“Innovation requires having at least three things: an idea, the ability to execute it, and a society that is supportive of those innovations. When those forces converge, that’s when the great transformations happen.”
– Walter Isaacson in “The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution”
Deepika Deshpande
Published in Web3 Blog – Sep 16, 2024
It Takes a Village
The story of innovation is often condensed into the story of individual genius. The names of the inventor and invention become inexorably linked in the collective conscience: the Wright brothers and the airplane. Graham Bell and the telephone. Edison, the electric bulb. While these narratives may have been true, they are an incomplete representation of innovation today. The scale and complexity of modern projects make teamwork essential, and invention is more of a collective, iterative process where collaboration is key. Moreover, taking a transformative idea to market for large scale impact can require an even greater level of collaboration, often at a societal level, combining public and private effort.
Much of the technological innovation that we see today appears to be dominated by private sector efforts and is characterized by a focus on market disruption, scalability and venture backed growth. The role of the government is mostly omitted from the narrative and sometimes even positioned as an impediment to change. Nothing could be further from the truth. Many breakthrough technologies – the internet, GPS, touchscreens, and voice-activated systems – were the result of government investment and risk-taking. Similarly, in the Web3 domain the fingerprints of government-backed initiatives can be seen in many key developments such as public-key cryptography, encryption standards, and secure communications. The lack of a collaborative approach between the public and private sector, if anything, has contributed to some of the challenges that the sector sees today. We seem to have rushed ahead “into the universe of artificial intelligence with almost no political or policy debate about its implications. It is time for that to change.” (Jonathan Taplin in Move Fast and Break Things: How Facebook, Google, and Amazon Cornered Culture and Undermined Democracy.)
This public private partnership plays an essential role in innovation since it facilitates the combining of strengths to solve complex problems. It helps create a balance between innovation and ethical standards, ensuring technologies are developed responsibly and scaled for maximizing societal good. So, while the crypto anarchists may have the state in their crosshairs, keeping the greater societal good in mind, what then can be a model for public private partnership in the decentralized ledger/ Web3 space?
Introducing the Finternet
The vision paper of the Finternet, presented by Mr AgustĂn Carstens, General Manager of the BIS and Nandan Nilekani, at the Peterson Institute for International Economics in April seeks to answer just that. Conceptualized as a part of the public digital infrastructure, the Finternet represents a meta network or a layer of interoperability that has the ability to connect many disparate, independent networks, legacy or otherwise. It is conceived as a user centric architecture, unifying markets and assets classes and built on technology that is universally available.
Much like the blockchain pioneers, the Finternet also trains its sight on disrupting the traditional financial system, but it approaches disruption from a different angle. While the crypto community has been set on building a parallel economic system, the Finternet looks at integrating various independent financial systems, while also leaving room for including new and emerging ones. The former was born out of a deep suspicion of centralized authority, the latter seeks to build trust through its openness, universality and inclusion. It has a giant embrace and takes the idea of disruption to a whole new level. It accommodates traditional finance as well as defi.
The idea of the Finternet is nothing if not a moonshot vision. As an architectural vision for a blockchain based financial system, it mirrors the ambition of a “Theory of Everything”.
The Finternet and the Blockchain
The Finternet leverages components of the blockchain technologies to realize its objectives, most notably, tokens and unified ledgers. Here is a quick primer on what these terms mean.
Tokens
A token, also referred to as a “digital asset” in blockchain parlance, is a digital representation of ownership rights to an asset. The asset could be a native on-chain asset (such as Bitcoin or Ether that only exists on a blockchain) or, more consequentially, it could be an off-chain asset such as a bank deposit, security, gold or a land title. In the case of the latter, the token would represent a verifiable claim to the asset in the blockchain ecosystem while the physical asset may be custodied with a third party (eg. a bank deposit would be custodied with a bank.)
Tokens are an essential functional component of the blockchain tech stack. Not only do they represent verifiable ownership rights, they can also be encoded with rules, logic, and conditions to carry out specific actions or behaviors automatically, without needing intermediaries. They can be designed to serve literally any purpose requiring unique and verifiable ownership and can be easily embedded in smart contracts. This unique blend of token versatility, verifiability, and programmability gives blockchain its remarkable power and potential.
As an example of token usage, the Thai government recently implemented a stimulus package that involved a digital token payout to 50 million low-income citizens with the objective of stimulating consumption and spurring economic activity. The token reached the recipients directly and could be programmed to be spent within 6 months (to avoid leakage into savings) and used only at authorized merchants within the local area of the recipient.
Unified Ledgers
A unified ledger is the second essential component of a blockchain tech stack. It acts as the underlying rails that tokens run on, ensuring seamless and secure movement of assets and data across the blockchain ecosystem. In other words, a unified ledger is a shared interoperable infrastructure that allows for the secure, efficient movement and interaction of tokens according to set rules and protocols. To be sure, it does not represent a single ledger but an integration of existing ledgers. By allowing for seamless transactability between tokens representing different asset classes, the unified ledger helps erase silos and completes markets.
The ledger is immutable and allows for the creation of conditional transactions and atomic settlements (i.e simultaneous completion of both legs of a transaction and eliminates settlement risk.)
Example
A traditional financial institution could enable itself on the “Finternet” by tokenizing its assets. For example, if a bank were to tokenize customer deposits and a land registrar were to tokenize land title certificates, the Finternet could allow for the exchange of money (represented by the deposit token) for a land (represented by the land title token) without an intermediary. The verifiability of the token would eliminate the need for title searches, the atomic settlements would eliminate settlement risk and the universality of the Finternet would allow for remote execution of transactions.
Finternet Disruption
The vision of the Finternet seeks to create an all-inclusive scalable financial ecosystem that can efficiently serve 8 billion people and 300 million businesses worldwide. It seeks to address issues not just of cost, speed and availability but also of competition and innovation and represents a generational step change to a higher performance equilibrium. If the first wave of disruption came from digitization, the second wave as envisaged by the Finternet, will come from tokenization.
While the Finternet leverages blockchain technology, it is not merely a technology play. Realizing the full potential of the change it can bring about will require technologies to mature but also require a supportive regulatory and governance infrastructure. That will take time.
To quote Dr. Wayne Dyer: “Everything that now exists was once imagined. So, if you want something to exist, you must first be able to imagine it.” The Finternet is an imagination of the future of finance.
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About the Author
Deepika is a post-doctoral research fellow at SMU’s Web3 center. In this capacity, she tracks the latest developments in the Web3 space, helps create awareness about Web3 through blogs and articles and contributes to Web3 research.
She is a financial services industry leader, currently serving as Chief Operating Officer for a Singapore-based cross-border payments fintech, SingX. Her prior corporate experience includes 26+ years at Citi Asia Pacific. Deepika’s academic credentials include an MBA from the Indian Institute of Management (Ahmedabad) and a PhD from SMU (Strategy and International Business).