(560 words 2 min 30s read)

In November 2019 I blogged about how programmable value is the future of financial services.

However, it is evident from reactions I have had that the concept and implications of programmable value can be difficult to grasp.

A clearer explanation is needed, so here goes.

Digital money is widespread in mobile and online banking, credit cards, debit cards, pre-paid accounts and so on, and these of course require computer programming to operate, so what’s new?

Take core banking systems as an example, typically used in banks to manage current accounts, savings accounts and other banking products. A core banking system has a ledger of say all the bank’s current accounts, so a payment between one customer of the bank and another is straightforward, fast and cheap – a debit on one customer account and a simultaneous credit on another, all within the control of the bank, made on the same ledger, by the same code in the same core banking system.

However, when a customer of Bank A pays a customer of Bank B, it gets complicated, because Bank A’s core banking system has no programmatic/write access or control over Bank B’s core banking system, and Bank A shares no common ledger with Bank B. It can debit its customer account on its ledger, but how does it apply a credit to Bank B’s customer?

The answer is, it doesn’t. Typically, Bank A asks Bank B, through an electronic message, often routed through a central clearing system, to credit the beneficiary account. Bank B does so with its own money on its own ledger, but it is now owed this money by Bank A. So, both banks settle up where they both have accounts on the same ledger, typically at a central bank where each has an account on a RTGS (Real Time Gross Settlement) system.

You can see immediately that this process of value transfer requires multiple proprietary ledgers, and islands of automation (core banking systems) able to communicate with each other but unable to write to each other’s ledgers; and requires separate clearing and settlement processes, with associated standards, rules, commercial and legal frameworks, needed to make it work but resulting in credit and operational risks.

However, if Bank A and Bank B are on a common blockchain, each is able to debit and credit both their customer’s accounts instantly, with the other bank’s agreement but without credit or operational risks. In essence, they have access to the same logical ledger – no need to have, nor to fund settlement accounts at a third party (central bank), no risk of errors where one bank has applied a debit but without a corresponding credit at the other, and no complicated clearing and settlement.

Instead, participants on a blockchain are able to make payments (and other types of transfer), instantly, at virtually no cost, to anyone else on the blockchain, at no risk, using only the sender’s funds, as if it were their own ledger. And, since any participant is able to control both the debit on the sender and credit on the beneficiary, with either both successful or neither successful (known as atomic settlement), participants can create logic (“smart contract”) and embed it in all manner of applications to execute payments with certainty and without risk – that is programmable value.