Programmable Payments and Money: The Future of finance

Exploring Programmable Money & Payments in Blockchain

The financial services industry is exploring the potential of blockchain technology. There have been significant conversations across a number of initiatives, including DeFi. Now, blockchain technology has emerged as an attractive payment system due to its exceptional transaction and settlement security, data integrity, record-keeping, and efficiency advantages.

"Programmable Money" and “Programmable Payments”  are popular terms in the blockchain industry. Even though you may have heard about automated payments in the current banking industry, the blockchain has taken it a step further with the introduction of programmable money. In this article, we will explore the concept of programmable money and programmable transactions and how they can be used as a part of the banking system.

What is Programmable Money?

Programmable money is digital money that can be programmed to behave in a specific way based on predetermined criteria. It can also be referred to as the automated form of money that can be programmed to have restrictions. It highlights the potential to give DLT-based tokens an inherent logic.

Programmable money allows us to design digital money with special rules. It’s like creating a token that has its own logic. For example, we could make a token whose value changes over time, or one that can only be used to buy certain things.

While the idea of "programmable money" comes from the world of blockchain, it doesn’t have to use blockchain technology. There are other ways to create digital money with special rules, even without blockchain.

What is Programmable Payment?

Programmable payments are automatic payments that are made using smart contracts or other digital technologies. They are a new way to send money, and they help improve processes, make new business models possible, and offer benefits.

With programmable payments, money is sent automatically when certain rules are met. This means no one has to be involved to check if the conditions are right for the payment. But, it can be hard to include complex rules in these payments, which makes them less flexible. However, smart contracts allow these payments to be part of more complicated business systems.

Even today, banks already use some forms of programmable payments, like standing orders and direct debits. Programmable transactions are payments made automatically using either digital money from blockchain (DLT) or traditional, non-digital money.

How Do Smart Contracts Work for Programmable Transactions?

When a contract is created, it starts the execution of the agreement. This contract is built on blockchain (DLT), so it’s called a smart contract. The system where the contracts are executed is called the "contract execution system."

This system includes things like pricing, charging, and payment initiation—all of which are done by smart contracts. This is the first step where the programming part of the smart contract is used.

The next step is making money programmable. This means putting rules on the tokens, such as who can receive the tokens, how many decimal points the number has, and how large the transactions can be. These rules are needed for making the transactions programmable.

When tokens can be traded for other tokens or services, their true potential is realized. This allows for fast, smooth exchanges and quick payment completion, which is called "delivery vs. payment."

Finally, we need to decide the type of money being used. In traditional payment systems, we only use money like dollars or euros. But in blockchain, we can use different types of money, such as Bitcoin or Ether. Many ways exist to transfer fiat money (like USD) using tokens, including CBDCs and fiat-backed stablecoins.

The Future of Programmable Payments

Programmable payments could offer many advantages, like helping to create new workflows, business procedures, and models—all without changing the money itself.

For example, driverless cars could automatically pay charging stations for the power they use without human help. Industrial machines might be able to check for issues, buy needed parts, and pay for repairs all by themselves. Programmable payments can make business operations run more smoothly, saving time and money.

Programmable payments make it easier to plan and schedule payments. This helps businesses be more efficient and reduces the need for manual tracking. The future could bring faster transactions and solve problems like cash flow issues for companies.

This change will also make business management easier. Instead of relying on humans or waiting for next-day payments, transactions can happen in real time based on actual events. With programmable payments, the financial system will become faster and more flexible, bringing banking into everyday business operations.

Furthermore, a DLT-based currency system can be utilised for novel business models based on tokenization. Micropayments might be carried out efficiently in this manner, which is presently not yet achievable with the current financial infrastructure. For these reasons, it is encouraging that financial institutions are considering tokenizing money to boost efficiency, minimise risks, and allow creative business models based on tokenization.

However, there is an operational risk associated with automation. Any vulnerabilities in the code of smart contracts can affect multiple users. Additionally, in a fully programmed environment, you can't take advantage of the weak as a competitor, and the powerful can further strengthen themselves.

Bottom Line

Programmable money unlocks a world of opportunities for businesses that want to automate their operations. Auxiliary payments can be made with the aid of programmable money, and control over the constraints programmed into the currency could ensure that this money can only be used for the purposes for which it is intended.