Digital assets are digital representations of value, including ownership of financial or real economy assets. These assets have the potential to facilitate more efficient transactions, improve financial inclusion, and unlock economic value. To create a new digital asset ecosystem, central bank digital currencies (CBDCs), tokenized bank liabilities, and well-regulated stablecoins, along with smart contracts, can serve as mediums of exchange. However, these new forms of digital money need to demonstrate their utility beyond existing e-payment systems.
Programmability and Fungibility of Money
One touted advantage of digital money is its programmability, but there is ongoing debate regarding this feature. It is crucial to ensure that programmability does not hinder the ability of digital money to serve as a medium of exchange. Money's singleness should be preserved, and programmability should not lead to fragmentation of liquidity in the system.
Purpose Bound Money (PBM)
This paper presents the concept of Purpose Bound Money (PBM), which allows money to be directed toward a specific purpose without requiring direct programming of the money itself. PBM utilizes a standardized protocol that works with different ledger technologies and forms of money. Users can access digital money using their preferred wallet provider.
Background and Motivation
Efforts to digitalize financial services have gained momentum, but they face challenges, such as the proliferation and fragmentation of payment schemes and platforms. Consolidating these schemes into a single platform that is open and interoperable across all schemes would enhance user experience and streamline digitalization.
Models of Programmability
There are different models of programmability: programmable payment and programmable money. Programmable payment involves executing payments based on predefined conditions, while programmable money embeds rules within the store of value itself. Both models have their advantages and limitations. With the increasing diversity of CBDCs, tokenized bank liabilities, and stablecoins, a common framework for interacting with different forms of digital money is needed.
Purpose Bound Money (PBM)
PBM combines elements of programmable payment and programmable money. It consists of a wrapper that defines the conditions for use and an underlying store of value serving as collateral. This design allows existing digital money to be deployed for various purposes without altering its native properties. When the conditions are met, the underlying digital money is released and becomes unbounded.
Components and Roles
A PBM consists of a wrapper implemented as smart contract code and the underlying digital money. The PBM creator defines the logic, mints PBM tokens, and distributes them. PBM holders can redeem non-expired tokens, while PBM redeemers receive the underlying digital money when tokens are transferred.
Lifecycle of Purpose Bound Money
The PBM lifecycle includes the issue, distribute, transfer, redeem, and expired stages. PBM tokens are created, distributed, and can be transferred based on programmed rules. When the conditions are fulfilled, PBM tokens are redeemed, and the underlying digital money is transferred to the recipient. Expired tokens can be destroyed or paused indefinitely.
Conclusion
Purpose Bound Money offers a new approach to programmability in the digital asset ecosystem. By defining conditions within a wrapper and using existing digital money, it enables directed use without compromising fungibility or the medium of exchange function. The PBM framework provides a common language to interact with different forms of digital money and promotes interoperability within the financial infrastructure.