The Bank of International Settlements (BIS) laid out an ambitious moon-shot program to rocket the global financial system into unification and beyond.
In a new paper published last week, the BIS proposes a worldwide reboot of finance built “on ecosystems interconnected with each other – much like the internet”.
Unavoidably dubbed the ‘Finternet’ by report authors – BIS general manager, Agustin Carstens, and co-founder of Indian IT firm Infosys, Nandan Nilekani – the mooted financial system upgrade would rest on so-called ‘unified ledgers’ capable of recording, transacting and settling instantaneously almost any asset restated in digital ‘token’ format.
“Unified ledgers are a promising vehicle to turn this vision into reality,” the paper says. “Grounded on a digital-first approach and leveraging tokenisation, unified ledgers would improve existing financial transactions, but also make entirely new financial products and transactions possible.”
If implemented, the finternet could dispense with “time-consuming clearing, messaging and settlement systems and physical paper trails” for transactions, among other positive effects.
We have the technology, the BIS report suggests.
But Carstens and Nilekani acknowledge that to reach escape velocity the finternet “requires proactive collaboration between public authorities and private sector institutions”.
“The benefits of a more efficient financial system would be distributed broadly, not least to individuals and small businesses through lower costs, more choice and better services,” the paper says.
“But the rents from maintaining existing barriers are quite concentrated. As a result, changes to the financial system, when they are eventually made, tend to be gradual and piecemeal.”
Governments and regulators will likely need to help overcome incumbent inertia before the finternet takes off.
“… public institutions can play a catalytic role in helping financial system development progress from individual experimentation to joint innovation,” the BIS think-piece says.
Under the Carstens-Nilekani plan, a digitised financial system would see many current intermediaries such as administrators, custodians and brokers potentially face an existential threat.
“While tokenisation does not eliminate the role of intermediaries, it changes the nature of that role,” the BIS report says. “Intuitively, intermediaries in a tokenised environment primarily serve a governance role, as the curator of the rules governing the transfer of tokens, rather than as a bookkeeper which records individual transactions on behalf of account holders.”
In addition to upending the traditional financial intermediation, record-keeping and asset management industries, Carstens and Nikelani argue the finternet would open up new application-driven services such as enabling “personalised financial planning, with AI-driven insights suggesting optimal investment strategies, insurance coverage adjustments and savings plans tailored to individual goals and risk profiles”.
The finternet would still feature central and commercial bank money, the paper says, although in digital formats. Many central banks are trialling, or contemplating, such digital cash systems including the Reserve Bank of NZ which opened a consultation on a proposed approach last week.
“Real world deployment of the Finternet, including unified ledgers, will require the development of a robust legal, regulatory and governance framework. Such a framework is essential to protect participants and preserve the integrity of the financial system,” the BIS paper says. “But many regulatory and legal considerations are beyond the reach of technological solutions. This reflects the foundational principle that trust in the financial system does not come from technology but from the legal and regulatory framework that underpins it.”
Channelling first-man-on-the-moon, Neil Armstrong, Carstens and Nikelani argue government and industry need to take “a giant leap for the financial system”.
“We know where we need to go. We have the tools to get there. Now is the time to take the first step.”