Open, programmable money is changing the way we understand and use money. It will reform how we interact with each other in ways that will drive new efficiencies and opportunities. It will allow us to enhance the traditional concept of money to change the nature of how and when we exchange value. Bermuda can leverage its developing reputation and that of the Bermuda Monetary Authority as a prudent regulator of the risks in this space to attract innovators to the island to help drive job creation and economic prosperity.
The concept of money is suggested to have been developed over thousands of years. Before the creation of money, people traded goods as a means of exchange, with the earliest proxy being the trade of grains and cattle in Ancient Egypt. Money developed as an easier means of facilitating trade. It acted as a representation of value that was more easily transferred, and over the centuries we have witnessed an evolution of money from metal coins to paper money to electronic transfers — and now becoming programmable.
The application of modern technology to money is changing its nature. The cost and complexity of creating money has been significantly reduced and democratised with the introduction of digital technologies such as blockchains and distributed ledgers. It has allowed money to be rethought in terms of how it works, what it represents and how it can be issued.
What is money? At its simplest, money is a shared set of rules for exchanging value. Government-issued paper money is one of the most readily understood forms of money. We can exchange paper notes for goods or services and know we can spend them later. The validity of such money is governed by rules established by the laws of that government, which provides confidence in its use. The strength of the government lends strength to the money itself.
By contrast, bitcoin and other such examples of non-government-issued cryptocurrencies are a shared set of rules for exchanging value that are governed by code that is run collectively on open shared networks. This application of code to the governance of the rules of exchange has changed our understanding of money and unlocked new possibilities which people are only just beginning to appreciate.
There are many variations of programmable money today. Cryptocurrencies such as bitcoin are the most well known, but there are others. Central banks are actively looking at whether they should launch their own central bank digital currencies. Facebook is creating an association to launch a currency backed by a basket of fiat currencies. Walmart recently announced an attempt to patent its own digital currency. Companies such as Circle, which recently got a Digital Asset Business Licence on island, has its own digital currency backed 1:1 by American dollars.
It isn’t worth getting distracted by debates on whether government money is superior to non-government money and which ultimately has value. Regardless of which money is chosen, it is important to take a step back and recognise the implications of being able to adjust or augment the rules that govern money once it has been digitised, whether sovereign or not.
By making money programmable and governed by code, the rules of money can transition from being as rudimentary as “you must accept this money” to as advanced as “you can receive this money only under these specific conditions”. It means you can attach policies on how portions of money, which can be self-enforced by code running as smart contracts, are spent or transferred. The policies could include conditions, triggers or an expiry of terms, which can all be programmed in. This would reduce the necessity of relying upon an intermediary to broker agreements, which can lower costs and complexity.
There are many different applications of programmable money and many more are being conceived. It enables the ability programmatically to govern the calculations of money being paid out, who it needs to go to and when. One company I spoke with recently is experimenting with leveraging programmable money to remove some of the pain of managing the complexity of paying workers. The company is aiming to make it possible to automate the process of paying taxes and payroll on a continuous basis. This could have significant benefits to employers to reduce the complexity of paying wages and associated taxes and benefits. It could also benefit employees to enable them to be paid daily rather than monthly to provide better access to overall cash, rather than having to rely on payday loans.
Could this be done without blockchain and programmable money? Of course, it could. The challenge is that most banking systems today are relatively closed and non-standardised. Building payroll and tax automation software would require access and permissions to transact in a variety of accounts across banks. This becomes insurmountably complex, challenging to do and not at all cost-effective.
The big difference with the concept of blockchain-driven, open, programmable money is that blockchains are driving standardisation. That standardisation is reducing the costs and complexity to be able to build on top of it and, as a result, is enabling innovation. It is also removing barriers and changing the shape and nature of banking services.
Today, banks offer a suite of services that they have built around their internal systems of managing money. Through one bank, you have an account, have access to deposit money for interest, send money abroad, access payment services, get loans and mortgages, and make investments. Open, programmable money is a foundational building block to unbundling all of these services so that individual companies can specialise in specific segments of traditional finance on a global scale, which is changing the fundamental nature of banking and finance.
As an example, you can transfer money to Circle and be issued USD Coin, its open, programmable money that is backed by 1:1 with US dollars. You can then transfer that money to one of several deposit and loan providers that will pay you interest on your USD Coins. Right now, I’m experimenting with one that is paying more than 8 per cent annual interest, calculated and paid weekly for money I have deposited with one of these providers and which I can withdraw at any time. This is a huge departure from the small amounts and significant lock-in from any comparable money market fund with a local bank. It is also for US dollar-based deposits, not anything heavily speculative such as bitcoin.
So, what’s the catch? The key challenge with these sort of companies is risk and who is regulating them. Of critical concern is that there are not clear indications of who has reviewed them for risks associated with cybersecurity, how they securely manage the money they hold and whether they are in line with global compliance requirements such as anti-money-laundering and know your customer rules. Those are before considering whether they have managed the risks associated with their specific business model as well.
These sorts of risks are the key areas that our regulatory framework is designed to manage, and it is the reason why individuals such as Hester Peirce, a commissioner on the US Securities and Exchange Commission, has lauded our approach. When it comes to these new businesses building on open, programmable money, the challenge is that if it is not clear who, if anyone, is regulating them on the management of these risks, then it is tough to have confidence in putting anything but a small amount of money on deposit with them.
However, this does highlight the opportunities in the space, particularly when it comes to developments in the area of open, programmable money that are driving the unbundling of traditional banking and financial services. Bermuda is developing a reputation as a progressive and reasoned jurisdiction for a solid approach to managing the risks associated with this space. Our progressive, reasoned approach is one of the reasons why Circle has chosen to establish its global operations in Bermuda and the chief executive, Jeremy Allaire, recently testified to the US Senate Banking Committee about it.
It is also a reason why we may be a good jurisdictional choice for the kinds of companies that want to clearly demonstrate to their potential consumers that they have the oversight of a competent and well-respected regulator such as the Bermuda Monetary Authority to ensure that they are appropriately managing these risks. Perhaps soon, as a result, we will have far greater choice and confidence in the kinds of companies that are building solutions on top of open, programmable money.
• Denis Pitcher is a Bermudian tech entrepreneur with an interest in exploring the potential of blockchain and distributed ledger technologies for Bermuda. He is a fintech consultant to the Bermuda Government’s fintech Business Unit as well as a tech cofounder and chief architect of resQwest.com, a global tourism technology solutions provider. He can be reached at firstname.lastname@example.org