{"id":6256,"date":"2020-09-16T15:55:28","date_gmt":"2020-09-16T19:55:28","guid":{"rendered":"https:\/\/cointelegraph.com\/magazine\/?p=6256"},"modified":"2020-09-16T15:55:28","modified_gmt":"2020-09-16T19:55:28","slug":"programmable-money-crypto-tokens","status":"publish","type":"post","link":"https:\/\/cointelegraph.com\/magazine\/2020\/09\/16\/programmable-money-crypto-tokens","title":{"rendered":"Programmable money: How crypto tokens could change our entire experience of value transfer"},"content":{"rendered":"

Programmable money (PM) is in the air.<\/strong> It may be the next stage in the evolution of money. And it could be as disruptive as any financial technology in development today.<\/span><\/p>\n

Yes, China is close to launching the first central bank digital currency (CBDC) at scale \u2014 perhaps within the next 12 months \u2014 but if so it will be eclipsed before the decade\u2019s end by CBDC 2.0, i.e., digital currency attached to blockchain-enabled smart contracts. At least, that\u2019s what many think.<\/span><\/p>\n

Programmable money is money with constraints. An analogy is food stamps where recipients are given coupons, the equivalent of money, which can be spent only on food \u2014 not on alcohol, betting on horses, lottery tickets or anything else. In modern guise, these \u2018food stamps\u2019 are digitized tokens transacted on a blockchain platform with smart contracts.<\/span><\/p>\n

Last month IBM was awarded a patent for a \u201cbespoke programmable crypto token,\u201d the first PM patent awarded in the U.S., co-inventor Jonathan Rosenoer told Cointelegraph Magazine.<\/span><\/p>\n

\u2018A slow moving tsunami\u2019<\/span><\/h4>\n

\u201cProgrammable tokens are being discussed more and more,\u201d Jonas Gross, a research assistant and project manager at the Frankfurt School Blockchain Center (FSBC), a think tank at the Frankfurt School of Finance & Management, told us. In Germany, for example, the Ministry of Finance together with the Bundesbank recently started a working group about developing programmable Euro.\u00a0<\/span><\/p>\n

\u201cCovid is forcing a slow moving tsunami in programmable money,\u201d said Gert Sylvest, co-founder of Tradeshift, a business commerce platform. It could accelerate the transition to programmable money in e-commerce. Since the pandemic, \u201cwe\u2019ve seen a spike in interest,\u201d especially when the ensuing liquidity crisis included a payments slowdown. Many are ready now to give programmable money, including automated payables\/receivables settlements, a new look, he said.\u00a0<\/span><\/p>\n

With IBM\u2019s <\/span>new invention<\/span><\/a> (\u201cUnited States Patent 10,742,398, Rosenoer, et. al. August 11, 2020\u201d), the crypto token\u2019s parameters \u2014 constraints \u2014 can be stored in the token itself, or they \u201cmay be stored in an on-chain or off-chain database referenced by a hashed identifier stored within the token.\u201d According to co-inventor Rosenoer, the token has the potential to advance many social\/economic purposes, including delivering humanitarian aid in the event of natural catastrophes or war. For instance:\u00a0\u00a0\u00a0<\/span><\/p>\n

I could create digital currency that can only be held by credentialed refugees and transferred to credentialed businesses. <\/span><\/p><\/blockquote>\n

“A charity or refugee agency can issue the credential to the refugee. The businesses can be similarly accredited. Then the programmed tokens representing funds can be issued to the refugee and held on his\/her phone. The refugee can use them to pay for goods and services from accredited businesses, only. The refugee could also transfer them to other refugees.\u201d\u00a0<\/span><\/p>\n

A programmable token could be created by an individual (\u201cyou could create your own AndrewCoin\u201d), a business, a charity, a bank, a government \u2014 or some other entity, he added. On the backend, an auditor could receive automated reports about who is holding the tokens and where they are being used. \u201cUnexpected patterns, indicating skimming or extortion, can trigger alarms and exception handling,\u201d noted Rosenoer. (\u2018Skimming\u2019 is a big problem in delivering humanitarian aid. And even when aid arrives, recipients are sometimes robbed \u2014 another worry a programmable token could mitigate.)<\/span><\/p>\n

What is the status of programmable tokens today? There are few <\/span>production-level <\/span><\/i>deployments of anything in the DLT\/blockchain space, said Rosenoer, but that is likely to change. Governments could use programmable tokens to enforce economic embargoes. A token could be programmed so that its value could be redeemed anywhere in the world \u2014 but not in North Korea or Iran, for example. \u201cPeople in startups are moving [use cases] forward,\u201d he added.<\/span><\/p>\n

More demand in the post-Covid world?<\/span><\/h4>\n

\u201cIn the U.S., it would have been great\u201d for the government\u2019s distribution of its coronavirus stimulus checks, the so-called helicopter payments made this spring to every tax-paying U.S. citizen, if programmable money had been an option, Kaj Burchardi, Managing Director & Partner of Platinion (Amsterdam), part of the Boston Consulting Group, told Magazine. \u201cIt could have been done in a few seconds, at no cost (distribution-wise). It would have been a no-brainer.\u201d\u00a0<\/span><\/p>\n

Professor George Giaglis at the University of Nicosia (Cyprus) told Cointelegraph Magazine that:<\/span><\/p>\n

Programmable money represents a historic shift on how we perceive and use money.<\/span><\/p><\/blockquote>\n

While many forms of such money exist today \u2014 most cryptocurrencies are programmable to a higher or lesser degree \u2014 much of the discussion around CBDCs involves digital currencies \u2014 <\/span>not <\/span><\/i>money <\/span>with conditions<\/span><\/i>. He added:\u00a0\u00a0<\/span><\/p>\n

\u201cNone of the existing initiatives involve programmatic money in the strictest definition of the term. Indeed, the CBDCs under development today are only programmable by the issuer \u2014 the central bank decides monetary supply, functionality, privacy and other characteristics \u2014 and not by the end user \u2014 i.e. you and I will not be able to write code attached directly to our money, dictating its behavior and movements.\u201d While the vision of fully programmable money is closer to reality than ever before, \u201cit will still be some time before governments and central banks go all the way that the private sector has, with digital currencies and decentralized finance (DeFi).\u201d<\/span><\/p>\n

In March, the German government organized a hackathon to find innovative ways to combat the Covid-19 crisis. One promising proposal was a decentralized common Euro \u2014 a \u201cdezentraler gemeinschaftlicher Euro\u201d (dgE) or <\/span>Diggi \u2014 <\/span><\/i>\u00a0a government-distributed blockchain-based voucher which could only be spent at participating businesses in economically hard-hit areas. Dorothee B\u00e4r, German State Minister for Digitalization, <\/span>said<\/span><\/a> the system would enable smaller companies to participate in aid programs.\u00a0<\/span><\/p>\n

The next evolution stage of digitalization<\/span><\/h4>\n

Boston Consulting Group\u2019s Burchardi told us that roughly 80% of the world\u2019s central banks are looking into a digital currency, including some who are exploring CBDC 2.0, \u2014 i.e., digital currencies connected to smart contracts. Publicly, no central bank appears to be pushing programmable money, however. The impetus is coming mostly from academia, including the Frankfurt School Blockchain Center in Germany and MIT Media Lab\u2019s Digital Currency Initiative in the U.S., as well as industry groups like the Association of German Banks (\u2018bankenverband\u2019)\u00a0<\/span><\/p>\n

\u201c[U]nlike with traditional digital money \u2013 the new forms of cryptomoney feature a significant technological innovation: they can be connected to so-called \u201csmart contracts,\u201d <\/span>noted<\/span><\/a> the Association of German Banks (AGB) in a blog. Germany\u2019s private banks regard programmable digital money \u201cas an innovation with great potential that can be a key component in the next stage of the evolution of digitalization,\u201d said the group.<\/span><\/p>\n

Gross told us that while programmable CBDCs were unlikely in the U.S. or Europe in the near future, \u201cprogrammable tokens will become available as tokenized commercial bank money or e-money in the short-run\u201d \u2014 the next one to three years. \u201cCurrently, banks increased their efforts to introduce commercial bank money-backed programmable tokens linked to bank accounts.\u201d Government-sponsored projects like CBDC 2.0 might take longer.<\/span><\/p>\n

Delivering humanitarian aid is one projected PM use case cited again and again in interviews. Rosenoer lived for two and a half years in Mumbai, India, surrounded by \u201cshocking poverty,\u201d where aid to the poor was stolen by intermediaries in prodigious quantities, he told us. Poor people don\u2019t have access to banks, but many today have cell phones. Without too much trouble they could receive digital currency on their phones, and bypass the banking system entirely.\u00a0\u00a0\u00a0<\/span><\/p>\n

A programmable token could strengthen controls around aid payments, tracking and tracing flows on a national level, using link analysis to uncover fraud and corruption. Where are payments going? Why is so much flowing to one place? \u201cThat\u2019s the real promise,\u201d said Rosenoer \u2014 rooting out the institutional corruption that keeps poor people poor. The developing world needs a tool like this \u2014 much more so than the U.S. or Europe \u201cwhere lots of things are [already] good enough.”<\/span><\/p>\n

Eliminating blacklists<\/span><\/h4>\n

Programmable money could enable global financial transactions that preserve compliance with local laws and regulations, suggested Rosenoer: \u201cAssume that you have a tokenized asset that you want to sell. Let’s call it a long-term debt. The law says that I can only sell it to an accredited investor \u2014 one that has a certain amount of net assets and annual income \u2014 or I can sell it to a foreign investor.\u201d These are classes of people defined by law. If Rosenoer sells his asset to them, they may have to hold the asset for a period of time if they are subject to U.S. jurisdiction, and then they can only sell to an accredited investor or a foreign investor.\u00a0<\/span><\/p>\n

\u201cI can program my token to ensure that whoever holds it meets these requirements,\u201d continued Rosenoer.\u00a0 <\/span><\/p>\n

This means that I do not have to, for example, create whitelists and blacklists. The token carries the restriction and someone else can issue the credential that meets the requirement(s).<\/span><\/p><\/blockquote>\n

\u201cThe future of money is programmable,\u201d <\/span>said <\/span><\/a>Neha Narula, director of the MIT Media Lab Digital Currency Initiative. PM can create a world that is difficult to envision at present. \u201cImagine a world where I can rent out my healthcare data to a pharmaceutical company. They can run large-scale data analysis and provide me with a cryptographic proof that shows they’re only using my data in a way that we agreed. And they can pay me for what they find out.\u201d\u00a0<\/span><\/p>\n

Programmable tokens can be used to help achieve environmental goals like ridding the world\u2019s oceans of plastic waste. During a coastal cleanup last year of the Manila Bay, for example, local fishermen collected 3 tons of trash \u2014 most of it plastic \u2014 and <\/span>were paid for their labor<\/span><\/a> with an Ethereum-based ERC-20 token. Coins.ph (a partner on the ground) helped to convert the crypto into fiat currency. Efforts like these appear to offer an ingenious solution to two seemingly intractable problems: poverty in the developing world and ocean plastic waste.<\/span><\/p>\n

Obstacles remain to programmable money<\/span><\/h4>\n

What hurdles still have to be overcome before programmable money becomes an everyday reality? The University of Copenhagen\u2019s Carl Victor von Wachter told Cointelegraph Magazine that \u201ccountry-wide level scalability issues of the blockchain have to be overcome. Further, a lot of technology and applications have still to be improved for end users. The technology is currently too complex in terms of user interface and user experience.\u201d<\/span><\/p>\n

Freddy Zwanzger, co-founder and chief data officer at Anyblock Analytics GmbH, told us that people need to become better educated in the handling of digital currencies and their usefulness as alternatives to fiat currencies. It may be helpful to put things in everyday terms \u201clike coupons and loyalty points to help them grasp the concepts.\u201d<\/span><\/p>\n

Gross said there was still a general lack of understanding about the potential benefits of programmable tokens, as well as insufficient collaboration between public institutions \u2014 e.g., central banks and governments \u2014 and the industrial sector that will be a main user of programmable tokens. Continued regulatory uncertainty doesn\u2019t help either.\u00a0<\/span><\/p>\n

Any digital payments solution will surely have to perform basic KYC (know your customer) checks and develop trusted governance protocols, Sylvest added. \u201cThe moment [digital] payments start flowing through different pipes, they become a challenge to regulators.\u201d<\/span><\/p>\n

Tobias Tenner, AGB\u2019s associate director and head of digitalization, explained that, \u201cprivacy and anonymity concerns must be taken into account\u201d if PM is to take hold \u2014 a point on which many agree. In contrast to Bitcoin (BTC), which offers a relatively high degree of privacy \u2014 users can\u2019t be easily surveilled \u2014 programmable tokens are designed for traceability. There are ways to engineer privacy into the token, however, said Rosenoer, using\u00a0 zero knowledge proofs, for instance, that can confirm an individual really has the assets claimed without revealing who that individual actually is.<\/span><\/p>\n

A society may tolerate only so much traceability, opined Burchardi. Not everyone wants the government tracing everything they do. So it\u2019s important to consider when to apply traceability and when not to. There could be thresholds. Below $1,000, a transaction would not be traced, for instance.\u00a0<\/span><\/p>\n

The evolution of money<\/span><\/h4>\n

What is the most likely time frame for widespread PM usage? The appearance of large-scale non-BTC digital currency is \u201cimminent,\u201d said Rosenoer \u2014 either\u00a0 the end of 2020 or beginning of 2021, and it is likely to come in the form of a Chinese CBDC or from a Libra stablecoin. Tenner added that a regulated programmable Euro issued by private banks could maybe coexist with other programmable e-money like Libra within the next five years.<\/span><\/p>\n

Said Zwanzger: \u201cIn my opinion, the need is there but the technology is not quite there yet in terms of UX, adoption etc. – and the much bigger obstacle is getting into the minds (and hearts) of the people\/users. There were experiments with local currencies for example even before blockchain was around, and they did not take off. I don’t see that the nascent blockchain technology can much change that at least over the next one to three years.\u201d<\/span><\/p>\n

Kevin Dowd, a professor of finance and economics at Durham University in the United Kingdom, struck a more skeptical note. \u201cIt seems to me that programmable tokens have yet to demonstrate that they can feasibly achieve outcomes that are superior to or cheaper than the outcomes that can be achieved from existing technologies. We are still talking early days here,\u201d\u00a0 he told Cointelegraph Magazine.\u00a0<\/span><\/p>\n

As noted in a Boston Consulting Group blog <\/span>co-written<\/span><\/a> by Burchardi, most CBDC models discussed over the past decade haven\u2019t really addressed the possibilities of <\/span>programmable <\/span><\/i>digital currency. But they remind us that when programmable money is adopted at scale \u2014 on the governmental level \u2014 sweeping societal\/economic changes could follow:<\/span><\/p>\n

\u201cThe first generation of CBDC, introduced roughly a decade ago, had limited interoperability and programmability. The next generation, known as CBDC 2.0, will likely work on a national or supranational level (in the case of the European Central Bank). These currencies could help to automate monetary policies, which could mitigate the risk of hyperinflation in emerging economies and reduce purchasing power inequality.”<\/span><\/p>\n

And as the report notes, perhaps the most attractive value proposition for governments:<\/p>\n

Better traceability would allow nations to curb criminal activities, tax evasion, and drug trafficking.<\/span><\/p><\/blockquote>\n

\n

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