Is Finternet, BIS's unified ledger, the Future of the Financial ecosystem?

It isn't everyday that an age old Financial entity coins a term that rocks the Fintech world. But with the unveiling of Finternet, by the Bank of International Settlement or BIS, at the Peterson Institute, by Agustín Carstens and Nandan Nilekani, had exactly that impact on both traditional and upstarts, in the world of financial services.  The reason? The promise of Finternet to connect all the different financial ecosystems across the world, much like how the internet did, opening up for fast financial transactions, and better financial products for everyone, Individuals and Businesses alike.

So, what are the problems of the existing financial  services that Finternet aims to solve for? And what about the underlying technology, a unified ledger, that makes it superior? This edition of the Fintech Chronicler finds out just about that. 

If you're in a hurry here is the TL; DR

1. The time is right now for multiple financial entities to be interconnected by a unified ledger
2. Finternet aims to better the current financial system by empowering individuals and businesses alike
3. Key problems with the current state of financial systems: Speed, cost to serve, Access and Availability
4. Tokenisation and programmability of unified ledgers is the building blocks of the project
5. There are already existing technologies in place which solve for these exact problem statement - but since they are decentralised or working in Silos, according to BIS they can never be the future of finances, which according to them is a unified centralised ledger from BIS can become
6. Project Agora and Finternet, thanks to their stronghold over regulatory institutions over the globe can achieve that, while making all decentralised public ledgers like Ethereum, a black area, by not welcoming them into the regulatory purview

The Future Financial System - Finternet: a giant leap for financial system ?

Imagine the internet, but for your money! That's kind of the idea behind Finternet. It's a vision of a connected world where different financial systems talk to each other seamlessly, just like websites do on the internet.

Think about how easy it is to book a hotel in a foreign city now compared to back in the day. Finternet aims to bring that same level of speed and convenience to everything money-related. We're talking not just about transferring money, but any financial asset, anywhere, anytime, with just a tap on your phone. No more expensive fees, slow processing, or feeling left out because of where you live.

This is especially important for places where getting basic financial services can feel like pulling teeth. Despite all the efforts to make everyone included, there's still a huge gap between rich and poor countries. Many people, especially in remote areas, just don't have access to the tools they need to manage their money well.

Finternet aims to change that by breaking down the barriers and making financial services fast, cheap, and accessible to everyone, no matter where they are.

Vision for the Future of financial systems

Imagine you have a toolbox full of amazing financial tools – fancy new apps, sleek digital wallets, and even self-executing contracts! But the tools are all scattered around, some locked in dusty boxes. That's kind of how the financial system works right now. Lots of cool innovations, but they're not talking to each other.

Here's the thing: these tools are way more powerful when they work together. Think of how useless a smartphone would be if it could only make calls! Finternet is all about creating a connected system, a "financial internet" where all these amazing tools can chat and collaborate.

We've seen some awesome breakthroughs lately. Programmable ledgers, like digital record-keepers on steroids, let us create "smart contracts" that handle things automatically. Then there's tokenization, where things like stocks or even cash are turned into digital tokens for easy transfer.

Why do we need interconnection of Financial Ecosystem?

But guess what? These tools are kind of stuck in their own corners. Finternet wants to break down those barriers. Imagine being able to instantly send any amount of money, anywhere in the world, using a token on your phone. No more slow transfers or hefty fees! This is especially important for people in areas with limited access to financial services.

Think of it like building a powerful phone network. You wouldn't just upgrade the phones, you'd also need better apps and a faster network for them to work on. Finternet is like building that network for all these amazing financial tools, unlocking their full potential and making finance smoother, faster, and more accessible for everyone.

Brief history of International Finance

Money has come a long way!  In the early days of international trade, people were basically bartering with gold and silver – imagine lugging around a chest full of coins to buy spices!  As the world got more connected and trade boomed, things needed an upgrade. Think about it, if every time we needed to trade goods and services across borders, if we were expected to carry along barrels of money, do you think innovation would have happened as quickly and widely as it has today ?

Early Developments: A Golden Era

In the good old days, international finance was a bit of a wild west. Gold and silver were the kings of the realm, facilitating transactions across borders like two trusty steeds carrying precious cargo. But as the world industrialized and trade expanded, things got a tad more complicated. It was like trying to navigate a maze with a single candle – you could see a few steps ahead, but the bigger picture remained elusive.

The Bretton Woods System: A New Dawn

Then came the Bretton Woods Conference in 1944, a gathering of financial masterminds that forever changed the game. It was like the world's currencies got together for a big group hug, with the U.S. dollar as the proud leader of the pack, convertible into gold at a fixed rate. This system brought stability to international transactions, setting the stage for a global economic renaissance.

But for this renaissance moment, we need 2 pivotal institutions- BIS and SWIFT. 

The Bank for International Settlements (BIS): The Central Bankers Club

Picture this: It's 1930, and the world is still reeling from the aftermath of World War I. In the midst of this turmoil, a group of financial masterminds decided to create a special club – one where central bankers from around the globe could come together, have a chat, and maybe even solve a few global financial puzzles over a cup of tea.

That's essentially what the Bank for International Settlements (BIS) was all about. Initially, its main role was to handle the reparation payments imposed on Germany by the Treaty of Versailles, but over the years, it evolved into something much more profound.

Today, the BIS is like the central hub for central banks worldwide. It's a place where monetary authorities can gather, exchange insider information, and keep a watchful eye on the ever-changing tides of the international financial system. Think of it as the ultimate water cooler for central bankers, but instead of gossiping about the latest office drama, they're discussing intricate financial matters that could shape the global economy.

But this isn't just a fancy clubhouse; it's also a full-fledged banking institution for central banks. It performs traditional banking functions, like lending and borrowing, but with a twist – its clients are the very institutions that control the money supply of entire nations. It's like having a personal banker who understands the complexities of managing an entire country's financial affairs.

So, the next time you hear someone mention the Bank of International Settlement, picture a group of financial gurus in suits, sipping tea and discussing the future of money – because that's exactly what's happening behind the scenes at this exclusive central bankers' club.

SWIFT: The Language of Global Money Talks

Imagine a world where banks spoke a thousand different languages, and every financial transaction was like a game of charades gone wrong. That's pretty much what the banking scene looked like back in the good old days of the Telex era.

Telex, the primary method of financial communication at the time, was like a snail-mail service for money matters. Slow, insecure, and about as standardized as a snowflake – it was a recipe for errors, miscommunications, and a whole lot of headaches.

But then, in 1973, a group of banking pioneers said, "Enough is enough!" and gave birth to SWIFT – the Society for Worldwide Interbank Financial Telecommunication. It was like inventing a universal language for money, one that every bank could understand, no matter where they were located on the globe.

SWIFT became the backbone of international banking communication, allowing financial institutions to send and receive information about transactions with the speed of light and the security of a digital fortress. Suddenly, moving money across borders became as easy as sending a text message (well, almost).

Today, SWIFT is the undisputed language of global money talks, facilitating trillions of dollars in transactions every single day. Whether you're buying a new house, investing in stocks, or just making sure your paycheck hits the right account, chances are SWIFT played a role in making it happen seamlessly.

From payments and securities to treasury operations and trade services, SWIFT has its fingers in every financial pie imaginable. It's like having a multi-lingual translator that understands the intricate dialects of banking, ensuring that every financial conversation happens without a hitch

High level architecture of Finternet

What are tokens ?

Imagine the financial system as a maze – slow, confusing, filled with paperwork and dead ends. Tokenization is like a magic key that unlocks a whole new world: faster, cheaper, and bursting with possibilities.

In the traditional financial world, we've got databases recording claims on assets (like land titles or bank deposits) and separate applications that allow us to transact with those assets (think e-banking apps). It's like having a recipe book and a kitchen, but no way to connect the two. Tokenization, however, brings everything together in one place, creating a digital representation of financial or real assets on a programmable platform.

With tokenization, all the information needed for a transaction – ownership details, rules, logic, and more – resides in a single, unified space. It's like having the recipe, ingredients, and cooking instructions all in one convenient package. This simplifies the trading process and enables mind-bogglingly complex pre-programmed asset transfers that would be practically impossible in a non-tokenized world.

This unlocks a treasure trove of benefits:

• Turbo-Charged Trading: Forget days of messages bouncing between banks. Tokens trade instantly, with all the ownership and info attached. It's like buying a car – everything gets done at once, no waiting!
• Smarter Transactions: Want to automatically invest your savings when you reach a certain goal? Tokenization makes it possible with pre-programmed rules built right into the token. Fancy, right?
• Goodbye Bottlenecks: The current system can be a logjam. Tokenization cuts through the red tape, allowing faster settlements and reducing risks. Think of it like switching from a dirt road to a highway.
• A World of New Options: Imagine bundling different financial products into one neat package? Tokenization opens the door to all kinds of innovative ways to save, invest, and manage your money.

But wait, there's more! Artificial intelligence (AI) is also shaking things up. Think of it as a super-powered financial assistant. AI can:

• Automate the Grind: Say goodbye to mountains of paperwork. AI can handle tasks like document verification and data entry, freeing up humans for more important things (like coffee breaks!).
• Predict Your Needs: AI can analyze mountains of data to understand your financial situation better and recommend the best products for you. No more financial guesswork!
• Compliance Made Easy: AI can streamline Know-Your-Customer (KYC) checks, making sure everything is above board while saving time and money.

But that's just the tip of the iceberg! Tokenization could ease many of the bottlenecks that plague the current financial system. Instead of the long, convoluted back-and-forth messaging between institutions, tokens themselves can trade, carrying all the necessary information like ownership, value, and regulatory details. It's like sending a self-contained digital briefcase instead of a flurry of separate memos.

Why do we need to tokenize real world assets?

While intermediaries won't disappear entirely, their role shifts from record-keeping to governance – curating the rules that govern token transfers. It's like transitioning from a librarian to a digital custodian, ensuring the smooth flow of tokenized assets.

And the benefits keep coming! Tokenization enables atomic settlement, where multiple legs of a transaction settle simultaneously, reducing counterparty risk and collateral requirements. It's like having a perfectly choreographed dance, with all the steps executed in perfect synchrony.

Moreover, programmability opens the door to contingent financial transactions that were previously unfeasible. Imagine setting up a transaction that automatically executes under specific conditions – like a self-fulfilling prophecy for your finances!

Tokenization also brings composability to the table, allowing multiple transactions to be bundled into a single executable package. It's like combining several recipes into one delicious financial feast!

With faster service, lower costs, and greater choice, tokenized financial assets could revolutionize how individuals and businesses save, invest, and insure themselves. It's a digital transformation that promises to reshape the financial landscape as we know it, one token at a time.

Need for a unified ledger ?

While all of the benefits make sense, I can't help but wonder, why unified ledger controlled by the BIS? And even though At Peterson's institute's unveiling, Carstens and Nilekani, they kept mentioning time and again, that this is not one ledger to rule them all, I couldn't help but see the parallels that kind of made it that. 

That said I do see some merits to  centrailised ledger, like the imagge below depicts:

Case 1: Seamless transfer of assets

Let's say Mayank wants to sell his real estate property, which happens to be tokenised and stored on a unified ledger. Now, the regular way would involve going to the registrar, greasing some palms, a broker to find a buyer, more greasing of palms. And may be he gets a fair value on his house (hard if you aren't in the top 10 cities in India btw, Lucknow for example has not seen a real estate mark to market in 10 years now). 

On the contrary if his assets were tokenised, as were the buyers intent to buy from different regions, and the recently appraised per square unit cost of real estate, the transaction gets completed the minute someone places a fair bid, that Mayank accepts.  And the ownership deeds too are transferred to the new owner, upon confirmation of the payment going through. 

The cherry on the cake? Becuase its been tokenised, all the information with regards to the asset are verified by a trusted 3rd party, the BIS authorised token providers, ensuring that product quality is ensured. So buyers can express their desire to purchase, across geogrpahies.

Case 2: Cross border transactions and payments

Talking of across geographies, the same also applies to trades that occur across borders. 

No more would we need a letter of credit, or bank guarantees, when trading with new entities across borders. No more would accepting foreign currency be a challenge, because all CBDC ledgers would be unified. 

Finternet Benefits to Individuals and Businesses

So as an individual, my ability to track my net worth of all assets becomes that much more easier and authentic and in real time. 

Not just that, I can chose, whom I want to grant access to my asset records. Or better yet, we could use zero knowledge proofs to verify my claims, without ever having to reveal all the details of my asset claims. 

Same applies to businesses, where without opening up their books, they can still get access to financial services, on their terms. 

Pretty much like what account aggregators enable people and businesses today in India. (More about how Account Aggregator ecosystem can evolve in the near future, enabling financial inclusion and growth in the next edition of the Fintech Chronicler). 

Alternatives to Finternet

But all of this is exactly what Ethereum sought to do, when it was founded in 2013 by Vitalik Buterin. 

You know how blockchain technology is all about decentralization, security, and transparency? Well, Ethereum takes things a step further by offering a blockchain with a built-in programming language that's both powerful and versatile.

Imagine having a digital playground where you can create "smart contracts" – pieces of code that can execute specific actions or enforce certain rules automatically. These smart contracts can be used to build all sorts of decentralized applications, ranging from financial tools to gaming platforms, and even things we haven't thought of yet!

Here's the cool part: with Ethereum you can essentially encode any kind of logic or state transition function you can think of, simply by writing a few lines of code. 

Instead of being limited by a blockchain's predefined capabilities, Ethereum empowers developers to create and deploy their own custom applications and systems on top of the blockchain, which are known as Layer 2 solutions. It's like having a blank canvas where you can paint whatever masterpiece you desire, all while leveraging the security, transparency, and decentralization that blockchain technology offers. And then there is India's implementation of Open Finance, with the Account aggregators. 

Which bakes in the consent architecture that Finternet aims to revolutionize. 

 Reading the Concept note really made me feel like its all old wine in a new label that is all. 

Is the BIS afraid of decentralized blockchains?

So instead of scaling existing technologies, like Blockchain, why are the bent on disuading people away from it, and onto their centralized platforms?

Much like the internet in its early days, Digitised Finance too is at the same point. And just like how a handful of big techs control the internet or rather the usage of internet world over, agencies like Bank for International Settlement and SWIFT, too plan to control the flow of finances world over. 

But if there are decentralized entities ding that, at a cheaper cost, and faster, then it throws a wedge at their credibility doesn't it?

That is why they have been using various innovative means to discredit what all it is that decentralized Finance and Web 3 stand for. Like writing cases about how Cryptocurrencies are used for financing terrorists, all while being silent about the role US Dollar bills play a role in that function. Or by highlighting failures of the likes of FTX, Silicon Valley Bank, both of which btw were due to age old issues of traditional finances and governance. 

However, I would want to still give credit to Carsten and Nilekani. Because their vision is to bring together central banks from world over into one umbrella tech stack. And integrate hundreds and thousands of financial institutions. All of whom speak a different technical language and have completely different (and at times) incompatible architectures. 

If anything, I'd like to tip my hat for this big audacious goal of theirs, which even if they accomplish a percentage of, will help maybe not the bottom of the pyramid, but some of the places where we see a lot of money being leaked out of the system unproductively. 

That is it for this edition, and the next edition, I shall be unveiling my concept note of what we could do next, on the Account Aggregator ecosystem. 

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