Blockchain Programmability and Customizability

When banks adopt new technology like blockchain, they often do so with a view that the technology will help them better serve customers or provide other benefits. However, without an understanding of a technology's underlying mechanics, policymakers may be wary that claims of its promise are inflated. A new paper by the Massachusetts Institute of Technology and J.P. Morgan is an excellent primer on how blockchain can help improve the customer experience in interacting with their banks.

In Application of Programmability to Commercial Banking and Payments[1], a joint research team from MIT's Digital Currency Initiative and J.P. Morgan's Kinexys[2] (known as Onyx at the time of publication) details live and future use cases for blockchain that expand the range of directions customers can give their banks to take actions on their behalf.

For example, maintaining a balance at a specific target amount is a common instruction given by customers to their banks. Once an event trigger occurs, such as an account being debited or credited, the bank transmits to the customer a debit or credit notification, which will generally be processed by the customer's systems, and the customer's systems will request more information as necessary. The customer's systems will use that information to evaluate the account balance and determine the amount of additional funds needed to maintain the target balance, if any, and the customer's system will request the action of moving funds through a payment initiation request. In short, maintaining a balance at a specific level involves multiple points of communication and engagement between the customer's system and the bank's system. Traditional instructions using existing technology may look like the relatively simple logic below.[3]

In contrast, blockchain allows the bank to execute a customer's more complex instructions without further customer communication or involvement, depending on the wishes of the customer.[4] Banks' ability to execute more complex instructions using blockchain spares customers the time they would have previously spent guiding a transaction or service. With programmable blockchain, customers can set more complex event-based triggers for their bank to take certain actions, such as ensuring an account returns to the target balance anytime it is debited. Existing technology is more limited. It may direct a bank system to check a customer's account balance at a certain time each day but may not be able to take more dynamic actions to ensure the balance is replenished if one of multiple events occurs, like a debit, or allow customers to automatically replenish an account by drawing from multiple other accounts instead of just one. Blockchain allows these more sophisticated instructions to be programmed directly into a bank's systems without further interim communications between the customer and the bank, as the below logic indicates.[5]

This higher level of customizability is critical for complex commercial enterprises that respond to market developments on a second-by-second basis and operate across time zones. For example, many large multinational companies seek to maintain the balance of an operating account at exactly the amount needed to meet expenses but no more. Companies seek to have any excess funds, even a small amount, invested in higher-yielding instruments to better benefit the company's bottom line. Currently, achieving this goal is limited by conventional technology, which does not allow institutions to track and manage payment flows involving other parties.

However, the greater customizability of blockchain instructions allows for a new kind of programmability that can help customers ensure accounts have the necessary funds while maximizing their returns.[6] For example, consider the logic below that can be programmed directly into a bank's systems using blockchain. The instruction "Dynamic Funding" would automatically fund the operational account whenever a payment could fail for insufficient funds, while the instruction "Zero Balance" automatically moves funds from an operational account to be deployed to higher-yield instruments at a certain time each day.[7]

Current technology allows customers to maintain a target balance through standing instructions, but blockchain does so while eliminating inefficiencies and increasing customer choice. For example, consider a customer who wants to make payments without overdrawing their account and, if that account lacks the necessary funds, to add funds from a different account where funds are held in a foreign currency. Blockchain can execute this sequence from a single, programmable ledger that can check the customer's account balance, conduct a foreign currency exchange to obtain the desired currency, initiate a funds transfer from the foreign currency account, and then execute the payment. By contrast, conventional technology often isolates these actions into separate bank systems. This separation requires additional time for each system to act independently and for the bank to reconcile the disparate actions to ensure consistent recordkeeping. Compared to current technology, blockchain enables customers to directly program a wider range of actions into a bank's systems, allowing for longer, more complex instructions that better support their specific goals.

Even more interesting possibilities emerge when considering blockchain's ability to integrate real-world, external data triggers for certain bank actions.[8] For example, in many cases, a buyer will want to ensure they pay a seller full price only for goods delivered on time in serviceable condition. In such cases, blockchain technology permits a bank system to reference an external, neutral data source agreed upon by the buyer and seller that can trigger an additional action. For example, a bank could release funds only after a GPS tracker evidences that the goods were delivered in the right place by the right time. In the case of perishable foods, a bank system could even confirm whether a delivery truck's internal temperature system was within an appropriate range before releasing payment. This logic is mapped below.[9]

In this paper, MIT and JPM explore only a handful of use cases, but the range of possibilities from integrating external data sources into programmable and customizable system logic is extraordinarily wide. The authors do not neglect the risks that come along with greater customization, noting that a customer's "ability to write, deploy and execute" code directly onto a bank's systems could lead to "governance concerns and cybersecurity risks."[10] The authors consider a range of actions to mitigate this risk, including "selectively enabling functions, operators and controls."[11]

Considering the concrete benefits to customers and markets from blockchain's increased programmability and customizability, and mitigation measures that can be taken to address new risks, policymakers should pursue sensible, incremental changes to the current framework by which banks are permitted to adopt it and other new technologies. One approach we have previously suggested is to increase the use of public-private partnerships to explore the use of novel technologies.[12] Policymakers should look to successful proof-of-concepts like that between MIT's Digital Currency Initiative and J.P. Morgan's Kinexys as models for new public-private initiatives to encourage safe innovation.[13]

In addition to increasing public-private partnerships, BPI also has called on regulators to:

1. rebalance their risk assessment of bank adoption of novel technology;
2. streamline the process for lower-risk activities where banks have already demonstrated they can operate safely and soundly; and
3. enhance agency expertise in novel technology.[14]

Banks are uniquely subject to in-house supervision by examiners who confirm compliance with law and regulation. They are ideal vehicles for exploring the benefits of new technology like blockchain that offers customers faster and safer ways to meet their individualized objectives.

[1] Wee Kee Toh, et al., "Application of Programmability to Commercial Banking and Payments," MIT Digital Currency Initiative and Onyx BY J.P. MORGAN (2024), https://www.jpmorgan.com/onyx/documents/Application-of-Programmability-to-Commercial-Banking-and-Payments.pdf.

[2] On Nov. 6, 2024, J.P. Morgan announced that Onyx is now known as Kinexys. See Introducing Kinexys by J.P. Morgan, formerly Onyx, J.P. Morgan (Nov. 6, 2024), https://www.jpmorgan.com/insights/payments/payment-trends/introducing-kinexys

[3] Id. at 16.

[4] See id. at 9.

[5] Id. at 17.

[6] See generally id. at 19-22.

[7] Id at 21.

[8] See generally 23-25.

[9] Id.at 25.

[10] Id. at 11.

[11] Id. at 30.

[12] See P. Paridon and J. Smith, Distributed Ledger Technology: Enhancing the Current Regulatory Approach,Bank Policy Institute, https://bpi.com/distributed-ledger-technology-enhancing-the-current-regulatory-approach; see also Paige Paridon and Josh Smith, Distributed Ledger Technology: A Case Study of The Regulatory Approach to Banks' Use of New Technology, Bank Policy Institute, https://bpi.com/distributed-ledger-technology-a-case-study-of-the-regulatory-approach-to-banks-use-of-new-technology.

[13] The Consumer Financial Protection Bureau recently criticized public-private partnerships as often giving "a competitive edge to a single market participant, without providing a larger market impact that was positive for consumers," and "sometimes waiv[ing] (or at least purport[ing] to waive) important consumer protections provided by Congress, including protections from discrimination." See CFPB, Comment on Request for Information on Uses, Opportunities, and Risks of Artificial Intelligence in the Financial Services Sector (Aug. 12, 2024), https://www.consumerfinance.gov/about-us/newsroom/cfpb-comment-on-request-for-information-on-uses-opportunities-and-risks-of-artificial-intelligence-in-the-financial-services-sector/.

[14] Paige Pidano Paridon and Josh Smith, Distributed Ledger Technology: Enhancing the Current Regulatory Approach, BPI (Feb. 9, 2024), https://bpi.com/distributed-ledger-technology-enhancing-the-current-regulatory-approach/. See also Paige Pidano Paridon and Josh Smith, Distributed Ledger Technology: A Case Study of The Regulatory Approach to Banks' Use of New Technology, BPI(Feb 1, 2024), https://bpi.com/distributed-ledger-technology-a-case-study-of-the-regulatory-approach-to-banks-use-of-new-technology/.

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