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 central bank digital currencies like a digital dollar or euro.
But really, the technology really comes down to something 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 far-ranging as automating payroll or paying out collision claims as soon fault has been determined — or even immediately on a no-fault policy.
Decentralized finance, or DeFi, is built around techniques like this, such as dispensing a loan when collateral is locked into an account, then liquidating that collateral when its value reaches a certain level. The same could apply to a credit score- and income-based car loan: Meet the terms, and it’s approved. Miss a certain number of payments, and your car will be repossessed. Work the internet of things into the equation, and a self-driving car could take itself straight back to the dealer.
Which raises an inevitable question: What part 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 to, it can’t be changed, which has upsides — no chargebacks, for example — but also downsides. Write a contract wrong and the funds are locked away forever.
Public vs. Private
Things get rockier when the “money” part of programmable money is legal tender like a digital yuan or digital dollar. That is why the privacy afforded users is becoming a bigger and bigger question. Part of that is tracking what the consumer does with their money — but between debit and credit cards and marketing databases, the privacy laws and regulations are all that control how much private enterprise or government agencies know about you.
But that level of control still takes warrants and cooperation by banks and corporations. If programmable money is issued directly by a government rather than run through banks and financial institutions, there is a fair bit of reasonable concern that it won’t need warrants or cooperation if it really wants to look. Programmable money could be programmed to report back how it is used, or turn off if it goes into a certain digital wallet.
Participants in the libertarian-oriented crypto industry during the Canadian trucker convoy protests at the beginning of the year were alerted to a big issue: crypto exchange executives at firms like Coinbase and Kraken warned customers that if ordered to freeze funds — like banks — they would, suggesting anyone concerned take their pseudonymous bitcoins and other tokens into private digital wallets.
And as for restrictions — well, gift cards that limit what you can or can’t buy have been around for well over a decade. Some rewards cards can only be used for travel — airlines, hotels, buying luggage, dining out.
As stablecoin issuers like Tether (USDT) and Circle (USDC) have demonstrated during token hacks, they can just freeze the coins at any time. And again, with a government-issued, blockchain-based CBDC, the basic difference is that depending on its design, the government wouldn’t need to go through courts or corporations — technically, although presumably not legally.
Which comes back to the main purpose bitcoin’s anonymous designer built into the first cryptocurrency: trustlessness. That means peer-to-peer payments are possible without needing the trust provided by third party like a bank.
But the thing about programmable money is that you have to trust the programmer, whether public or private.
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