#Digital Currency Ecosystem

CBDCs: making payments programmable

Global Trends
6 Mins.

The case for adding programmability to digital payments is becoming stronger and stronger. We explore how CBDCs could make the capability universally available – without compromising on performance or user trust – and examine the enabling role of smart wallets.

Within just a few years, central bank digital currencies (CBDCs) are expected to become an economic reality for millions of people in dozens of countries around the world.

By the start of 2023, 114 countries or currency unions, representing 95% of global GDP, were exploring – or implementing – a CBDC.1 In the build-up, the focus has shifted decisively from investigation and experimentation to the definition of a broad set of use cases for CBDCs that could result in major benefits for business, society, and individuals.

There is no universal case for a CBDC; each country has a different set of priorities and aspirations for this state-backed digital equivalent of cash. For some countries, the main impetus comes from a responsibility to ensure that fiat money continues to play its anchoring role in the digital era, against a background of privately issued digital currencies such as cryptocurrencies and stablecoins.

For others, the introduction of a CBDC is seen as the best route to much wider financial inclusion and a broader participation of individuals in the digital economy. Increasing efficiency in payments and lowering transaction costs are other compelling reasons.

In all cases, though, a key enabler of CBDCs is an extra dimension they would bring to legal tender: programmability.

The power of programmability

With digital money comes the powerful capability of adding logic to transactions in the form of programmable payments or smart contracts.

Programmable payments are payments that are automatically executed when a set of predetermined conditions are met – although the notion is not an entirely new one. Basic programmable payments, such as standing orders or direct debits, are already widely used in the banking system and are triggered by simple transaction events or thresholds. However, the capability to automatically apply complex preprogrammed rules to payments – and making that capability interoperable across all kinds of network-connected devices – is a hugely attractive one.

Momentum around programmable payments is building fast. The global market for smart contracts is projected to grow from $315.1 million in 2002 to $1.46 billion in 2029.2 Machine-to-machine (M2M) payments will become a major driver for such programmable payments. And, in the not-too-distant future, CBDC wallets are also expected to play a significant role in the adoption of self-executing contracts.

The scope for the application of programmability is only just being defined. In November 2022, for example, the European Central Bank (ECB) canvassed experts from the banking and payments industries to explore options for the kinds of programmable payment services that might be used with the digital euro. The main questions they asked: which use cases would be key for programmable payments, which standards might be needed to ensure interoperability, and what kind of back-end IT architecture would support this?3 The ECB is not alone: central and commercial banks, and other financial service providers, are all exploring the challenges and opportunities of implementing programmability – at all levels.

But it is an area that is already clouded with misunderstanding. The term programmable payments is often mistakenly equated with programmable money, which is a much less desirable option. With a programmable dollar, for instance, one digital dollar may not always be in par with one dollar in cash. The digital version could be programmed with the risk that it does not retain its face value. As such, the notion of programmable money has the potential to actually undermine public trust in CBDCs. In contrast, programmable payments present the opportunity to add huge value at business, societal, and individual levels.

CBDCs, programmability, and digital wallets

So, if programmability should remain at the payments level, where should the logic attached to any payment be triggered? A key element for instilling trust and payment functionality in CBDCs will be the provision of digital wallets. These 'smart wallets', most commonly held on smartphone apps, would be a safe place to store central-bank-issued digital cash as tokens. But the wallets could also be enhanced with numerous smart features, including the facility to execute the conditions that trigger payments.

Such digital wallets would not be a feature solely of smartphones: to ensure the inclusion of all citizens, 'smart wallets' would likely be implemented across many other form factors, including mobile apps, smart cards, wearables, and IoT devices (with varying levels of programmability).

Uniting valued-added services and consumer protection

Smart wallets would enable specific rules and policies to be set at different levels to meet the needs of institutions, businesses, and individuals. For example:

  • Central banks would be able to define policy rules that apply to all wallets – and cannot be changed by others in the payment value chain, e.g. rules that limit the amount that can be held in any single wallet in order prevent money laundering.
  • Banks, FSPs, or companies could set wallet conditions on behalf of customers at the issuance level, e.g. a wallet designed solely for use by a company’s employees for the purchase of healthy food.
  • Consumers’ wallet configurations might implement rules defined specifically by the users themselves, such as defining a weekly household spending limit or restricting a wallet’s use to family members.
Mother and daughter on the sofa with a mobile phone using a smart wallet

The scope of potential applications for the programmable features of digital currencies is limited only by the imagination at this stage:

  • Government direct-to-person payments: programmability could be used to enable public authorities to support citizens’ needs – for example, to issue energy subsidies or to activate a right to childcare services
  • National policy enactment: CBDC smart wallets could be used to promote policies that help meet sustainability objectives, e.g. by issuing a “green” wallet that would be a stimulus for consumers to buy environmentally friendly products and services.
  • Intelligent vehicle wallets: a smart electric car, equipped with its own programmable wallet, could automatically pay at a charging station after searching for the best energy deal, negotiating the price, and splitting the payment across relevant stakeholders (the charging station provider, the energy company, the carmaker, and so on).
  • Self-replenishing machines: IoT-enabled industrial equipment could be set up to order and pay for its own supplies when sensors indicate that these are running low or when a third-party source of data needs to be accessed. Equally, in a domestic setting, a fridge loaded with a smart wallet might automatically order, pay, and arrange for the delivery of regularly used items when the fridge detects depleting supply.
  • Pay-per-use: people and businesses could use programmability features to pay for services at the point of consumption rather than having to make advance payments.
  • Personalized wallets: parents could create wallets designed specifically for their children that might set boundaries on the scope of spending, such as blocking purchases of cigarettes or alcohol.
  • Customer loyalty: special-purpose wallets could enable merchants to introduce CBDC-based customer loyalty programs. For example, a customer could apply for a specific merchant wallet that could only be used for purchases at targeted stores and would provide cash back incentives in the form of a percentage of their spending paid directly into their wallet.

These are just a snapshot of the scope of potential applications. What they show, though, is the opportunity for CBDC-enabled programmable payments and smart wallets to stimulate a new generation of business models, applications, and services. Indeed, a well-designed CBDC can be a key driver of innovation as payments evolve while, at the same time, serve as a guardian of public trust in fiat money.

  1. CBDC tracker, Atlantic Council

  2. Global smart contracts market report, QY Research, 2023

  3. Call for interest: technical talks on programmable digital euro payments, ECB, 2022

Published: 09/03/2023

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