BIS ponders if CBDC programmability can be introduced after CBDC is already launched

The Bank for International Settlements (BIS) is wondering if programmable features can be introduced to a Central Bank Digital Currency (CBDC) after it is already launched while highlighting that blockchain technology is not essential to a functioning CBDC system.

While the BIS acknowledges that blockchain could aid in programmability, it is also looking into whether or not blockchain is actually necessary, and if programmability could be introduced later on.

“What type of CBDC designs could be launched without programmability but would leave open the capability to introduce it at a future date, if needed, without requiring a major redesign?“

Bank for International Settlements

Last month, the BIS published a 10-page report called “Central bank digital currencies: ongoing policy perspectives,” which questioned if programmability could be introduced via the backdoor following a CBDC launch.

Programmability in CBDC means that banks and their customers would potentially be able to program what you could spend your money on, where you could spend your money, how you could spend it, and when.

While blockchain technology is not deemed essential for programmability, the authors mention that it could enable certain types of programmability.

According to the report, “The use of blockchain technology within CBDC systems remains a possibility, although it is not deemed essential to the functioning of a potential CBDC system.”

However, “There may be ancillary uses for blockchain technology, and associated concepts from within the cryptoasset ecosystem, that could potentially extend the functionality of a CBDC (eg enabling certain types of programmability, micropayments).“

“The use of blockchain technology within CBDC systems remains a possibility, although it is not deemed essential to the functioning of a potential CBDC system“

Bank for International Settlements

According to the report, “Programmable payments involve allowing for some automation or conditions to be set around a transaction.”

Assessing their potential raises questions of:

• Whether supporting programmability requires a blockchain design, or whether it would be feasible to extract the required constructs and provide them in a non-blockchain design.
• What type of CBDC designs could be launched without programmability but would leave open the capability to introduce it at a future date, if needed, without requiring a major redesign.

The report is part of an ongoing collaboration between the BIS and several central banks, which include:

• Bank of Canada
• Swiss National Bank
• European Central Bank
• Bank of England
• Bank of Japan
• Board of Governors Federal Reserve System
• Sveriges Riskbank

“For us [central banks], the issuance of a digital currency that would be central bank money would not be programmable […] Those who can associate the use of digital currency with programmability would be the intermediaries — would be the commercial banks”

Christine Lagarde, European Central Bank

Last March, European Central Bank President Christine Lagarde told a BIS discussion panel that central banks had no interest in programming CBDCs with time limits or terms of use and the like, but that commercial banks certainly did.

“For us [central banks], the issuance of a digital currency that would be central bank money would not be programmable — would not be associated with any particular limitation, whether it’s in time, in type of use — that to me would be a voucher. It wouldn’t be a digital currency,” said Lagarde.

“Those who can associate the use of digital currency with programmability would be the intermediaries — would be the commercial banks.

“And that’s their business. They know how to do that, but if we are to say that a dollar is a dollar, whether it is cash or digital; or a euro is a euro, cash or digital — then for us [central bank] it cannot be programmable.

“It can be associated with conditionality, which is different, but not programmable,” she added.

“Just imagine that you are able to give your kids some money in digital rubles and then restrict their use for purchase of junk food“

Alexey Zabotkin, Bank of Russia

Bank of Russia deputy governor Alexey Zabotkin gave a real world example of what CBDC programmability could look like when he spoke at the annual cybersecurity training exercise Cyber Polygon back in 2021.

There, Zabotkin explained:

“This [digital ruble] will permit better traceability of payments and money flow, and also explore the possibility of setting conditions on permitted terms of use of a given unit of currency.

“Just imagine that you are able to give your kids some money in digital rubles and then restrict their use for purchase of junk food, for example.

“That would be a useful functionality for a customer, and of course you can come up with hundreds of other similar use cases.”

“By programming CBDC, those [sic] money can be precisely targeted for what kind of people can own and what kind of use this money can be utilized.”

Bo Li, International Monetary Fund

Speaking at a high-level roundtable on CBDC in Washington, DC in October 2022, IMF deputy managing director and former People’s Bank of China (PBoC) deputy governor Bo Li said of CBDC programmability:

“CBDC can allow government agencies and private sector players to program — to create smart contracts — to allow targeted policy functions. For example, welfare payment; for example, consumption coupons; for example, food stamps.”

“By programming CBDC, those [sic] money can be precisely targeted for what kind of people can own and what kind of use this money can be utilized,” he added.

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