Purpose Binding Currency: Next Generation Asset Swap Protocol

Introduction

Digital assets are the digital representation of value, such as ownership of financial or physical economic assets. The digital asset ecosystem is expected to facilitate more efficient transactions, enhance financial inclusion, and unlock economic value. Central Bank Digital Currencies (CBDCs), tokenized bank liabilities, and potentially well-regulated stablecoins, along with carefully designed smart contracts, can serve as exchange mediums in this new digital asset ecosystem.

Despite initial trials showing potential, these new forms of digital currency still need to prove their ability to surpass existing electronic payment systems in terms of practicality. One major advantage of digital currency is the support for programmability, but this remains a topic of discussion. Operators need to ensure that programmability does not compromise the ability of digital currency to act as a medium of exchange. The singularity of the currency should be maintained, and programmability should not restrict the distribution of the currency or lead to fragmentation of liquidity within the system.

This article outlines the technical concept of purpose-bound currency (PBM), which allows currency to be directed towards specific purposes without programming the currency itself. PBM adopts a universal protocol designed to work with different ledger technologies and forms of currency. Through standardized formats, users will be able to access digital currency using their choice of wallet providers. This article describes how to extend the PBM concept, first introduced in the Singapore Monetary Authority's Orchid project, to broader application scenarios.

Background and Motivation

In recent years, digital initiatives aimed at improving operational efficiency and user experience have made significant progress. However, the digitalization efforts in the financial sector also face challenges.

market diffusion and fragmentation

The increase in payment solutions and platforms brings complexity and challenges for users adopting digital financial services. Payment operators often run specific distribution channels for different solutions. Integrating merchants into proprietary platforms consumes significant resources. At the same time, integration with other platforms increases the operational burden on merchants, as they need to train staff to handle different payment solutions.

Private independent efforts are attempting to integrate these plans into a single platform to simplify the user experience. However, these efforts need to further ensure openness and interoperability across all plans. These platforms should not be limited to consumers and merchants within their ecosystems. Interoperable payment systems will provide greater flexibility and a seamless payment experience for businesses and consumers.

The programmability and fungibility of currency

Unlike traditional account-based ledger systems, digital currency allows unique characteristics to be programmed into individual bearer assets and determines how digital currency is used. However, directly implementing programming logic on digital currency alters its properties and acceptance as a medium of exchange. While this approach expands the functionality of digital currency, it limits its use as a viable medium of exchange if the conditions for use are diverse and dynamic. It also requires reprogramming all circulating digital currency every time new conditions or use cases are needed.

Another approach is for digital asset issuers to provide multiple versions of the digital currency, each with different built-in programming logic. However, this method may be impractical, as these digital assets cannot be exchanged interchangeably, leading to fragmented market liquidity. To understand how to maintain the interchangeability of digital currencies and allow for their free exchange, this article examines different programming models.

programming model

Programmable payments refer to payments that are automatically executed once a predefined set of conditions is met. For example, daily spending limits or recurring payments can be defined, similar to direct debits and regular orders. Programmable payments are typically realized through setting up database triggers or as an application programming interface (API) gateway, located between the accounting ledger and client applications. These programming interfaces interact with traditional ledgers and adjust bank account balances according to programming logic.

Programmable currency refers to embedding rules within the value storage itself, defining or restricting its potential uses. For example, rules can be defined so that the value storage can only be sent to whitelisted wallets, or transferred after transaction-level filtering is completed. The implementation of programmable currency includes tokenized bank liabilities and central bank digital currencies. Unlike programmable payments, programmable currency is self-contained, containing programming logic and serving as value storage. When programmable currency is transferred to another party, the logic and rules move along with it.

The advantages of programmable payments lie in the ability to define a set of programming logic or conditions applicable to various forms of currency. At the same time, programmable currency has self-containment and can transfer conditional logic between parties in a peer-to-peer manner. As central banks, commercial banks, and payment service providers around the world explore different CBDCs, tokenized bank liabilities, and stablecoin designs, it is expected that the future financial landscape will become more diverse. Therefore, there is an increasing need to ensure a universal framework for interacting with different forms of digital assets and to ensure interoperability with existing financial infrastructure.

The third model - purpose-bound currency ( PBM ), was explored during the initial phase of the Orchid project by the Monetary Authority of Singapore, based on the concepts and capabilities of programmable payments and programmable money. PBM is a protocol that specifies conditions under which the underlying digital currency can be used. PBM is an unregistered instrument that can be transferred peer-to-peer without intermediaries. PBM includes digital currency as a store of value, along with programming logic that identifies its use based on programmed conditions. Once the conditions are met, the digital currency will be released and become unconstrained again.

This can be illustrated using PBM as an example of a digital coupon. The coupon comes with a predefined set of usage conditions. Holders can present it to participating merchants in exchange for goods or services ( programmable payment functionality ). In certain cases, the coupon program terms allow for the transfer between individuals ( programmable currency functionality ). Therefore, consumers can purchase PBM-based gift vouchers and transfer them to another person who may use them at participating merchants.

However, unlike ordinary coupons, PBM restricts how the payer can use PBM, but there are no restrictions on the payee. When consumers use PBM to pay for purchases, if the terms of use are met, the digital currency will be released from PBM and transferred to the merchant. Thereafter, the merchant can use the digital currency for other purposes (, such as paying suppliers ).

Purpose Binding Currency

This section examines the lifecycle of PBM and the different components that make up PBM. It outlines the key entities and their interactions, emphasizing their roles in the PBM lifecycle.

System Architecture Overview

The PBM protocol refers to a four-layer model to describe the technology stack used in digital asset networks. Network components can be divided into four different layers: access layer, service layer, asset layer, and platform layer. The programming logic of PBM can be seen as a service, while digital currency is located at the asset layer. When digital currency is bound as PBM, it spans across the service layer and asset layer.

The design of PBM is technology-neutral and aims to work across different types of ledgers and assets. It is expected that PBM can be implemented on both distributed and non-distributed ledgers.

Access Layer

The access layer is the layer through which users interact with different services via various interfaces.

Service Layer

The service layer provides various services related to digital assets. It typically operates above the asset layer, enabling users to manage and utilize their digital assets.

Asset Layer

The asset layer supports the creation, management, and exchange of digital assets.

Platform Layer

The platform layer provides the underlying infrastructure for execution, storage, and reaching consensus on transactions.

component

PBM consists of two main components: a wrapper that defines the intended use; and an underlying value store that serves as collateral. This design allows existing digital currencies to be deployed for different purposes without altering their native properties. Once PBM is used for its intended purpose, digital currencies can be used without any conditions or restrictions. The issuers of digital currencies maintain control over the digital currencies, preventing fragmentation and ensuring ease of maintenance.

PBM Wrapper

The PBM wrapper implemented in the form of smart contract code specifies the conditions under which the underlying digital asset is available. The PBM wrapper can be programmed to ensure that PBM is only used for its intended purpose, such as being valid within a specific time period, with specific retailers, or for a predetermined denomination. Once the conditions specified in the PBM wrapper are met, the underlying digital asset will be released and transferred to the recipient. For example, the PBM wrapper can be realized as an ERC-1155 multi-token smart contract.

digital asset

The underlying digital currency bound to PBM serves as collateral for PBM. When the conditions of PBM are met, the underlying digital currency is released, and ownership is transferred to the target recipient. The digital currency must fulfill the functions of money, namely as a good store of value, unit of account, and medium of exchange. The digital currency can exist in the form of CBDC, tokenized bank liabilities, or well-regulated stablecoins. For example, the digital currency can be realized in the form of an ERC-20 compatible fungible token smart contract.

Roles and Interactions

Roles, as a flexible abstraction, can be implemented in various ways. An entity can hold multiple roles, or a role can be executed by different entities.

PBM Creator

This entity is responsible for defining the logic within the PBM, minting and distributing PBM tokens.

PBM holders

This entity holds one or more PBM coins. The entity can exchange unexpired PBM coins.

PBM Exchange

When the PBM token is transferred, this entity will receive the underlying digital currency.

lifecycle

Regardless of the programming language or network protocol used, the design of PBM has a consistent lifecycle phase, ensuring compatibility across different technical implementations. This section outlines the expected functions of PBM and the associated lifecycle phases.

Issuance

The PBM lifecycle starts from the issuance phase. Here, the PBM smart contract is created and PBM tokens are minted. The ownership of the digital assets is transferred to the PBM smart contract. The digital assets are now bound by the PBM smart contract, which can be implemented using ERC-1155 or its equivalents. The use of the digital assets is constrained by the conditions specified in the PBM smart contract, and they will only be released once all conditions are met.

Distribution

After the PBM token is minted, they are distributed by the PBM creator to the intended entity (, namely the PBM holders ) for use. PBM holders receive the PBM tokens in their packaged form and can only exchange the tokens according to the original conditions set by the PBM creator.

Transfer

At this stage, PBM tokens can be transferred from one entity to another in their packaged form according to their programming rules. The transfer stage is optional and depends on the use case. In government-issued ( such as learning grants ), PBM tokens may not be transferable to other citizens. However, in commercial vouchers ( such as retail mall vouchers ), PBM tokens can be transferred to other consumers.

exchange

After all the conditions specified in the PBM are met, the exchange phase will occur. At this point, the PBM token is unpacked, and the ownership of the underlying digital currency tokens is transferred to the receiving entity. The entity can freely use the digital currency tokens, and their use is only subject to the conditions specified by the digital currency issuer.

Expired

The expiration phase refers to a specific condition in the PBM that has been explicitly violated or has expired (, such as the expiration date ), rendering PBM tokens permanently unusable by PBM holders. Expired PBM tokens can be aggregated and destroyed or "burned" to return the underlying digital currency to the PBM creator. Alternatively, PBM can be indefinitely paused to prevent PBM holders from further interacting with expired PBM.

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