What is Purpose Bound Money?
Purpose Bound Money (PBM) was introduced by the Monetary Authority of Singapore (MAS) as part of Project Orchid Phase 1 in Oct 2022. It was also a key exhibit during the Singapore Fintech Festival held in Nov 2022. The Project Orchid whitepaper was followed by the Purpose Bound Money Technical Whitepaper released in June 2023.
With the advent of digital payment technology, fintechs have been looking at adding more programming logic to the payment process. The first of these are programmable payments, which are automatic execution of payments that are triggered via APIs. The programming logic in this case lies with the executor such as with a merchant that is triggering recurring payments.
As blockchain technology and smart contracts became more popular, the idea of programmable money was introduced. In this case, logic and rules are contained within the digital currency (or cryptocurrency). Smart contracts are used to trigger payments based on logic embedded within a token. However, with programmable money, different tokens have to be created for different purposes.
PBMs can be applied across multiple types of digital money and have separate programming logic.
Purpose Bound Money is designed to be a wrapper of sorts that applies logic to different forms of digital money such as:
CBDCs
Stablecoins
Cryptocurrencies
Other digital asset tokens
The wrapper makes it purpose-bound. This method allows the same token to be wrapped for different purposes. PBM can only be unwrapped if it meets specific requirements such as for a specified recipient or a specified purpose. In the technical paper, the ERC-1155 multi-token standard was discussed as a way to implement PBM.
The PBM journey can be described in 4 stages, initialization, minting, transfer, and redemption.
In the initialization stage, the PBM wrapper is first initialized and linked to the PBM manager and PBM logic.
Next, the token type and attributes are defined in the PBM manager.
Whitelisting and blacklisting logic is then stored in the PBM logic.
Finally, approval is given to wrap the digital money with the PBM wrapper.
The next stage is to mint the PBM. The minting request is made to the PBM wrapper.
The wrapper checks the logic to make sure that the requesting address is authorized. It then verifies the token definition with the PBM manager.
The required tokens are then transferred to the PBM wrapper. The wrapper updates the PBM manager with the new token supply, mints the PBM, and transfers it to the requestor/creator.
Once the PBM is minted, it can be used. The PBM can be transferred to another party if logic allows.
The PBM creator or any other PBM holder can request to transfer the token to another part, the wrapper checks the PBM logic if the address is authorized and changes the owner of the PBM if it is.
The PBM reaches the end of its life cycle when it is redeemed.
The token holder would request the wrapper to redeem the token.
The wrapper checks the PBM logic if the address is authorized.
If approved, the token is unwrapped and the digital money/ token is deposited with the recipient.
What are the use cases of PBM?
Where is the Trust?
Trust is embedded to ensure that the PBM is only used for a specified purpose. If the PBM is issued (wrapped) on a blockchain-based token, all actions can be traced and tracked from initialization to minting to transfer to redemption. This can prevent fraudulent redemptions such as the use of fake vouchers or fake identities for redemption.
However, the initialization process of the PBM may still be handled by human beings. There is room for misuse and fraud in the issuance (pre-minting) or the minting process. Vouchers can still be faked by insiders even if digital. When bad things happen, an audit trail allows for forensics and assigns responsibility to the relevant people. When an audit trail is mandated digitally, fraud is less likely to happen. Thus one can add the issuance process to the blockchain to create more trust. For this to work, approvals and other audit trail needs to be prerequisites for the issuance and minting process of PBMs
PBM Opportunities
There was a recent update to Singapore’s Payment Services Act that could present an opportunity for the use of PBMs. As of 18th Aug 2022, there are 200 Major Payment Institutions issued with a Payment Services license out of which 12 are Digital Payment Token (DPT) providers. There are also 15 Standard Payment Institutions out of which there are 12 Digital Payment Token Providers. There can potentially be more organizations that will apply to be DPT providers or Single Currency Stablecoin (SCS) issuers. Single Currency Stablecoin issuers can now apply to be regulated under MAS regulations, as of Aug 2023: “Stablecoin Issuance Service” as a new payment service are regulated under the Payment Services Act. SCS issuers require a base capital of S$1 million or 50% of its annual operating expenses, liquid assets need to be valued at higher than 50% of the annual OPEX or such amount assessed to be required to achieve recovery or an orderly wind-down.
Single Currency Stablecoins (SCS) that are under the SCS legal framework will be labeled as “MAS-regulated stablecoins”. More use cases will develop for SCS, Purpose Bound Money is one potential area of growth.
Mainstream fintech companies like PayPal are also entering the Stablecoin market. This points to a global trend for stablecoins and adopters may consider using PBM to infuse more functionality into the tokens.
Conclusion
As stablecoins, CBDCs, and even cryptocurrencies become commonplace, programmable money will start to find use cases. PBM is flexible and can be used to wrap any digital currency
In the enterprise space, this enhances transparency, compliance, and control for corporate finance. It also opens many possibilities to transform existing legacy processes for B2B, B2C, and even C2C. Tools to enhance compliance and make audits more efficient are needed
References
Project Orchid Whitepaper
-https://www.mas.gov.sg/publications/monographs-or-information-paper/2022/project-orchid-whitepaper
PBM Technical Whitepaper
-https://www.mas.gov.sg/publications/monographs-or-information-paper/2023/purpose-bound-money-whitepaper
ERC 1155 Wrapper
-https://docs.ethos.wiki/ethereansos-docs/items/items/item-v2-protocol-overview/wrapped-items/erc1155-wrapper
General ERC20 to ERC1155 Token Wrapper Contract
-https://github.com/0xsequence/erc20-meta-token
Stablecoins and the Payment Services Act
-https://www.drewnapier.com/DrewNapier/media/DrewNapier/17Aug23-MAS-finalises-stablecoin-regulatory-framework.pdf
