Physical cash is the only form of privacy-preserving currency that is accessible to all today. The monetary system itself rests on foundational trust in central bank currency as a public good. Billions of people rely on banknotes and coins as essential privacy tools to exchange and store value, yet these artefacts can be lost or stolen and require proximity to exchange.
As sovereign issuers around the world contemplate the introduction of retail central bank digital currencies, a digital complement to physical cash, stakeholders face a once-in-a-lifetime opportunity to steward this evolution. Digital cash should not only embody the fundamental attributes of its physical counterpart but also offer additional enhancements that can serve the emerging needs of society.
The dematerialisation of cash promises to unlock efficiencies and spur financial innovation. One such feature is the automated behaviour of money and transactions – programmability.
A somewhat loosely defined term, the concept of programmability manifests in three layers in a retail CBDC exchange – governance of the system, programmable features and transaction automation.
Governance is the set of rules that ensures compliance with regulation. With physical cash, obligated parties comply with anti-money laundering and combatting the financing of terrorism regulations by reporting transactions of concern and conducting know your customer and customer due diligence checks. With digital cash, this can be encoded within the protocols of the system, reducing costs and increasing regulatory effectiveness. Such rigid rules, however, may struggle with the sometimes fuzzy reality of social transactions that extends privacy to minority groups and offers flexibility for the informal sector, which accounts for some 2bn people worldwide, or more than 60% of the employed population.
By allowing greater autonomy for low level transactions, for example enabling an anonymous payment tier with regulatory controls triggering for higher value or high frequency transactions, CBDCs can remain attractive propositions for the general population. Built-in flexibility will therefore be critical for broad and sustainable public access and adoption of CBDC, and for more inclusive reach among hitherto unbanked and underbanked populations.
Programmable features are attributes and rules that could be applied to individual units of digital cash. For example, a financial service provider could reduce lending risks and offer more accessible credit by limiting what borrowers can spend it on. A citizen could have greater control over how or when a charitable donation is spent. A sovereign could encourage localised fiscal stimulus by providing digital cash that can only be spent in an area impacted by an ecological disaster.
While the benefits may be clear to see, the potential impacts on trust in the currency due to erosion of fungibility pose challenges for the design of such features. Provided a universally accessible form of cash remains available to all, though, unique flavours of digital cash may be gradually accepted by society if valuable utility can be found and incentives provided. Sovereigns will need to minimise risks by carefully selecting the types of characteristics that could be introduced while allowing for the development of features that meet public needs. If universal adoption of CBDC is the end goal, careful attention should be given to the mutual balancing of potentially competing or conflicting benefits for different stakeholders, whether sovereign issuer, intermediary or the public.
Transaction automation is conducted based on an agreement to an if-this-then-that sequence of events. It has existed in basic form for decades and is now an expected feature of modern financial management. Many people already set up recurring payments, such as standing orders, with private account money or automatically divide their income into goal-oriented saving ‘pots’. Enhancements to this sort of automation are possible through emerging technologies like smart contracts that allow for more complex, event-driven transactions.
A CBDC could certainly integrate such technology. These features would not make it unique but would benefit businesses and individuals with greatly increased efficiencies and lower costs by bringing these automations closer to the edge. For example, digital cash could support automated value added tax payments at points of sale helping small merchants reduce administrative burdens. A CBDC built on open and interoperable standards could allow a rich market to drive innovation in this area and extend atomic functionalities – enabling peer-to-peer exchange of digital cash.
Programmability in CBDCs can operate across different layers of the system to support the innovative evolution of money as a public good. Any implementation of programmability needs to be carefully considered to ensure it does not compromise financial freedom or trust in the underlying sovereign currency. Accessibility, fungibility and privacy will remain the expected traits of money as a public good that digital cash must provide across contexts to ensure adoption.
By building on that foundation, system governance, programmable features and transaction automation can be used to enhance the value proposition of digital cash for all and to drive financial innovation.
Andrew Slack is User Experience Design Strategist at SICPA.