The Monetary Authority of Singapore (MAS) has issued a technical white paper on purpose bound money (PBM). The white paper, published on 20 June 2023, continues MAS’s exploration of ways digital assets can improve the financial system [Note 1] and builds on ideas introduced in MAS’s Project Orchid, which is examining the design and technical aspects of a central bank digital currency (CBDC) system for Singapore.

MAS’s Views on Digital Money

MAS believes that new forms of digital money (which includes CBDCs, tokenised bank liabilities and “well-regulated” stablecoins) must provide value beyond what e‑money provides today. For example, instant transferability of digital money would not alone provide sufficient additional value because many payment systems already offer instant or near-instant transfers of traditional money.

MAS also believes that digital money must be fungible so that it retains its fundamental characteristic of serving as a medium of exchange and so that the liquidity of the overall financial system is not compromised by fragmentation of the money supply.

MAS sees no immediate need for retail CBDCs (i.e., CBDCs issues to the public). However, through Project Orchid and the PBM white paper, MAS wishes to prepare in case retail CBDCs are eventually issued, by identifying potential use cases for, and resolving potential issues with, retail CBDCs.

Programmability Models

Digital money supports programmable logic, which means that holders of digital money can specify the conditions of its use and transfer. MAS describes three models of programmable money:

• Programmable payments. Money is held as stored value by an intermediary and released according to instructions programmed into the intermediary’s database. The programming logic is separate from the stored value and is not transferred when the stored value is transferred.‍
• Programmable money. The programming logic is embedded into the stored value. Programmable money is a bearer instrument which can be transferred on a peer-to-peer basis (that is, without the need for an intermediary), but the logic is always transferred with the stored value. ‍
• Purpose bound money. The programming logic is implemented as a wrapper around the stored value. PBM is also a bearer instrument which can also be transferred on a peer-to-peer basis, but the logic is discarded when the stored value is released to the recipient. The recipient can then either freely use the stored value or rewrap it in other logic.

PBM is similar to programmable money, as it is a bearer instrument whereby the logic accompanies the stored value; but it is also similar to programmable payments, where the logic may be developed by a third party, not the stored value issuer.

Design Considerations 

MAS intends the PBM design to be technology neutral, and in particular to be capable of implementation on both distributed (e.g., blockchain) and non-distributed ledgers.

MAS also outlines several important choices a developer should consider when designing its PBM implementation. One is interoperability across different payment systems, which MAS encourages to avoid monopolistic behaviour.  Another is the nature of the stored value underlying the PBM.  The choices range from CBDCs to stablecoins to other types of digital tokens, all of which offer different ranges of certainty regarding settlement and different types of regulatory oversight. 

A third consideration is privacy. MAS noted that because a PBM wrapper logic could be created by an entity which is different from the digital money issuer, neither the logic creator nor the digital money issuer would have all the information relating to how the digital money is used.

Security is another essential aspect to be addressed.  MAS suggests engaging trusted third parties to verify code and to provide external data.

Use Cases

The white paper proposes several compelling use cases for PBM.  Many involve solutions to the perennial challenge of commercial transactions: buyers not wanting to pay without assurance of delivery, and sellers not wanting to deliver without assurance of payment.  Other use cases include facilitating greater transparency and accountability in financial donations and streamlining cross-border payments by programming compliance into PBM.

Looking Ahead

MAS identifies a few areas for further study. To facilitate adoption of PBM, system design for ease of use by retail customers and for reducing the risks of scams will be important. Thought should also be given to ways PBM can be used without smartphones and network connectivity, and to adopting a name addressing scheme instead of using wallet addresses for fund transfers.

Key Takeaway

MAS’s PBM white paper thoughtfully proposes a solution to integrate a form of digital asset into the mainstream financial system.  MAS’s views that digital money must add value beyond what traditional money now offers, and that digital money must be fungible to serve as a medium of exchange and to avoid adverse impacts to liquidity, provide useful guideposts for developers of digital money intended for use in Singapore.

For More Information

OrionW regularly advises clients on FinTech matters.  For more information about the regulation of financial technology in Singapore, or if you have questions about this article, please contact us at info@orionw.com.

Disclaimer: This article is for general information only and does not constitute legal advice.

[1] Project Ubin, launched in 2016,piloted the tokenisation of the Singapore Dollar and a variety of clearing and settlement schemes.  Ubin+ investigates the use of wholesale digital currencies for cross-border foreign exchange.  Project Dunbar demonstrated the feasibility of central banks transacting directly on a shared platform.  Project Guardian tests asset tokenisation and decentralised finance applications.