Edition 20 – Finternet: Blueprint for Tomorrow's Inclusive, Intelligent, and Resilient Digital Financial Services

Synopsis: Finternet, an innovative digital framework utilizing modern technology protocols, has the potential to transform the financial system, enhancing efficiencies and stimulating innovation, competition, and market growth. Yet, addressing obstacles and mitigating inherent risks is essential for harnessing its full potential.

"The people who are crazy enough to think they can change the world are the ones who do." - Steve Jobs

Imagine a future where Sofia, an expatriate employed in the USA, seamlessly manages cross-border money transfers in a fast, secure, and affordable manner, unencumbered by exorbitant fees and extended processing times that plague traditional remittance methods.

Picture Aarav, an Indian real estate investor, broadening his investment horizons by acquiring fractional ownership and access to a global investor pool, thus addressing the constraints of illiquidity and limited capital access in conventional real estate markets.

Finternet, a financial system tailored for the digital age, has the potential to actualize the narratives of Aarav and Sofia. Leveraging tokenisation and unified digital ledgers, multiple interconnected ecosystems within the Finternet can provide seamless, secure, and immediate transactions while also improving risk management and reducing costs.

Additionally, the strategic deployment of this digital infrastructure could stimulate the development of more streamlined markets and kickstart a positive flywheel of increased economic activity and inclusive growth, while also improving the delivery of welfare schemes and leading to significant fiscal savings.

Let's take a closer look.

Shortcomings of the Current Financial System

As per the 2021 Global Findex Database by the World Bank, approximately 1.4 billion adults worldwide remain unbanked.?This demographic predominantly comprises women who are typically poorer, less educated, and reside in rural regions.

While the current financial system has served us well for centuries, its design inefficiencies have hindered operations, escalated costs, and impeded competition and innovation, particularly as commercial transactions have grown in complexity. These shortcomings manifest in numerous ways:

• Low speed: Financial asset transactions like shares, bonds, or real estate settlements still take days owing to antiquated clearing and settlement systems, siloed proprietary databases, incompatible technical standards, complex regulatory compliance requirements, and manual and inefficient processes
• High cost: Slow transactions come with significant financial implications as they tie up capital for businesses, compelling them to hold large cash reserves or resort to expensive borrowing. Individuals may seek costly short-term loans due to delays in receiving wages. Settlement delays also increase counterparty risk, necessitating collateral postings.
• Restricted availability and access: Financial services are not as readily available as they could be, particularly in rural and low-income areas where some services might not be cost-effective. The decline in cross-border correspondent banking networks exemplifies this. The inability to access financial services not only diminishes welfare but also impedes small business investment in productive activities, stifling growth and development.

Envisioning Tomorrow's Financial Landscape

Central to the financial system of the future is the empowerment of individuals and businesses in their financial engagements. This entails:

• Economically sound architecture: This should provide individuals and businesses the autonomy to decide the timing and execution methods of financial transactions, promoting affordability, security, reliability, and convenience. This empowers users to circumvent slow clearing systems, minimum transaction thresholds, manual processes, and delayed settlements.
• Integration of innovative technology: To save costs and enhance the user experience, innovative technologies must be used. For instance, the tokenized assets on a unified digital ledger could significantly diminish the dependence on lengthy message clearing and settlement processes, which often lead to substantial costs and delays in the current financial system.
• Strong regulatory governance: To maintain public confidence in financial systems, strong regulatory governance is necessary. For instance, public authorities can establish Digital Public Infrastructure (DPI) to create platforms, rulebooks, and regulatory protections essential for an open and efficient financial system. This framework empowers private institutions to innovate and compete, delivering enhanced and cost-effective services to customers.

The Finternet meets these strategic imperatives by leveraging protocols and technologies like those of the modern internet, advocating for the tokenisation of financial assets to enable seamless transactions across disparate financial systems through unified digital ledgers.

Building Blocks of the Finternet

The fundamental concept behind the Finternet is to create a financial system where tokens are exchanged within unified ledgers. The end-to-end flow of a user navigating this system encompasses the following steps:

• User onboarding: Users have the flexibility to create accounts on unified ledgers, each linked to a globally resolvable virtual address. This setup empowers users to manage their assets efficiently, customize authentication protocols, and engage in diverse transactions within the Finternet.
• Asset tokenisation: Token managers act as stewards of the rules dictating token transfers, converting assets into digital tokens while embedding compliance and security standards. These entities, spanning from central banks and commercial banks to asset management firms and private corporations, facilitate asset trades, onboarding, offboarding, and the tokenisation process.
• Enhanced transactions with trust and value-added services: Entities such as attestors, verifiers, lockers, and guarantors foster trust and efficiency within the ecosystem and ensure transparent, immutable, and verifiable transactional information. Trusted data and identity support various use cases, including executing agreements through smart contracts, aiding in fraud detection and regulatory compliance, and facilitating the use of predictive analytics and risk management tools.
• Superior customer experience with the application ecosystem: Empower individuals and businesses to manage a wide range of financial activities, from banking and investments to insurance and beyond. For individuals, these applications manage diverse asset types, offer personalized financial planning, and facilitate various transactions, including domestic and cross-border money transfers. For businesses, they streamline financial operations, optimize cash flows, and support B2B transactions, supply chain finance, and real-time invoicing and payments.
• Supported by unified ledgers: Serves as the secure, immutable, and programmable foundation that oversees a variety of assets, each possessing distinct legal standings, market behaviors, and security prerequisites, thereby ensuring transactional security and market integrity.

Key Design Considerations

While technology undoubtedly plays a pivotal role in advancing the concept of a Finternet, its development is not solely dependent on technological innovation.

Policymakers must carefully consider a range of design factors to achieve a harmonious balance between robust governance and operational efficiency and foster a fertile playground conducive to innovation.

These considerations act as the guiding principles for crafting the Finternet framework, ensuring the inclusion of essential infrastructure, regulatory frameworks, and incentives to uphold its goals and enable its smooth integration into the global financial landscape.

• At its core, the Finternet must prioritize user needs, ensuring that individuals and businesses drive technological and regulatory decisions.
• This user-centric approach must be complemented by a commitment to interoperability, enabling seamless integration across diverse financial networks.
• Furthermore, the Finternet should be designed to evolve alongside technological advancements, with a modular architecture that fosters flexibility and personalization. As the network expands, scalability ensures that growth does not compromise security or functionality.
• The regulatory framework must foster competition among public and private sector entities to accelerate innovation and efficiency while prioritizing inclusiveness and accessibility to make financial services universally available and affordable.
• Finally, security and privacy must remain paramount, safeguarding user data and system integrity against cyber threats and ensuring operational resilience.

Final cut

“No power on Earth can stop an idea whose time has come.” - Victor Hugo

Fueled by economic aspirations, regulatory innovation, and technological advancements, tasks that were previously time-consuming and expensive, such as making international calls or securing lodging in a new city, are now effortless with just a tap.

The Finternet aims to bring similar advancements to the realm of financial services.

Standing at the precipice of a paradigm shift in financial services, we face both unprecedented opportunities and seemingly insurmountable challenges, necessitating nuanced policy, efficient economic and financial architecture, robust governance, and multi-pronged regulatory arrangements to fully harness the potential of the Finternet. ?