(Part 1 – China’s proposed pilot of its central bank digital currency in Hong Kong)
Currency is typically agnostic of how it is used. It’s a store-of-value and a medium-of-exchange. Banks’ accounting systems built on top determine whether deposits will bear interest, and if so, how much.
Ditto for credit. Each bank and nonbank lender implements its own loan accounting system that’s tied to it. This is why transferring a loan between two lenders, or between two borrowers is cumbersome. With programmable money, either a lender or a third-party could create credit tokens that represent aspects of a loan: interest rate, lock-in, transferability, a claim on other (similarly digitised and programmable) securities, and so on. Buying and selling loans, combining them, trading them could become a lot simpler.
With programmable money, ideas that today seem outlandish could become much more commonplace in the future. Sticking with credit, you could borrow money from another person, like today’s P2P lending, with your repayments sent directly to the lending person’s account as Didi ride credits, because that’s what the lender chose to be paid in – they take a lot of rides and this is a nice way to have their Didi wallet topped up with a known amount every month.
Take this further. The friend could ask to be paid in a mix of Didi credits, Starbucks credits, and a mutual fund investment, because all have been securitised via the central bank digital currency contract standard.
As for the P2P marketplace where this loan originated, this illustration bypasses the marketplaces’ role as both the matchmaker and the facilitator of the loans – in this new world, they focus solely on matchmaking innovation. Their fee, which would typically be a % of the final loan amount, would be paid out in interest-bearing tokens as well.