Finternet: Reimagining Finance for the Digital Age

12 min readAug 18, 2024

Picture this: It’s a sweltering summer evening in Mumbai, 2024. Nisha, a young software engineer, is hunched over her laptop, frustration evident on her face. She’s trying to send money to her brother studying in Canada, but the process is proving to be a Kafkaesque nightmare of forms, fees, and inexplicable delays. “There has to be a better way,” she thinks, echoing a sentiment shared by millions around the globe.

Little does Nisha know that halfway across the world, in an office in Basel, Switzerland, a group of visionaries are working on a solution that could make her financial woes a thing of the past.

Welcome to the world of the Finternet.

But what exactly is the Finternet? To answer that, we need to take a step back and look at the evolution of our financial system.

A Brief History of Financial Innovation

The story of finance is, in many ways, a story of technological progress. From the clay tablets of ancient Mesopotamia to the high-frequency trading algorithms of today, each era has brought its own financial innovations.

In the 1400s, the Medici family in Florence, Italy, advanced a way to track business finances called double-entry bookkeeping. Fast forward to the 1950s, and we see credit cards changing how people shop. The 1970s brought SWIFT, the first global network for sending financial messages. In the 1990s, online banking let us manage our money from home.

Each of these innovations solved problems of their time. Double-entry bookkeeping made complex business deals clearer. Credit cards offered convenience and short-term loans. SWIFT made international money transfers faster (for its time). Online banking brought banking services to our homes.

But here’s the catch: while these changes were big for their time, they were often built on top of old systems rather than completely rethinking them.

Finternet is different. It’s not about adding another feature to the old house. It’s about reimagining the financial system, one that’s made for the digital age from its very foundation.

Why We Need Change: Problems with Our Current System

Imagine trying to build a modern skyscraper using tools from the 1800s. Sounds ridiculous, right?

Yet that’s kind of what we’re doing with our global financial system. We’re trying to run a 21st-century digital economy using financial systems that, in many ways, haven’t changed much since the days of the telegraph.

Let’s break down the issues:

1. Financial Exclusion:

As of 2024, about 1.4 billion adults don’t have bank accounts. That’s close to the entire population of India, locked out of the global economy. For them, participating in the digital marketplace is about as easy as trying to use the internet with an old rotary phone.

2. High Costs:

Whether it’s fees for sending money overseas eating into hard-earned wages, or the costs of running huge banking networks, our current system is expensive to operate.

3. Lack of Interoperability:

Different financial systems often don’t work well together.

4. Opacity:

Despite tons of regulations, tracking money flows in real-time is still hard. This makes life easy for financial criminals and hard for regulators.

5. Inflexibility:

The system struggles to keep up with new forms of value exchange, from cryptocurrencies to carbon credits. It’s like a grandparent trying to understand TikTok.

In a world where you can trade digital cats for real money, our financial system is still figuring out how to handle electronic signatures.

Enter the Finternet: A Vision for the Future

It was against this backdrop of inefficiency and exclusion that Agustín Carstens and Nandan Nilekani put their heads together. Carstens, who used to run the Bank for International Settlements (a kind of central bank for central banks), and Nilekani, the architect of India’s groundbreaking Aadhaar digital ID system, looked at this financial mess and said, “We can do better.”

In their paper “Finternet: the financial system for the future,” they introduced an idea that could revolutionize finance as we know it.

Imagine a world where your digital wallet isn’t just a fancy way to store money, but a hub for all your financial activities. A world where sending money across borders is as simple as sending an emoji, where complex financial tools are accessible to everyone, not just Wall Street experts, and where money itself becomes as programmable as your smartphone.

Sounds too good to be true? Well, so did the idea of a globally connected network of computers back in the 1960s. And look where we are now, scrolling on our phones while waiting for our coffee.

The Three Pillars of Finternet

At its core, Finternet is built on three fundamental ideas:

1. User-Centric Design: In Finternet world, you’re not just a small part in a big financial machine. You’re in control of your financial destiny, with full power over your data and how you share it.

2. Unified Infrastructure: Finternet aims to create a seamless financial ecosystem that works across borders, institutions, and types of assets. It’s like taking all the different financial systems of the world and getting them to speak the same language.

3. Universal Access: The goal is to make this new financial system accessible to anyone with an internet connection. It’s not just about basic banking, but about giving everyone access to a full range of financial services, from complex investments to insurance.

The Tech Behind the Magic: A Deeper Dive

Now, let’s dive deeper into the technologies that make the Finternet possible.

Unified Ledgers: The Backbone of Finternet

Imagine a digital platform where all your money and investments live together. That’s what a unified ledger is in Finternet world.

What are unified ledgers?

They’re digital platforms where different types of money and financial assets can exist together.
This includes things like central bank money, your bank deposits, stocks, and even tokenized real estate.
Different countries might have different types of unified ledgers based on what they need.

Why are they special?

Everything in One Place: They combine all the parts needed for financial transactions in a single spot.
Smart Assets: Money and other assets on these ledgers can be moved around using pre-set instructions.

What could they do?

Make financial services faster and more secure.
Make it easier to follow financial rules.
Create new types of financial products.
Make financial services cheaper and more accessible, especially in developing countries.

Unified ledgers are like upgrading the financial world from old, separate systems to one smart, connected platform. While they’re not here yet, they show us what the future of finance might look like.

Remember, unified ledgers aren’t about having just one big ledger for everything. Instead, they’re about creating connected platforms that can work together, making finance smoother and more accessible for everyone.

Tokenization: The Language of Finternet

If unified ledgers are the infrastructure of Finternet, tokenization is the language it speaks. But what exactly is tokenization, and how does it work?

At its core, tokenization is the process of representing real-world assets as digital tokens on a blockchain or similar distributed ledger. Think of it as creating a digital twin of an asset.

Here’s a step-by-step breakdown of how tokenization might work in the Finternet:

Asset Identification: Let’s say we want to tokenize a piece of real estate, like an apartment building.
Asset Valuation: The building is professionally valued.
Token Creation: A set number of tokens are created to represent ownership of the building. For example, we might create 1,000,000 tokens, each representing a 0.0001% ownership stake.
Smart Contract Development: A smart contract is created that defines the rights of token holders (like rights to rental income) and the rules for token transfers.
Token Issuance: The tokens are issued on the unified ledger.
Trading: These tokens can now be bought, sold, or transferred instantly on the Finternet.

The power of tokenization lies in how it can make assets more liquid, divisible, and programmable. Suddenly, investing in real estate isn’t limited to those who can afford an entire building. Anyone could invest in a fraction of the building by buying a few tokens.

But it goes beyond that. These tokens could be programmed with specific behaviors.

For example, they could automatically distribute rental income to token holders, or enforce regulatory requirements like limiting ownership to accredited investors.

Cryptography

Underpinning both unified ledgers and tokenization are a few advanced cryptographic techniques. Some key technologies and how they might be used in the Finternet:

Zero-Knowledge Proofs (ZKPs): These allow one party to prove to another that a statement is true without revealing any information beyond the validity of the statement itself.
Example: Nisha could prove she has sufficient funds for a transaction without revealing her actual account balance.

Threshold Cryptography: This allows cryptographic operations to be performed when a subset of parties (above a threshold) cooperate. In the Finternet, this could be used for distributed key management and multi-signature transactions.
For example, a large corporate transaction might require approval from 3 out of 5 board members, each holding a part of the cryptographic key.

These technologies work together to create a system that’s simultaneously transparent (for auditability and regulatory compliance) and private (for individual and business confidentiality).

Real-World Examples and Pilots

While the full vision of the Finternet is still on the horizon, many of its component technologies are already being tested and implemented around the world. Let’s look at a few examples:

China’s Digital Yuan:

Also known as the e-CNY, this is one of the most advanced Central Bank Digital Currency (CBDC) projects in the world. As of early 2023, it had been tested in numerous cities, and it was used by over 5.6 million merchants across China.
The e-CNY uses a two-tier system where the central bank issues the digital currency to commercial banks, who then distribute it to the public. This structure mirrors some of the principles of the Finternet, particularly in its use of a unified ledger and tokenization.

2. Project Ubin in Singapore:

This multi-year project launched in 2016 by the Monetary Authority of Singapore explored the use of blockchain and distributed ledger technology for clearing and settlement of payments and securities. The project demonstrated how these technologies could make financial transactions and processes more transparent, resilient, and cost-effective.

3. The Jasper-Ubin Project:

A collaboration between the Bank of Canada and the Monetary Authority of Singapore, this project demonstrated how cross-border, cross-currency payments could be made faster and more efficient using distributed ledger technology. This aligns closely with the Finternet’s goal of seamless global transactions.

These projects, while not full implementations of the Finternet concept, demonstrate that many of its core ideas are already being actively explored and tested by financial institutions and regulators around the world.

Economic Implications: A New Financial Paradigm

The potential economic impacts of the Finternet are profound and far-reaching. Some of the key areas where it could drive significant change:

Monetary Policy: Central banks could gain new tools for implementing monetary policy. For example, programmable money could allow for more targeted stimulus measures or even negative interest rates on digital currencies.
Financial Inclusion: By lowering the barriers to entry for financial services, the Finternet could bring millions of unbanked individuals into the formal financial system. This could drive economic growth in developing countries and reduce income inequality.
Capital Allocation: Tokenization and fractional ownership could democratize investment, allowing smaller investors to access previously inaccessible assets like real estate or fine art. This could lead to more efficient capital allocation across the economy.
Global Trade: Simplified cross-border transactions could reduce friction in international trade, potentially boosting global GDP.

However, it’s important to note that these changes would not occur in isolation. They would interact with broader economic trends and policies, and their ultimate impact would depend on how the Finternet is implemented and regulated.

Implementation Challenges: The Road Ahead

While the potential benefits of the Finternet are enormous, so too are the challenges in bringing this vision to life. Some of the key hurdles:

A. Technical Challenges:

Scalability: Current blockchain technologies struggle to handle the volume of transactions that a global financial system requires.
Interoperability: Ensuring different ledgers and systems can communicate seamlessly is a complex technical challenge.

B. Regulatory Hurdles:

Jurisdictional Issues: How do we regulate a truly global financial system? Which laws apply to a transaction that occurs simultaneously in multiple countries?
Updating Regulatory Frameworks: Existing financial regulations are not designed for a tokenized, programmable financial system. Significant legal and regulatory updates would be necessary.

C. Economic Stability:

Transition Risks: Moving from the current system to the Finternet could create economic disruptions if not managed carefully.
Systemic Risks: Could increased interconnectedness lead to new forms of systemic risk?

D. User Adoption:

Education: Widespread adoption would require significant efforts to educate the public about how to use these new financial tools.
Trust: Building public trust in a new financial system, especially one that may seem complex or abstract, will be crucial.

E. Governance:

Who controls the Finternet? How are decisions made about its evolution and operation?
How do we balance the needs of different stakeholders — governments, financial institutions, businesses, and individuals?

Addressing these challenges will require collaboration between technologists, policymakers, financial experts, and civil society. It will likely be a gradual process that would be refined over time.

Case Studies: Finternet in Action

To better understand how the Finternet might work in practice, let’s explore a few hypothetical case studies:

Cross-Border Remittances:

Nisha, our software engineer from Mumbai, wants to send money to her brother in Canada.
In the Finternet world, here’s how it might work:
- Nisha opens her Finternet-enabled digital wallet app.
- She selects her brother’s wallet address (or perhaps just his phone number, which is linked to his wallet).
- She enters the amount in Indian Rupees.
- The app shows her the equivalent amount in Canadian Dollars and the minimal transaction fee.
- Nisha confirms the transaction with her biometric signature.
- The unified ledger processes the transaction in real-time, simultaneously deducting from Nisha’s account and crediting her brother’s account.
- Both their apps show the updated balances instantly.
- The entire process takes less than a minute and costs a fraction of what traditional remittance services charge.

2. Programmable Business Loan:

Sarah runs a seasonal business selling beach equipment. She needs a flexible loan that adapts to her cash flow.
In the Finternet ecosystem:
- Sarah applies for a smart loan through her Finternet-enabled business banking app.
- The app uses secure multi-party computation to analyze Sarah’s business data from various sources (sales data, inventory levels, weather forecasts) without actually seeing the raw data.
Based on this analysis, Sarah is offered a programmable loan with the following features:
- The interest rate adjusts based on her real-time business performance.
- Repayments are automatically deducted as a percentage of daily sales.
- During the off-season, repayments automatically pause if sales drop below a certain threshold.
- Sarah accepts the loan terms with her digital signature.
- The loan agreement is encoded as a smart contract on the unified ledger.
- Funds are instantly transferred to Sarah’s business account.
Throughout the loan term, the smart contract automatically manages repayments and interest calculations based on real-time data, without Sarah needing to manually manage anything.

These case studies illustrate how the Finternet could make financial services more accessible and efficient and tailored to an individual’s need.

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Conclusion

As we’ve explored, the potential benefits are profound. A truly inclusive global financial system could unlock economic opportunities for billions.

Programmable money and smart contracts could automate and streamline complex financial processes.

Enhanced transparency could help combat financial crimes while advanced cryptography protects individual privacy.

The democratization of finance could lead to new forms of value creation and exchange we can scarcely imagine today.

Yet, the challenges are equally significant. Regulatory hurdles, technological barriers, privacy concerns, and the sheer complexity of overhauling a global financial system cannot be underestimated.

The next steps will require unprecedented collaboration between technologists, financial experts, policymakers, and users across the globe.

Kudos to Augustin Carstens, Nandan Nilekani, Siddharth Shetty, and Pramod Verma for this incredible piece of idea!

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