In the Finternet, Survival of the Fittest

This article first appeared on Global Fintech Institute - World Scientific Series on Fintech: Volume 6 - Reviews and Advances in Fintech I, published by World Scientific.

Ever since the Bank of International Settlement’s general manager, Agustin Carstens, and tech entrepreneur, Nandan Nilekani, published ^[1] their concept of the ‘Finternet’ in April 2024, observers have been fascinated with their vision of a digital ecosystem to unite the finance world.

Much like how people browse, order, and pay across thousands of connected sites on the web, the Finternet in its ideal state will link the world's scattered financial entities to facilitate seamless backend transactions.

It may be helpful to picture this proposition as a blockchain layer overlaid on financial markets, akin to what SWIFT’s (Society for Worldwide Interbank Financial Telecommunication) network brought to the traditional financial markets in the 1970s, where it enabled banking systems to communicate in a seamless and effective way across organizations. The goal is to maximize efficiency and eradicate delays, red tape and other symptoms of ineffective money-handling.

The latest in a series of tectonic shifts decentralizing finance, the Finternet, if realized, will likely claim the tasks now undertaken by middlemen, who facilitate the process of connecting buyers and sellers across jurisdictions and asset classes.

This potential disruption puts forth the question: in a model with atomic settlement, what will happen to the thousands of financial intermediaries on which the current system runs?

Not so fast

The simple, and perhaps unwelcomed prediction is that yes, firms might be disrupted by the latest wave of innovation.

Some are more at risk than others. Banks are likely to retain their value as an anchor within the ecosystem, but function-specific FinTech firms, those built to resolve or alleviate a specific pain point, could take a hit.

Clearing and settlement houses might see displacement from blockchain technology enabled by the automation of smart contracts. Meanwhile, firms that facilitate market making – such as Web 3.0-centric exchanges – would require further stress testing before gaining wider adoption.

But there is time to adjust. The scale and scope of jurisdictional collaboration required to realize stringent, globally unified financial regulation, and the likely need for a supranational organization to lead the charge, means the Finternet could take a decade or more to materialize.

When it does unfold, its growth path could likely echo the trajectory of other major technological innovations. First: the initial wave, where regulators, exchanges, banks and fintech firms – all seeking to build the overarching blockchain that connects the Finternet – crowd the space with trials.

Next, saturation. Directions diverge as companies pursue niches. Finally: attrition and consolidation, concluding in a potential oligopoly.

This first step is already unfolding, given recent multi-party pilots such as Canton Network’s interoperable blockchain for institutional assets that Northern Trust participated in^[2]; Project Agorá’s tokenized cross-border payments^[3], and Marketnode’s DLT-powered, fixed income infrastructure^[4].

By many measures, a mature Finternet is great news for intermediaries, who stand to reap efficiency rewards. Fewer administrative hoops and higher institutional connectivity mean quicker trades at lower rates, translating to faster time to market and better value for clients.

The key is staying relevant as the paradigm shifts.

Doubling down on value

Traditionally, the value of intermediaries lies in enhancing market liquidity by facilitating faster asset movement. But with the Finternet, role consolidation is likely as process workflows shrink to fewer steps, and clients continue the ongoing process of scaling down on providers.

To thrive in this new environment, intermediaries must clarify their value proposition and transform quickly to avoid being switched out for rivals who offer better connectivity, more robust analytics, or efficiency.

Chief among these is rooting out inefficiencies and learning to operate in a trustless world of seamless activity. For one, even with a global unified ledger, some identity verification will likely still be required – possibly a simplified version that works across systems (Project Guardian in Singapore made trust anchor a key focus area of the initiative^[5]). Whatever the case, intermediaries’ infrastructure must be able to handle digital credentialing and trustless identity tools.

More importantly, continued relevance of intermediaries lies in providing value-added services that blockchain functionality cannot: market knowledge, regulatory expertise, and insight into local contexts and licensing models.

One potential focus area is security. In theory, the Finternet could be compliant by design, with whitelisting as a prerequisite. Once verified, users can pursue investment activities, perhaps aided by service providers. However, the reality is that new technologies expose us to emerging risks that cannot yet be conceptualized – think blockchain’s susceptibility to tech loopholes resulting in lost assets, or bad actors hacking into wallets and intercepting and redirecting funds.

In such an ecosystem, intermediaries function as a trusted third-party helping clients navigate trading and holding risks. Global custodians such as Northern Trust play roles in supporting investment activity across markets and safekeeping institutional assets.

A second focus is convenience. The Finternet’s frictionless state of finance will likely be achieved through tokenization, requiring fluency in the medium. And though the Finternet promises seamless transactions, the same cannot be said for user experience. Here, intermediaries can undertake the task of navigating evolving systems.

Though decentralized finance is hardly a new concept, it is a vision more real today than ever given new technologies. The Finternet is the latest expression of this ideal state, and these are its early days, with opportunities to navigate to positions of future prominence.

When mature, there will potentially be nothing like the Finternet in the market. Intermediaries simply need to survive the sea change to be there to see it.

[1] https://www.bis.org/publ/work1178.htm

[2] https://www.canton.network/pilot-press-release?utm_source=Linkedin&amp

[3] https://www.bis.org/press/p240403.htm

[4] https://www.marketnode.com/media-centre/sgx-temasek

[5] https://www.mas.gov.sg/schemes-and-initiatives/project-guardian

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