Programmable Value is the Future of Financial Services

About 3% of the money supply in the UK is made up of physical notes, the rest is electronic money held on computer systems. Globally, about 8% of the world’s money is cash, 92% is electronic.*

With the advent of crypto-currencies – also known as digital assets, virtual currencies, or digital currencies, many, especially older bankers still think crypto-currencies are a solution looking for a problem they believe was solved decades ago with electronic money.

However, crypto-currencies, whether in fiat form (so-called stablecoins) or digital assets such as Bitcoin, are fundamentally different to electronic money, and are becoming a force for massive change in financial services.

Crypto-currencies v Electronic Money

To understand the difference, it is best to view electronic money as static and lifeless, transferrable from one static bank account to another by computer programs applying debits and credits; and to view crypto-currencies as dynamic money, embedded with rules that control the transfer of value between private keys that own the crypto-currency (with your own private key, you can send and receive money directly from/to the key).

A good illustration of this difference is in FX – why is it relatively easy to buy and sell crypto-currencies on digital asset exchanges (numbering several hundred worldwide) and use the purchased crypto-currency immediately, anywhere that accepts it; while it is difficult to do the same for fiat currencies (at least for individuals) - where are the equivalent digital FX exchanges?.

The difference is, crypto-currencies are exchanged using simply the programme code embedded in their protocols**, while fiat FX requires having accounts in different countries, impractical except for wealthy individuals and corporates, with cumbersome instructions and connections to move money to them; and FX exchanges require banking partners to provide liquidity, custody and money transmission, adding cost and complexity.

Programmable Money

The best way to view crypto-currencies is as programmable money, that is dynamic, programmable, with conditions if required, to reach its destination directly, reducing, even eliminating the need for intermediaries.

Cars provide a useful analogy. Without a driver, normal cars are static and lifeless, they need someone to operate them and drive them, otherwise they are stationary. In contrast, driverless cars (of the future) are dynamic and programmable, able to direct themselves to arrive safely where, and when they need to be without external intervention. It is the same with programmable money.

The use cases are limitless – examples include shares automatically paying dividends directly to shareholders, insurance claims payable only on specific goods, electricity meters paying power generators directly, consumers paying tax directly to the government on purchases and on receiving salary payments, all without the need for intermediaries.

The technology behind crypto-currencies is distributed ledger technology (DLT), also called blockchain technology, which comes with bewildering terms and concepts such as smart contracts, blocks, consensus... Most of these you can ignore, but smart contracts are instrumental in making crypto-currencies programmable money - they are simply scripts of computer code (rather than contracts) which make transactions repeatable and dynamic, specifying destinations and conditions necessary for payment (which could include, for example, logic for sanctions and transaction monitoring).

Implications

The implications of crypto-currencies for payments and money transfer are enormous. Undoubtedly, crypto-currencies will create new business models, enabling new experiences, new products and new services for decades to come. Existing ones reliant on bank accounts - static electronic money stores, will disappear or be side-lined over time.

Core banking systems, card systems, electronic money wallets all will be reinvented or superseded by programmable money systems using DLT/blockchains, as will clearing infrastructures (ACH, RTGS) that connect them together. The evidence for this is gathering rapidly – China’s recently announced CBDC (central bank digital currency) for the Renminbi partially using blockchain, Facebook’s plans for the Libra crypto-currency (the controversy surrounding it is symptomatic of the implications for central banks and regulators), the call by the Association of German Banks for a programmable, digital euro, and bank initiatives for crypto-currencies such as JPM Coin and Fnality are the tip of the iceberg of the change to come.

Programmable Value

This change is more than just about programmable money – all forms of value transfer are programmable using DLT/blockchains. Shares, bonds, derivatives, loans, repos, CDs, letters of credit, factored invoices, loyalty points and so on.

In short, “Programmable Value” is the future of financial services.

* my calculations for the UK; for the world, check howstuffworks.com(!)

**For example, if buying ETH (Ethereum) for BTC (Bitcoin), the seller transfers ETH from their ETH private key to the buyer’s ETH private key, while simultaneously the buyer transfers BTC from their BTC private key to the seller’s BTC key. The digital asset exchange provides price discovery and manages an order book to match the two, and an escrow mechanism to ensure the simultaneous transactions are both completed, but the transfers are done on the BTC and ETH blockchains controlled by their respective protocols. Once done, the buyer is able immediately to use their ETH anywhere in the world without needing any intermediary to get it there.