-led blockchain platform. It offers much more flexibility than traditional standing orders at banks to adapt to changing circumstances as they unfold.

“It’s more than just moving money, it’s doing it in ways that enhance treasury, liquidity, and cash management lines of business in ways that haven’t been available before.” James Wester, co-head of payments research at Javelin Strategy & Research, told American Banker. “For a bank the size of JP Morgan to begin offering this type of flexibility to their treasury and cash management clients, based on blockchain no less, is significant.”

Swift and Visa have also teamed together, along with Wise, to offer similarly streamlined B2B payments. Such services allow corporate treasuries to be much more nimble and drastically reduced the cost of cross-border transactions.

“As we move to 24/7 processing and real-time transactions, you need to be able to respond in a more flexible manner, and that is the driver for creating programmable payments,” Mallela said. “You can respond more dynamically to changing conditions than simply working off of preset parameters,” Mallela said.

The more programmable payments become possible, the more use cases people will find for them. What’s already clear is they’re a lot more smart and secure than a dollar you found on the ground.