Finance in the 21st century is still too costly, and clubby. Besides, when compared with the instantaneous gratification in other aspects of our digital lives, money appears to move too slowly online.
Sure, there have been efficiency gains from better communication technology: Catching a flight from JFK to Heathrow used to be the fastest way for same-day cash delivery across the Atlantic as recently as 2010. No longer. But for all the strides in mobile banking, remittance costs globally still average a steep 6.2%. It takes $15 to send $200 to sub-Saharan Africa.
The bottleneck lies in the very architecture of how value is transferred from one customer to another — as messages flowing between trusted intermediaries. Supplanting it with a superior design will be less like replacing carrier pigeons with telegrams, and more like substituting the existing 700-year-old record-keeping system with something analogous to an internet protocol, built for finance.
Agustín Carstens, the general manager of the Bank for International Settlements, and Nandan Nilekani, the Indian tech billionaire behind the world’s largest digital identity program, have proposed just such a financial system of the future. They’re calling it the “Finternet.”
At the heart of idea is the so-called unified ledger. Think of it as a giant scoreboard. Customers can use it to track activity in their e-wallets, which will contain different kinds of coins. Some will represent securities, others will stand in for bank deposits. A third type may consist of central bank digital currencies, or CBDCs, of different countries, or privately issued stablecoins that mimic them.
Real-world possessions such as property, cars and art will have their own value representations. Customers will use financial institutions to swap all kinds of tokens with one another according to pre-programmed logic. No coin will leave any wallet if the payment for it doesn’t come out of another. Participants will monitor the game not by sending messages but by looking up at the scoreboard.
Tokenization, or the process of converting traditional securities into their digital copies, might bring a $22 trillion market in alternative assets within reach of a liquidity-constrained middle class. Even if these investors have the risk appetite to seek higher returns in private equity, hedge funds or infrastructure, they lack the ability to make lumpy bets that are locked in for long. Carving up these securities into small pieces on the blockchain could make them more liquid, Moody’s Investors Service said in a report last week.
Everyday costs could also come down, particularly on cross-border transactions. Instructing institutions to debit and credit accounts, and then reconciling multiple ledgers to ensure nobody comes up short, is how delays and expenses pile up. Which is why the current system discriminates against small businesses and individuals by excluding them altogether or short-changing them on fees.
Another draw of the Finternet is that it can support all kinds of innovative purpose-bound money, which can wrap a layer of programming around the value stored as tokens and direct it to a specific end. For instance, governments may give education vouchers to poor households and ensure that those are only used for school fees, lunch and stationery.
Yet, Carstens and Nilekani are themselves quick to outline the challenges. For the Finternet to work, central banks will need to provide digital cash — if not to the public at large, then at least to financial institutions. But four out of five of the world’s monetary authorities either don’t have clear legal power to issue tokenized money or are specifically barred from doing so.
The next difficulty is fraud mitigation via a “trusted user identity.” That, too, is hard to solve. Even Aadhaar, the biometric-based unique ID that Nilekani pioneered in India, continues to be plagued by abuse and theft. Additionally, users need to assured that putting all their monetary transactions on the Finternet will not lead to privacy breaches — or make them targets of surveillance.
The vision of Carstens and Nilekani has come the closest to fruition in Brazil. Its proposed Drex platform will be a unified ledger where wholesale tokenized central bank money, bank deposits, e-money, and treasury securities will coexist. Separately, Bank of France (representing the Eurosystem), the central banks of Japan, South Korea, Mexico, Switzerland and the UK, and the Federal Reserve Bank of New York have come together under Agorá, a BIS project. The goal is to rope in large financial institutions to investigate how tokenized bank deposits can be seamlessly integrated with wholesale CBDCs on a public-private platform.
Bringing the legal and regulatory architecture up to speed will take years. But the ultimate test of the Finternet will be its ability to win over consumers. It won’t be an easy terrain for users to navigate. For instance, a coin promising ownership of a digital artwork will typically not be registered with a public authority, but a representation of a property or a vehicle must be. Some assets like stocks and bonds will be tightly regulated; others like cryptocurrencies may not. Some money tokens will be spent with the finality of cash changing hands; others may be like check payments that can be stopped.
Depending on whether or not they are registered, regulated, fungible or bearer, tokens will have different legal rights. Their attractiveness will depend on how much complexity an average individual can handle. The Finternet looks daunting currently — just as email and mobile payments did once. But if the prize is large enough, consumers will put in the work.
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