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©2024 International Monetary Fund
WP/24/177
IMF Working Paper
Information Technology Department
Programmability in Payment and Settlement — Concepts and Implications
Prepared by Xavier Lavayssière and Nicolas Zhang1
Authorized for distribution by Hervé Tourpe
August 2024
IMF Working Papers describe research in progress by the authors and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: Programmability in payment and settlement has yet to realize its potential to support policy goals such as efficiency, safety, and innovation. This paper proposes a comprehensive framework for understanding and evaluating programmability. It explores two key dimensions: external programmatic access, which is the ability for external participants to access the system data and functions with code, and internal programmatic capabilities, the extent to which internal execution of programs is supported and guaranteed. By developing strategies based on these dimensions, financial institutions, regulators, and related actors can better improve resilience, reduce costs and interoperability, all while managing associated risks. The resulting hybrid systems are coordinated efforts balancing the advantages of permissionless blockchains, such as composability, with regulatory requirements and a wider range of technologies. The paper describes these programmatic models to inform and guide the development of digital finance, bridging policy discussions with technical considerations.
RECOMMENDED CITATION: Lavayssière, Xavier; Nicolas Zhang (2024). Programmability in Payment and Settlement — Concepts and Implications. Working Papers WP/24/177, International Monetary Fund.
| JEL Classification Numbers: | E14, L86, F33, G15, O33 |
| Keywords: | Programmability; Tokenization; Automation; Payment; Settlement |
| Authors’ email addresses: | XLavayssiere@imf.org, NZhang@imf.org |
| JEL Classification Numbers: | E14, L86, F33, G15, O33 |
| Keywords: | Programmability; Tokenization; Automation; Payment; Settlement |
| Authors’ email addresses: | XLavayssiere@imf.org, NZhang@imf.org |
Title Page
WORKING PAPERS
Programmability in Payment and Settlement
Concept and Implementations
Prepared by Xavier Lavayssière and Nicolas Zhang
Contents
Contents
Glossary
Introduction
External Programmatic Access in Closed Systems
Benefits of Opening Programmability
Implementation Challenges in Closed Systems
Internal Programmatic Capabilities of Open Systems
A Standardized and Transparent Environment
From Advanced Programming Features to Composability
Strategies for Improving Programmability
Hybrid Systems
Trade-offs of Enhancing Programmability
Conclusion
Appendix
References
BOXES
Box 1. Categories of Smart Contracts
Box 2. Challenges of Programming Money
FIGURES
Figure 1. Simplified Matrix of Two Key Dimensions of Programmability
Figure 2. External Programs Access the Payment and Settlement System through APIs
Figure 3. Representation of a Closed System with One Ledger
Figure 4. External and Internal Communication in Permissionless Blockchains
Figure 5. Example of a DeFi Protocol Combining Smart Contracts
Figure 6. Hybrid Models can be Evaluated along the Two Dimensions of Programmability
Figure 7. Example of Connection of Permissioned Blockchains with Legacy Infrastructures
Glossary
Application Programming Interface (API): A digital interface enabling programs to interact with a digital platform in a standardized, secure, and reliable manner.
Asset Smart Contract: A program running on a blockchain infrastructure representing an asset digitally. It contains data on ownership, and operation functions.
Atomicity: Indivisibility of a digital operation. Atomicity is employed to guarantee the mutual conditionality of both legs of settlement mechanisms such as DvP or PvP.
Conditional Payment: A payment category transmitted with instructions to settle once specific conditions are met. Such a condition could be a delay or the confirmation of the other leg of a trade.
Composability: The capacity to programmatically combine operations. For example, a tokenized debt can serve as collateral in other automated operations. Composability relies on shared interfaces, trust -minimization, and connected infrastructures.
Delivery vs. Payment (DvP): A settlement mechanism ensuring the mutual conditionality of the transfer of a financial instrument, and its corresponding payment.
Distributed System: A software solution implemented over multiple agents, processes, or computers. Properly designed distributed systems enhance scalability, availability, and resilience of digital platforms.
Distributed Ledger Technology (DLT): A state management distributed system inspired by Bitcoin’s blockchain. DLTs are primarily used in finance to maintain a shared ledger across various entities.
Fast Payment System (FPS): A digital infrastructure enabling immediate or near-real-time transfer and settlement of funds between parties.
Ledger: Register of financial assets ownership. It can denote debt, money, or financial instruments.
Native Digital Asset: A financial asset directly issued on a digital platform. In the context of permissionless blockchains, it refers more specifically to the underlying digital asset used to pay for the network’s security (e.g., Bitcoin or Ether on their respective platforms).
Open-loop vs. Closed-loop: An open-loop payment system is accessible to different payment companies (e.g., card networks), while a closed-loop payment system is generally limited to one company (e.g., transportation cards or voucher cards).
Oracles: Services providing external data to smart contracts on blockchains. Oracles provide data, such as stock prices or interest rates, in a decentralized or centralized manner.
Partitioning: Process of dividing a database into smaller logical partitions. Each partition can be stored on distinct servers while managed as a unified database.
Payment and Settlement System: arrangements, infrastructures and schemes that facilitate financial transactions between institutions. They include systems provided by banks, Fintech firms and central banks such as Fast Payment Systems and Financial Market Infrastructures.
Payment vs. Payment (PvP): A settlement mechanism ensuring the mutual conditioning of two parties’ payments. It reduces settlement risk in foreign exchange transactions.
Permissionless blockchain: Shared ledger maintained by a distributed network where anyone can participate to the validation according to consensus rules.
Primitive: Basic functions of a platform accessible to internal, and external programs. Programs use them to fetch data and trigger actions.
Programmable Financial Platform: Digital platform enabling code-based financial operations through interfaces like APIs, smart contracts deployments, or other code-based tools.
Programmed Asset: A financial asset with code-defined properties that maintain its integrity and contain its usage. On a blockchain, it uses an “Asset Smart Contract.”
Secure Element: A hardware component that guarantees secure code execution and sensitive data storage. A secure element can consist of a dedicated chip or a secure enclave within a microprocessor. Secure elements are commonly used in payment cards and electronic devices for security.
Smart Contract: A program running in a trust-minimized manner on a public blockchain or a DLT network. Smart contracts can be used to represent assets, create atomic operations, or implement Decentralized Finance (DeFi) protocols.
Tokenization: Process of issuing a financial asset on a shared, programmable, and trust-minimized platform. This process involves legal and technical operations.
Trust Minimizing Technologies (TMT): Technological tools and methods employed to minimize the need for trust among parties of a financial transaction, e.g., cryptographic signatures and secure elements.
Zero-Knowledge Proof: A cryptographic method allowing one party (the prover) to prove a statement’s validity to another (the verifier) without revealing extra information. They can be used to ensure that financial transactions have been executed according to coded rules without revealing their details.
The authors would like to thank Clement Berthou, Sonja Davidovic, Paul Desprairies, Andreas Veneris, Veljko Andrijasevic, Itai Abraham, German Villegas-Bauer, Yaiza Cabedo, Ashley Lannquist, Arvinder Bharath, Victor Budau, Frankosiligi Solomon, Pearl Kuebel, and Hervé Tourpe for their careful reviews and comments.