A new paper by the Bank for International Settlements (BIS) presents the think tank’s vision for a new financial system dubbed the “Finternet”.

This new financial system involves multiple financial ecosystems interconnected with each other to empower individuals and businesses, and leverages innovative technologies such as tokenization and unified ledgers to expand the range and quality of financial services, lower barriers between financial services and systems, and promote access for all, the paper says.

Released on April 15, the paper lays out the BIS’ vision for the Finternet, arguing that this envisioned financial system could help address today’s financial system’s shortcomings, including the slow transactions, high costs and a lack of competition. These shortcomings are limiting the range of financial services on offer, especially in rural and low-income areas.

While the report acknowledges that considerable progress has been made in recent decades, it notes that 1.4 billion adults are still excluded from the financial system. Lack of access is particularly acute in emerging market and developing economies (EMDEs) where only a quarter of adults used a savings account in 2022 and just about half borrowed that same year, it says. Moreover, in most EMDEs, insurance premiums per capita, also referred to as “insurance density”, are less than US$1,000 per year, and premiums relative to GDP, or “insurance penetration”, stand at less than half the level in advanced economies.

In response to these shortcomings, the paper identifies technological innovations as potential solutions, exploring the prospects of tokenization and artificial intelligence (AI) in revolutionizing the financial system through faster service, lower costs, and greater choice to users.

Tokenization involves creating digital representations of financial or real assets on a programmable platform. The technique simplifies asset trading, enables more complex asset transfers, and alleviates bottlenecks in the financial system by reducing dependency on intermediaries.

Another technology with significant potential impact is large language models (LLMs) and AI. LLMs are AI systems capable of understanding and generating human-like text. Applications of these models has the potential to transform financial systems, allowing financial institutions to quickly identify and respond to suspicious activities, streamline compliance processes and streamline many back office tasks.

The “Finternet”

The paper then introduces the concept of the Finternet as a vision for the future financial system. In this vision, the Finternet comprises a network of interoperable financial ecosystems through which individuals and businesses are able to transfer any financial asset at any time, to anyone anywhere in the world and using any device.

The paper proposes a token-based financial system supported by unified ledgers. These unified ledgers would contain digital representations of central and commercial bank money and other tokenized financial assets. Within a given ledger, different types of assets would reside in separate partitions that would be owned and operated by their respective operating entities, or so-called “token managers”.

Unified ledgers would also include the information necessary for their operation, such as the data required to ensure the secure and legal transfer of money and assets, as well as real-world information sourced from outside the ledger.

Individuals and businesses would interact with these ledgers through applications. These applications would allow users to conduct transactions within individual ledgers, between ledgers or in exchange for assets that exist outside the Finternet.

According to the BIS, unified ledgers offer transformative potential by streamlining transactions, enhancing security and increasing transparency. Equipped with tokenized assets, these ledgers would reduce the need for lengthy messaging, clearing and settlement systems. They would enable programmable transactions and greatly simplify compliance processes, and would meet the regulatory and supervisory standards that are required in today’s financial system.

To combat financial fraud like impersonation, circumvention, and compromise, the Finternet would employ advanced mechanisms including identity verification, real-time authentication, and smart contracts for compliance.

Internal threats would be addressed through automated monitoring and immutable records, deterring fraud and manipulation, while social engineering attacks would be countered with educational programs, behavioral analytics, and multi-factor authentication. Compliance would be automated through smart contracts, with regulatory requirements such as know-your-customer (KYC) and anti-money laundering and the countering the financing of terrorism (AML/CFT) directly programmed into the system.

The BIS argues that its vision for the Finternet could bring about a broader range of services and assets, increase flexibility in financial management, and enable faster, more secure transactions accessible to everyone. According to the organization, emerging markets, where financial services access is most pervasive and the potential to leapfrog to the technological frontier is the greatest, stand to benefit the most.

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