Is the Finternet closer than we think?
A new financial system could enable better ways to transfer assets between different parties.
Digital public infrastructure (DPI), described by the World Bank as “solutions and systems that facilitate essential society-wide functions and services, such as identification, payments and data exchange”, is proving to be a transformative way to improve the resilience of societies, drive economic growth, and enhance quality of life. Now, a new vision for an interconnected global financial system, based on open payments and powered by unified ledgers, could hold the key to transforming DPI strategies in developing countries.
Today’s policymakers only have a certain amount of levers they can pull to achieve what may seem like an inexhaustible list of urgent socio-economic goals. However, governments are realising that DPI offers many benefits that will enhance economic opportunities, improve service delivery, and help foster social inclusion.
Countries that have adopted DPI strategies have seen significant benefits and, according to the UN, for 70 low-and-middle-income countries, implementing DPI could speed up their economic growth by as much as 33%.
India with DPI initiatives, such as its Aadhar digital ID system, Universal Payments Interface, and DigiLocker platform, is among the countries pushing ahead with DPI. Other examples include Singapore's National Digital Identity Stack, Estonia's X-Road secure data exchange layer, and Thailand’s PromptPay. South Africa’s own DPI programmes are also gaining traction, including e-government services, such as SARS' e-filing, and the national instant payment solution, PayShap.
A good deal of the challenges facing DPI rollout lies with foundational digital capabilities, such as sending payments, verifying identity, and safely exchanging information between perpetually siloed public and private systems.
In many developing countries a good deal of the financial systems are further hindered because of antiquated processes, legacy technology and regulatory gaps. In many instances transactions can still take days to complete and rely on time consuming clearing, messaging and settlement systems. In some cases, they even rely on physical paper trails.
Any kind of meaningful solution to the DPI challenge relies on a re-imagining of our global financial ecosystem.
Enter the Finternet
Tackling these DPI challenges will require a collaborative effort. Agustín Carstens, GM, Bank for International Settlements (BIS), along with Indian entrepreneur, Nandan Nilekani, are turning this dream into reality with their concept of “The Finternet.”
Carstens describes the Finternet as “a vision of multiple financial ecosystems that connect with each other, much like the internet…It will enable both individuals and businesses to transfer any financial asset they like, in any amount, at any time, using any device, to anyone else, anywhere in the world.”
He sees these transactions as inexpensive, secure, near-instant, and designed to meet the needs of the currently underserved segments of the population.
The concept relies on unified ledgers and the BIS describes it as a shared platform of interconnected ledgers that could handle various financial transactions, from payments and settlements to asset management and securities trading. This would cut out lengthy messaging and clearing processes, driving efficiencies and reliability. In addition, by leveraging tokenisation for added security and an efficient way to exchange value or assets, unified ledgers could facilitate new, innovative financial products and transactions, fostering what Carstens and the BIS describe as more “complete” markets as well as a means to improving welfare.
Bridging financial systems and geographies to realise the vision
The value of unified ledgers is quickly being realised across the globe. For instance, Brazil has used the technology in its stablecoin project, DREx. In Africa, open source, interoperable payment platform, Mojaloop, has been designed to facilitate digital payments across the continent. Open-source software platform Mifos, meanwhile, provides tools to manage microfinance institutions, which can then be integrated with payment systems, like Mojaloop, to facilitate transactions and improve efficiency.
However, the missing ingredient has been a way for the different ledgers to communicate and exchange value, even if they are not directly connected via an API integration.
It’s here that we see Interledger a integral role. Interledger (via its payment gateway, Rafiki), acts as a bridge between different financial systems across geographies. Its currency-agnostic protocol (ILP), allows people to open an account and facilitate transactions between any ledger - whether it’s on a unified platform or not.
We believe that by combining the power of unified ledgers with central bank oversight, we could revolutionise the way we conduct financial transactions and manage assets. This would require proactive collaboration between public authorities and private sector institutions, using enabling digital technologies. But should this be achieved, we could take a giant leap forward in enabling DPI efforts, making the goal of improving people’s quality of life entirely possible.