Digital assets have been receiving increased recognition in terms of legitimacy and potential to positively reform the financial ecosystem. However, the use of digital money at a more widespread level carries certain challenges, including structural concerns over the fragmentation of payment systems and the fungibility of digital money, and practical concerns over security and privacy.
The Monetary Authority of Singapore (“MAS“) has been looking towards developing an institutionalised framework for the organised development of digital money usage. MAS has taken formative steps by issuing a Purpose Bound Money (“PBM“) Technical Whitepaper (“Whitepaper“). The Whitepaper provides a technical overview to the concept of PBM, proposing it as a common protocol for interacting with different forms of medium of exchanges.
Under a PBM protocol, underlying digital money is programmed with specific conditions upon which it can be used. Once the conditions are met, the digital money is released, and it becomes unbounded once again. The digital money issuer retains control over the digital money, preventing fragmentation and ensuring easy maintenance.
The stages in the PBM lifecycle are as follows:
(a) Issue. A PBM smart contract is created, and PBM tokens are minted.
(b) Distribute. The PBM tokens are distributed by the PBM Creator to PBM Holders for usage.
(c) Transfer. PBM tokens may be transferred from one entity to another.
(d) Redeem. After all the conditions in a PBM have been fulfilled, the PBM Holder may redeem the PBM token.
The Whitepaper proposes a PBM protocol to address the identified challenges of digitisation in the financial sector, setting out: (i) the system architecture; (ii) PBM components; (iii) roles and interactions; (iv) lifecycle; and (v) sequence flow.
The Whitepaper sets out the following design considerations for the implementation of a PBM, providing guidance for its design and execution:
(a) Interoperability. PBM technology should be designed at the onset to be interoperable across different platforms.
(b) Digital money. It is important to consider the reserve assets backing the digital money, as well as their regulatory implications and compliance requirements.
(c) Privacy. To protect the privacy of the user, the framework may separate the roles of PBM creator and issuer.
(d) Digital readiness. The digital savviness of the stakeholders should be factored into the design of the PBM scheme.
(e) Security. It is crucial to establish a governance framework that ensures the safety of the code as part of the software deployment process.
Click on the following link for more information:
- Purpose Bound Money Technical Whitepaper (available on the MAS website at www.mas.gov.sg)
