The world is veering toward a fragmented monetary future in which central bank digital currencies (CBDCs), stablecoins and other digital money variants jostle for position in an increasingly complex financial ecosystem. Under these conditions, rifts between different ledger technologies and payment infrastructures could also widen over time.
But fragmentation is no friend to market efficiency or liquidity. Today, the relatively poor interoperability of different digital assets is already exposing early pain points for consumers, businesses and even public authorities. Transferring value between any combination of them can be risky, expensive and time-consuming.
The Monetary Authority of Singapore (MAS), the country’s central bank, is mulling a solution to this challenge in the form of Purpose Bound Money (PBM). First proposed in November 2022 under MAS’s Project Orchid – an examination of a potential retail CBDC in the city-state – PBM could be a game-changer for the future of digital money.
At its core, PBM goes beyond programmable payments and programmable money and refers to a “protocol that specifies the conditions upon which an underlying digital money can be used”, according to MAS.
In other words, PBM can only be exchanged when specific criteria are met. This might include a consumer’s PBM use being restricted to a particular merchant under specific terms, akin to a voucher. Once released to the merchant, however, it would be usable without constraint. It could also deliver an escrow-like function between buyer and seller.
Purpose Bound Money is becoming more and more needed as different pilots and developments are leading to a fragmentation
But PBM’s more explicit value lies in MAS’s proposal that it be interoperable across different platforms, wallets, payment systems and rails. “Purpose Bound Money, as a concept, is becoming more and more needed as different [digital asset] pilots and developments are leading to a fragmentation of ledger technologies and forms of money,” says Francesco Burelli, partner at Arkwright Consulting.
In a major step forward for PBM, MAS published a technical whitepaper on June 21 in partnership with the Bank of Italy, Bank of Korea, International Monetary Fund and private sector groups, detailing its proposed system architecture, components, lifecycle, sequence flow and design considerations.
“[The whitepaper] is very forward-thinking in nature and highlights a proposed framework to address challenges that will inevitably arise from the wide range of CBDC and digital money initiatives that are happening globally,” says Mr Burelli.
This includes details of how PBM would achieve interoperability. According to MAS, PBM would consist of two main components: an underlying store of value acting as collateral and a “PBM Wrapper” that would define the intended use, in the form of a smart contract code.
In this way, MAS’s PBM design mirrors the wrapping that occurs in the cryptocurrency ecosystem to enable tokens to be used on different blockchains. “PBM is actually a wrapper. It’s wrapping the store of value. No one else out there is actually thinking about this [in traditional finance] but wrapping is a very common concept in crypto,” says Kenneth Bok, managing director at Blocks in Singapore and author of Decentralising Finance.
“It’s a very smart way of thinking about it because it achieves generalisation. We don’t know what the future of money actually looks like and MAS has said that it doesn’t see a need for a retail CBDC as yet. But if the EU goes ahead with the digital euro and we already know that the e-CNY is in play, then MAS might need to respond and come up with CBDC-like solutions in order to compete with the new features of foreign CBDCs,” says Mr Bok.
In terms of the underlying assets, MAS’s white paper only references CBDCs, tokenised bank liabilities and stablecoins. But PBM’s proposed capacity to free these assets from their underlying networks or infrastructures is designed to facilitate a digital assets ecosystem that will build financial inclusion, engender efficient transactions and create economic value, according to the central bank.
It’s a very smart way of thinking about it because it achieves generalisation
“I think what MAS is trying to demonstrate is that private currencies like tokenised deposits and stablecoins, and central bank digital currencies, can co-exist. And [the whitepaper] proposes a technical model for how it could possibly happen,” says Angela Ang, senior policy adviser at TRM Labs in Singapore.
At present, MAS’s PBM concept is being trialled on an e-commerce use-case by industry partners including Amazon, DBS Bank and Grab, among others. According to Ms Ang, this is testament to the central bank’s forward-looking approach to innovation, as well as its focus on private sector partnerships.
“Policy-makers and central banks are very influential. They have the ability to really corral a wide variety of stakeholder groups and I think MAS has really done that with PBM,” she says.
Nevertheless, PBM’s infancy means that it is not immune from teething pains or criticisms. For one, serious privacy concerns have been raised by detractors. And, from a security perspective, it faces a similar set of challenges to other digital asset designs.
“There are a variety of general risks starting from code vulnerabilities, logic design errors or gaps in governance that may offer criminals ways to misuse the system or steal funds,” says Mr Burelli.
For now, however, the momentum is clearly behind Singapore’s experimentation with PBM. “Given that Singaporeans are really used to digital financial innovation, it looks likely that MAS will push ahead with PBM if it gets to a point where they can make it operational,” says Mr Bok.
