Empowering Real World Asset Tokenization with Purpose Bound Money: A New Frontier in On-Chain Settlements

Introduction

In the ever-evolving landscape of digital finance, the advent of Purpose Bound Money (PBM) heralds a transformative era for the tokenization of real-world assets (RWAs). This innovative financial mechanism, by embedding specific usage constraints within digital currencies, offers a nuanced approach to directing capital flow towards targeted economic, social, and environmental objectives.

Purpose Bound Money (PBM) is an advanced iteration of digital currency innovation, expanding upon the foundational principles of programmable payments and money. At its core, PBM is a protocol that meticulously outlines the specific conditions under which its underlying digital currency can be utilized. It transcends traditional digital currencies by embedding sophisticated programming logic directly into the currency itself, making it a bearer instrument that carries its own set of rules and restrictions. This self-contained programming ensures that the funds are dedicated exclusively to predetermined purposes, whether for sector-specific investments, social initiatives, or environmental projects.

The unique characteristic of PBM lies in its ability to facilitate direct transfers between parties, eliminating the need for intermediaries and enhancing the efficiency and transparency of transactions. Through this innovative framework, PBM empowers issuers to channel financial resources with unprecedented precision, aligning financial flows with strategic objectives and contributing to more targeted and impactful outcomes.

As we stand on the cusp of a new frontier in on-chain settlements, the integration of PBM into RWA tokenization not only promises to enhance the efficiency and transparency of transactions but also to redefine the parameters of investment and asset management. This article seeks to explore the theoretical underpinnings and practical applications of PBM, particularly in the context of real estate, carbon credits, and company shares, thereby illuminating its potential to act as a catalyst for sustainable development and financial inclusivity in the digital age.

The Background: Project Orchid

So where did PBM come up, and where are its origins? Purpose Bound Money (PBM) which is a protocol for the use of digital money under specified conditions, was part of a wider pilot in Project Orchid (Monetary Authority of Singapore). The Monetary Authority of Singapore (MAS) released a whitepaper specifying conditions for the use of central bank digital currencies (CBDCs), tokenized bank deposits, and stablecoins on distributed ledger technology.

The study was conducted in collaboration with the International Monetary Fund (IMF), Banca d’Italia, Bank of Korea, and various other financial institutions and FinTech firms. It outlined business and operating models for programmable money transfers.

"This collaboration among industry players and policymakers has helped achieve important advances in settlement efficiency, merchant acquisition, and user experience with the use of digital money. More importantly, it has enhanced the prospects for digital money becoming a key component of the future financial and payments landscape," said Sopnendu Mohanty, Chief FinTech Officer at MAS.

As part of the study, MAS studied foundational digital infrastructure, which supports digital identity, data exchange, and interoperable payments, which al; play an important role in enabling financial services to be accessed by a wider set of the population and support economic and social development. Businesses and innovators could build upon these foundational infrastructures to develop innovative services, leading to more efficient and affordable services with better user experiences.

One area where significant strides have been made in recent years is the development of the concept of programmable payment and, more recently programmable money, popularised with the blockchain and peer-to-peer money movement.

1. Programmable payments are essentially automated transactions that are triggered once specific criteria have been fulfilled. This could involve setting limits on daily expenditures or establishing automatic, periodic transfers, akin to the mechanisms of direct debits or standing orders. In practice, these automated payments are often facilitated through the creation of database triggers or via Application Programming Interfaces (APIs) that act as intermediaries between the financial ledger and the user's application. These interfaces engage with conventional banking ledgers, modifying account balances in accordance with pre-set instructions.
2. On the other hand, programmable money introduces the concept of incorporating governance rules directly into the currency itself, thereby dictating or limiting how it can be used. For instance, it's possible to program the currency to be divisible into extremely small fractions, down to the eighteenth decimal place. Forms of programmable money include tokenized deposits, stablecoins, and Central Bank Digital Currencies (CBDCs). Unlike programmable payments, where the control logic is separate from the monetary value, programmable money integrates both the value and the rules within the currency. As a result, when the currency is transferred, the embedded instructions and value are transferred together, maintaining the integrity of the programmed conditions.

The project then introduced a novel dimension to the realm of digital currency programmability, Purpose Bound Money (PBM) emerges as a groundbreaking model initially investigated during the early stages of Project Orchid. This innovative approach synthesizes the foundational principles of both programmable payments and programmable money, offering a unique protocol that delineates the specific conditions under which its associated digital currency can be utilized.

PBMs stand out as bearer instruments endowed with intrinsic programming logic, enabling direct transfers between parties without the need for intermediary facilitation. This self-sufficient programming capability ensures that PBMs can be precisely tailored to meet designated objectives, enhancing the targeted effectiveness and efficiency of digital transactions.

A crucial aspect of PBM is that the underlying digital medium of exchange bound within it comes embedded with programmable logic that makes it possible for use across different platforms and systems (Project Orchid - MAS, 2023).

PBMs may be utilized as a digital coupon as an example to demonstrate this. A predetermined set of guidelines for its use is attached to a voucher. The voucher-bearer (a programmed payment feature) can exchange products or services with participating merchants by presenting the voucher. The voucher scheme's provisions occasionally allow it to be transferred between individuals (a programmable money feature). Therefore, a customer may buy a gift card based on PBM and give it to someone else, so they may spend it at a partner retailer.

It does, however, impose limitations on the payer's use of the PBM, but not on the payee, in contrast to a standard voucher. When a customer uses PBM to pay for his purchase, the digital money is released from the PBM and given to the seller as long as the use conditions are met. After then, there would be no restrictions on how a merchant may use the digital money for other reasons, like paying a supplier.

Purpose Bound Money (PBM) Architecture

The technological stack utilized in a digital asset-based network is described by the PBM protocol using a four-layered paradigm. The network's constituent parts may be divided into four discrete layers: the asset layer, platform layer, service layer, and access layer. A PBM's programming logic may be thought of as a service, with digital currency located at the asset layer. Digital money exists between the asset and service levels when it is bound as a PBM.

A PBM based architecture has four distinct components:

1. Digital currency backing PBM - the digital currency backing a PBM serves as collateral for the PBM. When the conditions of a PBM are fulfilled, the underlying digital currency is released, and ownership is transferred to the target recipient.
2. PBM Wrapper - The PBM Wrapper implemented in the form of smart contract code specifies the conditions upon which an underlying digital currency can be used. The PBM Wrapper could be programmed whereby the PBM can only be utilised for its intended purposes, such as validity within a certain period, at specific retailers, and in predetermined denominations. Once the conditions specified in the PBM Wrapper are met, the underlying backing digital currency will be released, and transferred to the recipient.?
3. PBM Infrastructure - the ownership of a digital currency and the smart contracts governing its usage are executed upon a ledger-based infrastructure. The PBM infrastructure establishes the foundation for the implementation of Programmable Money and enables new possibilities for interactions among consumers, merchants, financial institutions, and government agencies. The ledger-based infrastructure could be DLT or non DLT based.?
4. PBM Wallet - PBM wallets are used by users to send and receive PBMs and the respective backing digital currencies. They refer to cryptographic wallets which are software programmes that hold users’ private keys that grant them access to PBMs.

Digital Currencies Backing PBM

Beyond the scope of a retail Central Bank Digital Currency (CBDC), the technology underpinning Purpose Bound Money (PBM) is crafted to be compatible with other emerging digital currency formats that may serve as programmable "money" in the future, including tokenized deposits and stablecoins with robust backing.

Essentially, any form of electronic or digital currency can be broken down into two key components: the financial instrument itself and the underlying framework that facilitates the management and transfer of balances. Although the initial focus is on retail CBDCs, PBM technology is intentionally developed to be neutral regarding the specific financial obligation it represents, enabling its application across a diverse range of digital currencies. MAS cited three considerations that would underpin this design choice:

1. The Monetary Authority of Singapore (MAS) anticipates that any potential retail CBDC will represent only a minor portion of the total money supply, similar to the role currently played by physical cash. Presently, cash in the form of notes and coins issued by MAS constitutes about 8% of the total money supply, with the vast majority, 92%, being comprised of privately issued bank deposits.
2. Furthermore, MAS envisions the retail CBDC system as a crucial component of Singapore's comprehensive digital infrastructure. This infrastructure integrates various elements such as payment systems, digital identity, and mechanisms for data exchange and consent, aiming to enhance the protection of individual privacy and welfare. As a public payment infrastructure, the retail CBDC is expected to uphold minimum standards in payment services regarding safety, speed, convenience, and cost. The goal is for the retail CBDC system to serve as a universal and open platform that seamlessly interacts with existing payment systems.
3. Lastly, MAS acknowledges that the justification for introducing a retail CBDC in Singapore is still under consideration. Given the swift evolution of financial innovations worldwide, it's premature to predict the future landscape of money and payment systems. Amidst these uncertainties, MAS hopes that by developing the technical know-how for issuing a retail CBDC, it will contribute to the global knowledge base, enhancing the development of payment systems, irrespective of the final decision on implementing a retail CBDC.

The PBM Wrapper

Purpose Bound Money (PBM) can be generated by encapsulating various types of digital currencies, as discussed previously, within a PBM smart contract. This process transforms these digital currencies into PBMs, which are then distributed to users. Consumers engage with PBMs in their encapsulated form, eliminating the need for them to deal directly with the underlying digital currencies. This approach also means that issuers of these vouchers do not need to create their own payment methods.

Essentially, those who create PBMs are not introducing new forms of payment; instead, they are adding specific conditions to existing financial instruments. The decision to incorporate emerging digital currencies into the PBM framework is driven by a desire to explore and experiment, acknowledging the potential benefits these new forms of currency may offer.

Benefits of PBM

Targeted Economic and Social Outcomes: One of the most significant advantages of PBM is its ability to direct funds towards specific economic or social objectives. By embedding conditions within the digital currency itself, PBMs ensure that the money is spent exactly as intended by the issuer, whether it's for educational purposes, healthcare, environmental sustainability, or other targeted initiatives. This precision in financial flows can enhance the effectiveness of policy measures and social programs.

Enhanced Transparency and Accountability: PBM's inherent programmability facilitates a high level of transparency and accountability in financial transactions. Since funds can only be spent on predefined purposes, it becomes easier for issuers and regulators to track and audit the use of funds, reducing the risk of fraud and misallocation.

Financial Inclusion: PBMs can play a crucial role in promoting financial inclusion by making it easier to distribute funds directly to individuals or communities that may be underserved by traditional banking systems. For example, social welfare benefits or disaster relief funds can be distributed more efficiently and securely, ensuring that assistance reaches those in need promptly.

Limitations of PBM

Complexity and Implementation Challenges: The development and deployment of PBM systems involves significant technical complexity and regulatory challenges. Ensuring the interoperability of PBMs with existing financial systems, as well as the scalability and security of the underlying blockchain platforms, can be daunting tasks. Additionally, establishing a comprehensive legal and regulatory framework that accommodates the novel features of PBMs is essential but challenging.

Privacy Concerns: While the transparency of PBMs offers benefits in terms of accountability, it also raises privacy concerns. The traceability of transactions could potentially lead to surveillance and misuse of personal financial data if not properly managed. Balancing transparency with privacy protection is a critical issue that needs to be addressed in the design of PBM systems.

Risk of Exclusion: Although PBMs aim to promote financial inclusion, there's a risk that they could inadvertently exclude individuals who are not digitally literate or do not have access to the necessary technology to use PBMs. Ensuring that PBMs are accessible and user-friendly for all potential users is crucial to avoid exacerbating existing inequalities.

Dependence on Technology: The effectiveness of PBMs is inherently tied to the reliability and availability of the underlying technology. Issues such as system failures, cyber-attacks, or technological obsolescence could undermine the utility and security of PBMs, posing risks to users and the broader financial system.

Closing Remarks

As institutions navigate through the intricate landscape of digital finance, the exploration and implementation of Purpose Bound Money (PBM) stand as a testament to the innovative strides being made towards creating a more efficient, transparent, and purpose-driven financial ecosystem. The journey through the conceptualization, benefits, and limitations of PBM underscores the complexity and potential of integrating such technologies into our daily transactions and broader economic frameworks.

The critical reflection on PBM reveals a balanced view, acknowledging both the transformative potential it holds for directing funds with precision towards intended uses and the challenges that accompany its widespread adoption and technical implementation. As with any emerging technology, the path forward involves navigating uncertainties, addressing regulatory and technical hurdles, and fostering a broad understanding and acceptance among stakeholders.

The rapidly evolving nature of digital currency development suggests that what we see today is merely the tip of the iceberg. There are likely to be further enhancements, innovations, and applications of PBM that have yet to be uncovered. In this context, the Monetary Authority of Singapore (MAS)'s Project Orchid serves not just as an experiment but as a pioneering effort to lay the groundwork for a future-proof financial infrastructure. This initiative is poised to benefit a wide array of participants in the financial ecosystem, from corporates and merchants to financial institutions, FinTechs, and the general public.

In conclusion, the initial phase of Project Orchid and the exploration of PBM technology represent crucial steps towards realizing a vision of a digital financial infrastructure that is adaptable, inclusive, and capable of meeting the evolving needs of society. While challenges remain, the proactive approach taken by MAS and the commitment to innovation and experimentation are commendable. These efforts are likely to pave the way for a financial system that not only addresses the current demands but is also well-equipped to handle future developments in the digital currency space. As we move forward, it is clear that the journey of digital finance is one of continuous evolution, and the work done today will serve as a cornerstone for the financial innovations of tomorrow.