The Finternet Moment
Nandan Nilekani proposes a futuristic idea interlinking existing global financial systems, making them interoperable, saving time and costs. EPISODE #175
Dear Reader,
A very happy Monday to you.
A few weeks ago, Nandan Nilekani, the man who spearheaded the ideation and rollout of the game changing Aadhaar, the 12-digit unique identity issued to 1.4 billion Indians, co-authored a fascinating paper for the Geneva-based Bank for International Settlements—the think tank for central banks.
It is on the next innovation—Financial Internet or Finternet—which will integrate global financial systems.
At present they operate as silos within respective sovereign borders. Nilekani is proposing that they be interlinked by establishing a common protocol that will enable the mantra of interoperability—wherein it does not matter which financial system you or anyone else uses, they can talk to each other.
Imagine the power the user will wield in this system, including for cross-border transactions. Sounds familiar. Indeed yes.
This is the same principle that guides India’s Unified Payments Interface—which is logging 13 billion transactions a month. But Finternet is far more sophisticated and complex. So this week I try and unpack this complex game changer.
The cover picture is a collage of flowering Gulmohar trees, taken by me while driving around Delhi soaking in this seasonal wonder. Watch out for another floral surprise next week.
Happy reading.
Reimagining Global Finance
A few weeks ago, Nandan Nilekani co-authored a research paper with Agustin Carstens published by the Geneva-based Bank for International Settlements (BIS). They proposed the idea of Finternet—a vision for the future of the existing global financial system.
At present they operate as silos within sovereign borders. Consequently, cross-border transactions take time, often days, to complete as they rely on a process of messaging and settlement systems relying on physical paper trails.
Nilekani and Carstens, propose linking the existing financial systems through a common protocol. Similar to the way the Internet operates—illustrated by the simple example of email: It does not matter whether you use gmail and I use outlook, we can communicate with each other because both mail systems use a common protocol or digital rails.
An even better example for those of us either in Brazil or India is the Pix (Brazil) and the Unified Payments Interface (UPI). The common digital rails or protocol enables any financial entity to operate on this framework and talk to each other. Both these innovations are taking the world by storm.
They have democratised payments, challenging the walled garden gateways set up by the likes of Visa and Mastercard to operate like monopolies. Worse, as we saw in the case of Russia, they can withdraw operations, crippling a nation’s financial network and thereby its economy.
Now, Nilekani and Carstens, propose to take this principle of democratisation and apply it to global financial systems: Finternet or interconnected global financial systems.
As a result financial assets, once tokenised or digitised (like the way our holdings of equity shares have been converted into a demat form) they can be traded within and across borders of countries.
However, unlike UPI and Pix, this system will be far more sophisticated, complex and will require heavy lifting from global regulators.
Three Pillars
The above graphic, sourced from a presentation by Nilekani, sums up the principle of the Finternet. It is built around a user, who can be anybody, and is unified across countries leaving it open for universal use.
The authors put it thus:
“We identify three necessary components: an efficient economic and financial architecture, the application of cutting-edge digital technology and a robust legal and governance framework.
Unified ledgers are a promising vehicle to deliver on all three.”
Unified ledgers means a network of networks that will allow seamless interaction among entities.
However this would mean that assets be tokenised. Like I explained earlier, imagine a ecosystem that creates a digital avatar of our financial assets—akin to demat shares.
According to the authors this is eminently doable.
“Most of the technology needed to achieve this vision exists and is fast improving, driven by efforts around the world.
This paper provides a blueprint for how key technical characteristics like interoperability, verifiability, programmability, immutability, finality, evolvability, modularity, scalability, security and privacy can be incorporated, and how varied governance norms can be embedded.
Delivering this vision requires proactive collaboration between public authorities and private sector institutions.
The paper serves as a call for action for these entities to establish a strong foundation. This would pave the way for a user-centric, unified and universal financial ecosystem brought into the digital era that is inclusive, innovative, participatory, accessible and affordable, and leaves no one behind.”
One World, One Network
As captured in the graphic above sourced from the same presenation, Nilekani and Carstens, propose a unified global network to productionise their idea. This vests controlling power with users. In other words, a user can choose to tokenise an asset and trade it at a time, price and geography of their choice.
As Nilekani explained in his presentation:
“Now, what happens is, if I'm a user, I can take a deposit from the bank or I can take a mutual fund or ETF from my asset management company and ask them to tokenise it and give it to me.
And then I will keep it in my account and my account will have a mix of assets. What this does is essentially unlock the closed system here to create a marketable set of tokens, which can then be traded among themselves.”
However, to protect against fraud and misuse, these assets will have to be certified and registered with some public authority. At the same time it will require regulatory oversight—for which regulators will have to re-equip themselves.
As Nilekani argued, the power of this innovation is that it employs “the value of cryptography, the value of real time transactions 24x7 operations, all that but within a regulatory framework, which allows all the laws to be enabled.”
The authors were clear that this innovation does not mean a destruction of the existing financial system. Instead, it builds on top of it. Something similar to UPI, which coexists with existing mode of payments like credit cards, cheques, inter-bank transfers and so on. As a result, people have a choice for their medium of payments. Similarly, it is not necessary for the Finternet to be adopted by the entire world at the same time. It can be gradual.
Guess, once the benefits of use become visible, especially in terms of ease of use and reduced costs, others will join. Once again to cite the UPI example: Eight years ago when it was launched it found few takers, today UPI averages 13 billion transactions a month.
Given that the idea of digital public infrastructure (UPI is an example of this innovation) has been adopted as a universal standard by the G20 grouping last September, there is every reason to believe that Finternet, with the backing of BIS, will gain currency.
Indeed, if this does happen, India will be at an advantage, given its recent history of innovation and use of digital public infrastructure.
Recommended Viewing/Reading
Sharing the latest post of Capital Calculus on StratNews Global.
A few weeks ago, Bayer, the German pharma major announced that it was purging its middle-level management. Instead, it would empower its 100,000 employees. This radical plan is being held up as the new corporate playbook as companies prepare for decentralised supply chains.
To shed light on this I spoke to Debu Mishra. Debu, who is Dubai-based, is partner and head advisory at True Search. He is an immensely experienced and insightful professional and someone who often thinks out of the box. The perfect person to guide us through this new disruption impacting the corporate world.
Sharing the link below. Do watch and share your thoughts.
Till we meet again next week, stay safe.
Thank You!
Finally, a big shoutout to Shashwathi, Premasundaran and Gautam for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by all you readers. Gratitude also to all those who responded on Twitter and Linkedin.
Unfortunately, Twitter has disabled amplification of Substack links—perils of social media monopolies operating in a walled garden framework. I would be grateful therefore if you could spread the word. Nothing to beat the word of mouth.
Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
There is no doubt that the plan presented by Nandan is a world class idea. However, I would rather suggest Nandan and others to first present a paper on online voting system for India. Middle classes in India DONOT vote for many reasons, including just apathy and carelessness. The management of elections is a humongous task for EC as it is a pain for voters due to long queues, missing names etc. What we broadly get finally is 100% voting from the minority community and those who are induced one way or the other for voting. We must introduce optional online voting linked Adhaar and mobile banking etc with a fool proof plan that will pass all the hurdles including that of SC. This will increase voting percentage and it can lead to consequences for not voting too! I would suggest to Anil to give this idea a thought and come out with some ideas soon.