The rise of the Finternet

BASEL — The financial system is ready for a giant leap forward. It’s time to explore new frontiers. We foresee a time when applying for a mortgage or a small business loan could be as easy as texting a friend or booking a hotel room online.

There has been some progress on technology to enable such a new reality, as evidenced by the proliferation of mobile-payment apps. But transforming financial services will require creating an entirely new system to match the advances made in communications since the advent of the Internet and smartphones. Today’s mobile phones are powerful computers, after all, so it would be a waste not to maximise their use.

To this end, we have drawn on our joint expertise in economics and technology to offer a blueprint for the future financial architecture. What we call the “Finternet” is a vision of multiple financial ecosystems that connect with one another, much like the Internet, in order to give individuals and businesses full control over their financial lives. We foresee a world in which people and companies can use any device to transfer any financial asset, no matter the amount, to anyone in the world. These transactions would be cheap, secure, near-instantaneous and available to all.

This new system would be particularly important for emerging and developing economies, where large gaps in access to financial services remain despite efforts to bolster inclusion. Many services are simply unavailable or not widely available, particularly to people living in remote areas and with low incomes. And even when people are able to access financial products, using them is often expensive and slow.

Important breakthroughs in recent years have paved the way for the Finternet. One example is tokenisation, whereby tokens representing digital assets can uniquely identify ownership as well as applicable rules. Another is programmable ledgers, the digital platforms that combine the record-keeping functions of traditional databases with the governance arrangements required to update them.

To unlock the value of financial innovation and build a seamless, interconnected network, we must combine all these elements and break down the current financial system’s barriers and silos. Specifically, bringing together different tokenised assets on unified programmable ledgers would drastically reduce the need for lengthy messaging, clearing, and settlement systems that create extra costs, take more time, and limit access to credit and other financial services.

Unified ledgers would also enable “smart contracts, which can trigger an action — transferring ownership of a house, for example — if prespecified conditions are met. They could even bundle together numerous automated transactions. So, in the case of a property transfer, the payment of the purchase price and anti-money laundering checks could happen at the same time and take seconds rather than weeks. Overall, these ledgers would meet, and perhaps surpass, today’s regulatory and supervisory standards, while also being faster, cheaper and more reliable than current systems.

But technology is not enough. Central banks, as the guardians of public money, have a major role to play in the new financial architecture. The money they issue is the vehicle through which all economic transactions are ultimately settled. A digital form of this money is thus a necessary foundation for the Finternet. Commercial banks will also play a crucial role in interacting with consumers, not least by providing tokenised bank deposits that will form the lifeblood of the Finternet’s monetary system.

Moreover, a robust regulatory and supervisory structure must underpin the Finternet. Safeguards such as deposit insurance and public oversight of financial-services providers should be maintained to protect customers and ensure that money has the same value regardless of whether it is issued by a central bank or a commercial bank.

The radical use of new technology could streamline the layers of manual checks now required to comply with rules and regulations. This would enable the creation of products that otherwise might not be developed due to compliance burdens, while also ensuring that the Finternet is not used by bad actors seeking to exploit loopholes.

Making the Finternet a reality will take years, but we must start now. The technology is mature enough, and, crucially, we are not yet locked into rigid institutional frameworks or trapped in “walled gardens” of services created by monopolies. This is a once-in-a-lifetime opportunity to redesign the architecture of the financial system, and we should be thinking big and imaginatively, instead of focusing narrowly on individual technologies.

We know where we need to go. Equally important, we have the tools to get there. Now the global financial system just needs its “Neil Armstrong moment”, a small step that represents a giant leap for mankind.

Agustín Carstens, a former governor of the Bank of Mexico, is general manager of the Bank for International Settlements. Nandan Nilekani, co-founder and chairman of Infosys, is founding chairman of UIDAI (Aadhaar). Copyright: Project Syndicate, 2024. www.project-syndicate.org