Introduction

The BIS recently published a working paper entitled “Finternet: the financial system for the future”. This Finterent – or financial internet – is an intriguing vision of a modern financial system based on shared, interoperable, and unified ledgers, upon which the world’s assets and value would be stored and transferred. This represents a seismic shift from our current world where record keeping is held in institutional silo’s – todays banking cores – and updated through a web of messaging systems.

The BIS’s vision would likely require multi-year public-private and international collaborations to be fully realized. However, it’s plausible we will see hybrid solutions emerge quite quickly. Pockets of new shared ledgers solving specific problems around the world – asset tokenization platforms here, a CBDC launch there - that are progressively linked together as in the BIS’s grand unification vision.

What would this new model mean for banks? First, let’s have a closer look at the Finternet vision.

The Finternet – why it’s needed & what it’s for

The BIS do a great job of summarizing the inefficiencies in today’s financial system – too slow, too costly, and too inaccessible to many people who are insufficiently served.

The Finternet vision is underpinned by new technologies – tokenization, cryptography, and self-executing smartcontracts, running on shared ledgers. A key premise is that tokenizing only the asset side of a transaction – for securities, or anything else – is insufficient without also tokenizing money. On-ledger atomic transactions can fully replace the asset delivery-versus-payment flow, avoiding today’s multiple intermediaries and separate payment legs.

Another crucial element is the multi-ledger idea, that we will likely see a mix of private ledgers for example for CBDC, combined with public ledgers or blockchains for tokenized assets, requiring cross-chain interoperability.

As gradual progress is made, institutions will be driven to offer hybrid solutions that blend for example flows of money between traditional deposits on one hand, with CBDC and tokenized deposits on the other, which might better serve specific use cases, demographics, or regions. Adoption will be driven by incentivizing use, either through provision of a better experience, being cheaper, or fulfilling some new need.

Beyond the core: banks as the multi-ledger gatekeepers

Financial institutions will be at the fore-front, providing services that blend traditional finance combined with new Finternet services. Banks will be the gatekeepers to these new financial systems, in mapping anonymous shared-ledger accounts to real users for KYC controls. Their depth of regulatory expertise will be fundamental. In a future world where both assets and money move around at the speed of light, technologically advanced checks and controls will be more important than ever. Banks are well placed with AI powered fraud and real-time AML controls, in addition to compliant tax-reporting, all of which will need to be enhanced to span customer assets across multiple ledgers.

As the world shifts to user-controlled digital identities, another pillar of the Finternet vision, user onboarding will be significantly eased from today’s complex flows. This will reduce friction, promote ease of movement between providers, and reduce customer stickiness. The best products and experiences combined with the lowest costs will win. Banks will need to integrate to new ledgers quickly, to stay competitive in offering the full gamut of new innovative products and pass on cost savings.

As today’s custodians of our deposits, banks will have a unique role in providing on/off ramps allowing for flows between different monetary forms. They will be well positioned to offer embedded wallets as part of their secure digital app ecosystem, providing slick interfaces with aggregated views of assets held across traditional accounts and new tokenized forms, and services to convert and advise.

To service the digital channel banks will need an efficient and flexible orchestration layer to facilitate the movement of value between new ledgers and existing cores. They will need tools and registries if offering asset tokenization services, or to support deposit token infrastructure as part of the burn-and-issue model. They will need to integrate to real-world data sources for asset pricing and exchange rates, or via on-ledger oracles. Again, banks can leverage their operational excellence for appropriate security and governance, for example in seamlessly applying wallet limit controls and waterfall techniques used to auto-convert excess balances.

Institutions can additionally look to a broader role as providers of aggregated BaaS wallet infrastructure to other players who might focus on digital channels, or to service the rise of IoT payments.

Conclusions

Fulfilling the BIS's vision will take time and considerable effort. There are many challenges to resolve, such as interoperability, privacy, and scalability. And yet as the BIS says, “now is the right time”. The goals of rebuilding the world’s financial plumbing to reduce costs, improve efficiency, to render finance more accessible, and give users more control, are all worthy.

The full extent of the financial services landscape that will sit atop this Finternet – whatever its final form - remains to be fully imagined. Banks will need to evolve to become the aggregators and regulatory gatekeepers, the advisors and distributors of these new forms of tokenized asset and money residing on shared ledgers. Exciting times ahead for financial technology!