原文标题：Finternet: the financialsystem for the future
原文作者:Agustín Carstens,Nandan Nilekani
原文来源：BIS Working Papers
Compiler: Spinach Spinach Talks Web3
Foreword: At present, most people are skeptical of RWA, believing that RWA is just a narrative hype of capital, which is not feasible to land, and many teams and even countries have made many attempts, but they have frequently failed in the past. However, we continue to insist that RWA is the largest potential market for the development of the Web3 industry, not only because we are working with central banks in many countries to explore and accumulate a lot of practical experience and important feedback, but also because the Bank for International Settlements is becoming the most supportive international financial organization for RWA in the world.
The Bank for International Settlements (BIS), known as the "central bank of central banks", is the world's oldest international financial institution and has been a global leader in monetary and fiscal policy innovation since its founding in 1930. The institution is composed of central banks and financial regulators of more than 60 countries, and its far-reaching impact on monetary policy and financial stability has undoubtedly led the development direction of central banks around the world.
In June 2023, the Bank for International Settlements (BIS) released its annual economic report, which includes a chapter detailing the blueprint for the future financial system. In the report, the term "tokenisation" is highlighted as a core concept and is seen as the key to reforming the current financial and monetary system. Following this report, BIS has published several research articles on Tokenisation and launched several related projects, such as Project Promissa (tokenization of cashier's checks), Project Atlas (exploring the economic value of distributed finance (DeFi)), Project Genesis 2.0 (tokenized carbon credit system), and Project Dynamo (using tokenization technology to support SME financing) and more.
It can be seen that the Bank for International Settlements (BIS) is serious about the real-world asset tokenization (RWA), and it has adopted a careful and systematic strategic deployment. Whether it is in theoretical research, case deployment or project implementation, it shows a high degree of professionalism and comprehensive consideration. Its systematization and depth in this field are far beyond the general understanding of the concept of "Internet of Value" in the Web3 industry.
In April 2024, Agustín Carstens, the current management boss of the Bank for International Settlements, released an article "Finternet: the financial system for the future", proposing a new concept "Finternet", which is of great significance and represents the full acceptance of Web3 in traditional finance A strong signal of technology has also laid the development direction and vision of the traditional financial world to use Web3 technology.
In April of the same year, the Bank for International Settlements (BIS) launched a major project, Project Agorá, which brings together seven central banks, the Institute of International Finance (IIF) and invited private financial institutions for one thing: the tokenization of cross-border payments. Therefore, Spinach judges that the huge flashpoint of RWA in the future will be the tokenization of payment, that is, programmatic payment, combined with international trade and supply chain finance scenarios, there will be a huge potential market.
Last October, Spinach wrote an article about Real-World Assets Tokenisation The 30,000-word research report expounded his personal understanding of Tokenisation, dividing it into two logics: Crypto and TradFi, the former focuses more on narrative and asset issuance, etc., and the latter focuses more on how to use Web3 technology to improve the existing world's financial system Made a comprehensive and systematic summary, is a collection of masterpieces, spinach also pays great attention to BIS's every move, so spinach has made a Chinese translation of the article for everyone to read, this article deserves great attention from the industry.
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This paper proposes a vision of the "financial internet": multiple financial ecosystems that are interconnected, similar to the internet, and aim to empower individuals and businesses by putting them at the center of their financial lives. The article advocates a user-centric approach that lowers barriers between financial services and systems to facilitate access for all. The envisioned system leverages innovative technologies such as tokenization and a unified ledger underpinned by a solid economic and regulatory framework to significantly expand the scope and quality of financial services. This integration is designed to foster broader engagement, provide more personalized service, and improve speed and reliability while reducing costs for end users.
Much of the technology needed to make this vision a reality already exists and is rapidly improving, thanks to global efforts. This article provides a blueprint for how to integrate key technical features such as interoperability, verifiability, programmability, immutability, finality, evolvability, modularity, scalability, security, and privacy, and how to embed different governance specifications. Achieving this vision requires active cooperation between public authorities and private sector institutions. The article aims to call on these entities to build a solid foundation. This will pave the way for a user-centric, unified and pervasive financial ecosystem that will move into the digital age and be inclusive, innovative, engaged, accessible and affordable, leaving no one behind.
- The Financial Internet: The Financial System of the Future
- introduction
- Box A: There's never been a better time for the financial internet
- A vision for a more technologically advanced financial system
- 2.1 Inadequacies of the current financial system
- Speed: The financial system is too slow
- Cost: The cost of the financial system is too high
- Access and availability: The scope of financial services and products is too limited
- 2.2 Technology-Driven Opportunities
- 2.3 The Financial Internet: A Vision for the Future Financial System
- Box B: Faster Payment Systems: Lessons from Digital Public Infrastructure
- Box C: Lessons from India's Digital Public Infrastructure
- From vision to reality
- 3.1 Unified ledger as a tool for improving the financial system
- 3.2 Structure of the Financial Internet
- User-centric financial internet
- Tracking fraud
- Fraud at the entrance: Prevent unauthorized access
- Fraud within the system: Protect against insider threats
- Respond to social engineering attacks
- The effective implementation of technology will be driven by use cases that benefit society
- 3.3 Regulatory and Legal Considerations
- Box D: Use cases for unified ledgers and tokenization
- Box E: Advances in cryptography and ledger technology
- Design principles
- Principle 1: User-centricity
- Principle 2: Interoperability
- Principle 3: Evolvability
- Principle 4: Modularity
- Principle 5: Scalability
- Principle 6: Division of labour and competition
- Principle 7: Inclusivity and accessibility
- Principle 8: Security and Privacy
- conclusion
- Box F: Drex in Brazil: Putting a Unified Ledger into Practice
- Box G: The contribution of the BIS Innovation Center to the Unified Ledger Architecture
- Glossary
introduction
In recent decades, advances in digital technology have revolutionized our lives. We can see the impact of this change in every way: in the way we shop, in the way we get news and entertainment, and in the interactions we have with friends, family, and colleagues. What was once an expensive, complex, and time-consuming task, like making an international call or booking a hotel room in an unfamiliar city, can now be done with just one click.
In the financial system, the potential for digital innovation is also emerging. Widely deployed mobile payments and faster payment systems have made the purchase of goods and services – perhaps the most ubiquitous financial transaction – simpler, cheaper, and more secure. At the same time, in some regions, verifiable digital identity systems have helped hundreds of millions of people open bank accounts, set up savings, take out insurance and take out loans for the first time.
However, such examples are not enough. Much of the financial system is still stuck in the past. Many transactions still take days to complete and rely on time-consuming clearing, messaging, and settlement systems. Some transactions even involve physical documents. Even domestically, there is a lack of adaptive interconnection between the various parts of the financial system and often do not interact with each other. The barriers to cross-border transactions are even greater.
The failure to develop a modern financial system has many costs. Some of the costs are obvious: asset transfers take too long, the failure rate is high, and the costs are too high. There are also hidden costs: beneficial activities fail to take place, and access to financial services is unnecessarily restricted, as the financial system remains at the mercy of traditional systems.
The costs of an outdated financial system are particularly evident in emerging market and developing economies (EMDEs). For many residents, financial services are not only of low standard, but simply inaccessible. As a result, they are still left with cash as their only means of payment, borrowing from informal sources and hiding money "under mattresses". Lack of access to financial services prevents people from increasing their incomes, upskilling them, expanding opportunities, and making the most of the digital economy.
In order to build a future-proof financial system, we need to agree on the vision we want to achieve. In this article, we propose the concept of the "financial internet" (Finternet): multiple financial ecosystems that are interconnected, similar to the internet, and aim to empower individuals and businesses by putting them at the center of their financial lives. It will lower the barriers between different financial services and systems, drastically reducing the complex clearing and information chains and other frictions that currently hinder in the financial system. In line with our vision, individuals and businesses will be able to transfer any financial asset, regardless of amount, to anyone, anywhere in the world, at any time, on any device.
Financial transactions will be cheap, secure, and almost instantaneous. And these services will be open to anyone, ensuring financial inclusion by meeting the needs of the currently underserved population. The financial Internet will provide wider access, better risk management, increased information availability, and lower transaction costs than currently available services. New, personalized financial services will emerge that promote more "complete" markets and improve well-being.
Such a vision is ambitious. Some of these aspects may not be possible. But the potential gains are enormous. Therefore, we should do everything possible to make it a reality. The good news is that many of the technologies needed to achieve a better financial system already exist. We can represent financial assets – whether they are money, stocks, bonds, real estate, or insurance contracts – in numerical form. We can send these assets around the world at the touch of a button. We may also use digital tools to instantly and conclusively verify that the individuals and businesses involved in the transaction are complying with all relevant laws and regulations.
What we lack is the means to bring together the various components of the financial system. The financial ecosystem contains many moving parts. Individual actors trying to break down barriers and optimize efficiency face a vast array of legal, regulatory, and institutional barriers. The benefits of a more efficient financial system will be widely distributed, especially by reducing costs, providing more choice, and improving services for individuals and small businesses. However, the rental income that sustains the existing barrier is quite concentrated.
As a result, changes to the financial system, when they are finally implemented, tend to be gradual and piecemeal. Improvements in processes, systems, and infrastructure are constrained by the need to consider legacy architectures that are not moving as quickly. Therefore, there is every reason for public authorities to play a catalytic role in working with private sector partners to build a complete financial, technological and governance architecture that will enable the birth of the financial system of the future (see Box A).
The "Unified Ledger" is an essential component of the financial Internet and a promising tool to turn our vision of an efficient future financial system into reality. These are digital platforms that bring together multiple markets for financial assets, such as wholesale tokenized central bank currencies, tokenized commercial bank deposits, and other tokenized assets, including company stocks, corporate or government bonds, and real estate, as executable objects on a programmable platform. In this way, the unified ledger will provide an economic and financial framework to realize the full potential of tokenization and other emerging financial technologies, underpinned by strong legal and governance arrangements and modern technology support.
Once assets are recorded on the ledger, they can be transferred immediately, securely, and reliably, reducing reliance on external verification processes or the information systems that make today's financial system so expensive, slow, and in some cases unreliable. Based on a digital-first approach, utilizing tokenization, the unified ledger will improve existing financial transactions, making them cheaper, faster, and more secure. They will also enable entirely new financial products and transactions.
While the financial internet, including the unified ledger, offers benefits to all economies, the benefits are particularly pronounced in emerging market and developing economies (EMDEs). These are the most currently most restricted jurisdictions for access to and use of financial and payment products. They are also the areas that have the greatest benefits from new opportunities to leverage new technologies to expand participation in economic activity and provide individuals with investment, protect themselves through insurance, and ensure the safe custody of their assets.
Bridging the gap between vision and reality will be a challenge. Coordination problems and vested interests that impede the improvement of existing financial infrastructure also need to be overcome in order to deploy entirely new systems. Institutions seeking to facilitate the development of a unified ledger and related financial architecture will need to decide where to start and how to make the necessary compromises to move things forward without sacrificing greater future gains. However, the existence of these challenges is not a reason to postpone action. On the contrary, it increases the urgency to take the first step, starting by experimenting and exploring alternative methods.
In this article, we present a blueprint to help both public and private institutions take the first step. In the second part, we begin by articulating our vision for the financial internet and describing how recent advances in digital technology can help make this vision a reality. In the third part, we describe the economic case for a unified ledger – a tool that promises to turn our vision of the future financial system into reality – and the technical, regulatory, and legal building blocks needed to integrate the ledger. The fourth part presents eight basic design considerations that we believe must be a core part of the financial Internet. Nevertheless, we admit in advance that there is no one-size-fits-all solution. Each jurisdiction needs to chart its own path to build the financial internet based on its own laws, regulations, and the state of the existing financial system. Part V summarizes.
Box A: There's never been a better time for the financial internet
The financial services industry is at a critical juncture of change and is being influenced by a combination of trends. These trends are expected to reshape the way more than 8 billion individuals and 300 million businesses access and interact with the financial ecosystem. These trends present both opportunities and challenges, and nuanced, forward-looking policy and technology frameworks are needed to realize their potential. Historically, the convergence of fundamental technologies and trends, such as the combination of mechanization, steam power, and mass production during the Industrial Revolution, or the convergence of the Internet, Global Positioning System (GPS), and smartphones in the digital age, has created new platforms for innovation. This has led to a major transformation in the social and economic structure of humanity. We believe that the financial services sector is also on the threshold of similar opportunities. This is driven by the following factors:
1. Increased economic ambition and engagement of individuals and businesses: The rise of the digital age has amplified the economic ambitions and capabilities of individuals and businesses. It has also raised expectations for more accessible, personalized, cost-effective and efficient financial services. The formalization of informal activities, the increase in entrepreneurial ventures, and market participation reflect a wide range of financial needs and applications. This expanded pattern of economic activity requires a robust financial system that is strong enough to support the evolving and diverse needs of a connected, digitally empowered population.
2. Regulators' clear intentions: Regulators have a clear intention to harness the potential of financial innovation in a safe and controlled manner. This is reflected in open finance, open banking, tokenization of central bank money, regulation of digital assets, the introduction of faster payment systems, and many other initiatives across multiple jurisdictions. While most of these initiatives start with a broader vision, they tend to become siloed when implemented. Therefore, there is a need for an architecture that supports a unified approach. This ensures that the initial broad vision is effectively realized.
3. Universal access: The ubiquity of smartphones and the expansion of internet access are key to democratizing access to financial services, enabling digital applications and providing a user-centric experience to a wider range of people. While smartphones and internet connectivity will drive the adoption of digital-first solutions, the application of the financial internet can be accessed in a variety of ways, including feature phones and assisted modes, ensuring that no one is left behind.
4. Advances in cryptography: Recent advances in cryptographic methods and techniques have significantly improved the capabilities of the financial system, providing features such as programmability, immutability, composability, interoperability, and verifiability. When these technological advancements are put to good use, they can enable more secure, efficient, and seamless interactions between different financial platforms and systems.
5. Advances in computing and artificial intelligence (AI): AI is on the verge of revolutionizing financial services, enhancing identity verification, fraud management, underwriting, and advisory services. Advances in cloud computing and other computing technologies have made it possible to develop sophisticated AI tools. These technologies, including voice-based interfaces and multilingual experiences, are breaking down traditional barriers, making financial services more widely accessible to a wider audience, including people with disabilities or non-native speakers, and ensuring an inclusive financial ecosystem. The advent of large language models and other forms of generative AI is a major technological advancement, and cloud infrastructure plays a key role in processing and analyzing large amounts of data. This development of AI can transform the financial system, especially when it comes to fraud detection, where AI models can quickly identify and respond to suspicious activity for enhanced security. Generative AI can streamline many back-office tasks, reduce costs, and reduce processing time for activities such as document scanning, transcription, data entry, customer request filtering, and text summarization. In addition, AI's ability to detect novel data patterns can help financial institutions better understand customer needs and creditworthiness. It also streamlines compliance processes such as know-your-customer checks, reducing costs and increasing speed and accuracy.
A vision for a more technologically advanced financial system
The financial system is at the heart of the modern market economy. They are places for individuals and businesses to save, borrow, invest, and self-insure. When financial systems operate efficiently and affordably, they achieve two main goals. First, they provide individuals with the means to safeguard their financial well-being. Second, they devote financial resources to creating economic activities, which are essential to stimulate new ideas and innovation. A well-functioning financial system contributes to growth and development, benefiting all members of society. In contrast, a poorly functioning financial system can harm a country's economic performance and, more importantly, the well-being of its citizens.
Improving the functioning of the financial system is therefore an important public policy objective. Technological advancements can bring the financial system closer to people and businesses at a lower cost and with greater efficiency. But technology alone is not enough. It needs to be combined with efficient economic and financial architectures and sound governance and regulatory arrangements. To assemble these three components, it is essential to have a clear vision of what the financial system should offer. In this section, we begin by describing what we see as the main flaws of the current financial system. We then explain how technology can help overcome many of these shortcomings. Finally, we present a vision of the financial system of the future.
2.1 Inadequacies of the current financial system
In many ways, today's financial system still serves the past, not the future. It has a number of flaws. Many defects can fall into three broad categories: speed, cost, and availability reduction.
Speed: The financial system is too slow
The dramatic increase in the speed of information flow and communication has changed many aspects of daily life, but these changes have not left a corresponding imprint on the financial system. Admittedly, retail payments have improved, with the introduction of faster payment systems being a notable example (Aurazo et al (2024), Bech et al (2020), Frost et al (2024)). But these are the exceptions. Many financial asset transactions, such as those involving stocks, bonds, or real estate, still take days to settle, making them difficult, if not impossible, for many individuals.
Outdated clearing, messaging, and settlement systems are a major source of delays. Even when individuals use advanced front-end interfaces for so-called "digital" transactions, the movement of funds and other financial assets behind the scenes often relies on owners with siloed proprietary databases to initiate and process transfers. These databases often operate under different technical standards and governance arrangements, connected by third-party information systems, which may not interact smoothly. In some cases, it is still necessary to exchange physical contracts. Especially in cross-border transactions, differences in time zones and business hours can further slow down the process.
Cost: The cost of the financial system is too high
Meeting regulatory requirements, such as anti-money laundering and countering the financing of terrorism (AML/CFT) regulations, is another source of delay. These regulations are certainly crucial in their own right, designed to deter illegal activities and preserve the integrity and stability of the financial system. However, the implementation of these regulations is often manual, customized, and inefficient. For example, customer authentication may be repeated multiple times in the same transaction. The resulting inefficiencies can affect individuals and businesses that trade legally, just as badly, as they do those who trade illegally. These compliance costs are rapidly increasing due to the increased complexity of the criminal threats to the system and the increased regulatory expectations.
Slow transactions are costly transactions. Particularly in emerging market and developing economies (EMDEs), delays between trade execution and settlement can tie up working capital, forcing companies to hold large cash reserves or rely on expensive forms of borrowing, such as credit cards, to stay afloat. For individuals, long waits for wages and government transfers to reach their bank accounts can force them to seek short-term loans, which often come with high interest rates. Settlement delays also create what is known as "counterparty risk", which is the risk that one or more participants will not be able to provide money or financial assets to perform the transaction. In order to mitigate these risks, participants in financial transactions are often required to provide collateral, which also comes with their own financial costs.
Manual processes can also lead to errors. Relying on external verification and information systems means that participants in financial transactions often do not have full visibility into the actions of other parties and are unable to track the progress of their own payments in real time. Extensive auditing, compliance, and other back-office costs are required to monitor and confirm the progress of payments and other financial transactions. Errors or inconsistencies in information between financial institutions may go undetected and subsequently take time to resolve. This also imposes costs on users of financial services.
Lack of competition is another source of cost. Some of these costs are obvious, in the form of high prices or service charges. This cost is especially significant for individuals and businesses making small transactions or cross-border payments. For example, the cost of sending cross-border remittances averages 6.3% of the total amount disbursed (FSB (2023), World Bank (2023)). Other costs are less apparent, such as poor quality of service or hindered innovation.
Access and availability: The scope of financial services and products is too limited
Slow systems, high costs, and a lack of competition ultimately limit the range of financial services offered. For example, high costs may make certain financial services uneconomical in some areas, particularly rural and low-income areas. The contraction of cross-border banking communication networks in recent decades is a case in point. The lack of choice leads individuals to make sub-optimal choices, such as keeping a large balance in a cash account with a low interest rate or, as mentioned above, relying on expensive forms of credit, such as credit cards, for borrowing.
In many cases, difficult geographical conditions and outdated technology also hinder access to financial services. In some emerging market and developing economies (EMDEs) with relatively poor transport links, even basic financial services, such as the provision of physical banknotes and coins, may be lacking (Jahan et al (2019)). The deployment of digital financial services, which complement existing services, accessed through mobile phones and other electronic devices, offers the prospect of overcoming many of these geographical challenges. But in many jurisdictions, these services are still limited to a relatively basic set of financial assets and services.
There are also huge hidden costs, meaning that potentially valuable deals and products never materialize. To cite just one example, trade finance procedures – which can lead to significant delays between the production of goods and services by businesses and the receipt of payments – can be greatly simplified through the use of smart contracts to enable conditional or partial payments (4). However, such contracts are difficult to implement in today's financial system, and may even be impossible. This represents a significant ineffective loss of economic opportunity. As a result, the market is unnecessarily incomplete. Incomplete markets are not conducive to improving welfare.
In extreme cases, individuals may not have access to financial services at all. Despite considerable progress in recent decades, 1.4 billion adults are still excluded from the financial system (Demirgüç-Kunt et al (2022)). Even if they have some access, their level of participation in the financial system tends to be limited.
According to the World Bank's Findex database, while 76% of adults have a trading account, only 55% have a debit or credit card, and 59% made digital payments in 2021. Access to credit and savings is even more restricted, with only 28 per cent of adults borrowing from formal financial institutions and 29 per cent saving money in the financial system.
Lack of financial services is particularly acute in emerging market and developing economies (EMDEs) (Figure 1.A). Only a quarter of adults in these regions use a savings account, and about half borrow – more than half of them from informal sources (Demirgüç-Kunt et al (2022)). In some regions, such as Latin America and the Caribbean (Figure 1. b), and even lower access to credit or savings products in certain demographic groups, such as those defined by age, gender or education level. At the same time, small businesses in EMDEs often lack sufficient credit to support working capital. Lack of access to retail investment and insurance limits households' ability to build wealth or build resilience. In most EMDEs, per capita premiums ("insurance density") are less than $1,000/year, and insurance premiums relative to GDP ("insurance penetration") are less than half the levels of advanced economies (AEs) (Figure 1.C).
Lack of access to financial services reduces the level of welfare. A measure of financial health – defined as the degree to which an individual or household successfully manages their financial obligations and has confidence in their financial future – is much lower than advanced economies (AEs) among emerging market and developing economies (EMDEs) (Figure 2.A; Cantú et al (2024)). Limited access to financial services hinders individuals' ability to manage risk and save for the future (Dupas et al (2013)). It also inhibits growth and development by weakening the ability of small businesses to invest in productive activities (Banerjee and Duflo (2014)). Ultimately, access to credit and financial services is critical to empowering individuals to escape poverty and enhance overall economic inclusion by investing in human capital and other income-generating activities.
This access to financial services is directly related to the economic vitality of societies and the economic autonomy of individuals, which in turn affects the inclusive and sustainable development of the entire economy. Therefore, making the financial system more inclusive and efficient can not only improve the quality of life for individuals and families, but also bring broader economic benefits to society as a whole.
2.2 Technology-Driven Opportunities
Recent technological innovations have the potential to overcome many of the shortcomings of today's financial system.
Some progress has been made. In many jurisdictions, smartphones have facilitated payments and reduced transaction costs. Digital identity systems make it easier and cheaper to open a bank account (D'Silva et al (2019)). Digital credit is underpinned by the use of alternative data, such as rapid response (QR) payments and data generated by quick payments. This has brought benefits to individuals and small businesses (Beck et al (2022)) and expanded access to credit through alternative collateral (Gambacorta et al (2022), Aurazo and Franco (2024)). At the same time, novel retail investment and insurance platforms have created new ways for individuals to build wealth and diversify risk. In some countries, faster payment systems have become a key innovation. The rapid adoption of these systems provides lessons for other emerging financial technologies (see Box B).
The benefits of these innovations are clear. Overall, there is a positive correlation between the use of borrowing and savings products and measures of financial health (Figure 2. B）。 The wider use of digital payments is associated with a lower degree of economic informalization, i.e., a smaller share of the "shadow economy" (Figure 2. C）。 This may reflect the use of digital payments to merchants and digital payment payroll in creating data trajectories, helping to formalize previously unrecorded (cash-based) activities (Aguilar et al (2024)).
Box B: Faster Payment Systems: Lessons from Digital Public Infrastructure
The Faster Payment System (FPS) currently serves households and businesses in some 119 jurisdictions, while in other regions, authorities plan to implement FPS in the coming years. The level of success in the adoption and use of FPS varies from region to region, and the role of central banks varies, whether they are catalysts, regulators, or operators.
Recent experience has shown that certain design features of FPS are particularly important to inspire user adoption (Frost et al (2024)). Thailand's PromptPay, India's Unified Payment Interface (UPI), and Brazil's Pix are three prominent examples that have been notably successful in driving the adoption of digital payments (Figure B1.A), and they have also facilitated private sector innovation and the entry of new payment service providers (PSPs) (Figures B1.B and B1.C). These FPSs share several common characteristics: (i) user-centric design that covers multiple use cases, (ii) robust settlement infrastructure, (iii) participation rulebooks, such as mandatory participation by large banks, and (iv) a strong governance framework that includes the public sector, especially central banks. In addition, these FPS include open application programming interfaces (APIs) and aliases (e.g., mobile phone numbers) to initiate transactions, as well as low transaction costs.
It is worth noting that both UPI and Pix leave room for private sector (non-bank) involvement. In fact, UPI payments (developed by the Reserve Bank of India and the National Payments Corporation of India) only really started gaining popularity in 2018 after allowing third-party app providers (now dominant) to connect. The private sector has played a vital role in bringing UPI to financial exclusions, through innovations such as Integrated Quick Response (QR) codes and audio-based payment confirmations for small merchants in areas with poor internet connectivity. Pix is also encouraging private sector innovation by adopting a standardized API mandated by the Central Bank of Brazil, enabling merchants to integrate Pix payments into their online shopping experience via QR codes. In addition, innovators utilize Pix QR codes to pay for tolls and gain access to private buildings.
These examples highlight the importance of regulatory oversight and private sector engagement in achieving public policy objectives.
Although these innovations have been very successful, their widespread use is still limited to a small number of jurisdictions, albeit in growing numbers. The wider adoption of these technologies still has the potential to bring further benefits. At the same time, other technological innovations that have not yet entered the mainstream offer the prospect of further progress.
Tokenization is a prime example. Tokenization involves generating digital representations of financial or physical assets that exist on a programmable platform (Aldasoro et al (2023)). Traditionally, financial systems have separated databases that record financial assets, such as land ownership registers or bank customer deposit records, from governance rules and applications that allow users to trade those assets, such as e-banking applications. Tokenization eliminates the distinction between the two, as all the information needed to trade financial assets, such as ownership, rules and logic governing transfers, is stored in one place. This greatly simplifies the mechanics of trading assets, while also enabling more complex pre-programmed and conditional asset transfers, which would not be feasible in a non-tokenized environment.
The adoption of tokenized financial assets can alleviate many of the bottlenecks that exist in the current financial system. Tokenization has fundamentally reshaped the process of financial transactions. Instead of a long, complex sequence of information transfers between financial institutions, the tokens themselves are transacted, accompanied by all the ownership, value, and regulatory information, which is often recorded in a database.
While tokenization does not eliminate the role of intermediaries, it changes the nature of intermediaries. Intuitively, intermediaries in a tokenized environment primarily play a governance role, acting as managers who manage the rules for token transfers, rather than bookkeepers who record individual transactions on behalf of account holders. By reducing reliance on clearing and information systems, tokenized assets allow for atomic settlement—i.e., simultaneous and simultaneous settlement of multiple links of a single financial transaction—thereby reducing counterparty risk and reducing collateral requirements. Programmatic can also make some conditional financial transactions feasible in today's financial system. Tokenization also provides a greater scope for composability, i.e., bundling several transactions into one executable package. Such features open the door to the development of entirely new financial products that help individuals and businesses save, invest, and insulate. In conclusion, tokenized financial assets will provide individuals and businesses with faster services, lower costs, and more options than traditional options.
The advent of large language models and other forms of generative artificial intelligence (AI) is another technological advancement that could have a significant impact on the financial system. The application of AI models has the potential to bring about a qualitative leap in the amount and type of data that financial institutions can process. Generative AI, in particular, can simplify many background tasks, reducing costs and processing time. For example, scanning, transcribing, or verifying documents, data entry, sifting through customer requests, or summarizing text can all be done more efficiently with the support of AI. AI models can identify previously undiscovered patterns in data, helping financial institutions more accurately predict customers' financial needs or borrowing capacity. In addition, AI models can also help financial institutions automate compliance procedures, such as Know Your Customer (KYC) checks, significantly reducing costs while increasing speed.
But technology is not an end in itself. The benefits of tokenized assets and other forms of financial innovation are limited, as long as the assets remain siloed. For example, trading tokenized assets with non-tokenized assets still requires a range of information to connect tokenized and non-tokenized systems. Clearing and settlement can still be subject to long delays and failure points. In addition, such a transaction may not even take place if the legal and regulatory framework governing tokenized assets is not in place. To unlock the full benefits of tokenization, it is necessary to centralize multiple tokenized assets on a common platform, supported by a robust governance and regulatory framework. However, this is much more ambitious than simply providing existing financial assets or services in the form of more advanced technologies. So, in order to move forward, one first needs to identify the specific goals that one wants to achieve. That is, the vision of the future financial system needs to be pursued. We're going to move on to that vision next.
2.3 The Financial Internet: A Vision for the Future Financial System
We proposed the concept of the Financial Internet (Finternet) as a vision for the future financial system. This vision includes a network of interoperable financial ecosystems, with individuals and businesses at the center of their financial interactions. The system is based on three foundational pillars: (i) an economically sound structure, (ii) the integration of advanced technologies, and (iii) a robust regulatory and governance structure.
The design of the economic architecture should put the user at the center. Individuals and businesses should have the greatest possible control over their financial transactions and when and how they are transacted. Financial services should be cheap, secure, reliable, and easily accessible.
To achieve this vision, the financial system needs to make the most of innovative technologies to enhance the user experience. At the same time, it cannot be dependent on a specific technology platform, architecture, or data standard. Technology will continue to advance, so the financial system needs to be able to adapt to technological advances. Within this flexibility, it should give users the ability to interact with financial services through a variety of devices and interfaces. This paper proposes an approach to integrate basic technical features such as interoperability, verifiability, programmability, modularity, scalability, security, and data empowerment. Adoption of the system can be done in stages, allowing different players to integrate and put into use at their own pace. This phased approach adapts to the different readiness and capacities of the various entities within the ecosystem, ensuring a smooth transition to the new financial framework.
Promoting user choice also means dismantling the barriers and silos that exist in the current financial system. Rather than relying on slow clearing and information systems, minimum trade values, manual processes, and delayed settlements, individuals should be given control over the financial assets they trade, the amount of transactions, and the timing of transactions.
An open and efficient financial system should promote strong competition, encourage new entrants and maintain the flexibility of existing service providers. This will foster continuous innovation within the financial industry and reduce costs for consumers. In order for users to take full advantage of this competitive environment, it is necessary to ensure that individuals have control over their financial data, including support for multiple verifiable identities to enhance privacy while maintaining accountability.
Not everything needs to change. Many of the key foundations of today's financial system, such as the two-tier structure that clearly defines the roles of the public and private sectors, should remain unchanged. Central bank money should continue to serve as a credible foundation for the financial system, and the settlement of wholesale central bank money on the central bank's balance sheet should be the determinant of the finality of financial transactions. Commercial banks should continue to play a key role as intermediaries between depositors and investors, as well as providers of money for commercial banks. But even in these cases, the assets provided by these institutions to the public should be represented in more advanced technological forms, such as wholesale tokenized central bank money and tokenized commercial bank deposits.
Sound governance remains crucial. To maintain the security and integrity of the financial system, all participants are expected to fully comply with all regulatory and legal obligations. This includes taking steps to protect personal privacy and trade secrets. Here, the application of technology will be a key enabler of safety, speed, and efficiency.
Public authorities will play an important role in the financial system of the future. By developing digital public infrastructure, they can establish platforms, rulebooks, and regulatory protections to provide an open and efficient financial system (see Box C for lessons on digital public infrastructure in India). As a central bank money provider, they will continue to provide the underlying assets of the entire monetary and financial system. With this infrastructure and regulatory foundation, private institutions will have the freedom to compete and innovate to deliver better, faster, and cheaper services to their clients.
In addition, the role of public authorities is not limited to providers of regulation and infrastructure, but also includes the role of stimulating and promoting financial innovation. By participating in the development and implementation of norms and policies that meet the needs of contemporary financial markets, public institutions can help shape healthy, transparent, and highly adaptable financial ecosystems. In this ecosystem, innovation is not only allowed, but encouraged, while maintaining the security and robustness of the system. This collaborative and supportive environment is essential to unlock the potential of the private sector to drive overall improvements in financial services and the growth of people's wealth.
Box C: Lessons from India's Digital Public Infrastructure
The implementation of Digital Public Infrastructure (DPI) highlights the far-reaching impact that interoperability, a unified approach, universality, evolvability, user-centricity, and modularity can have in the financial ecosystem. As recognized by the Global Partnership for Financial Inclusion under the G20, DPI plays a key role in enhancing access, use, and quality of financial services, driving innovation and competition. This framework will briefly review some examples from India (see Alonso et al (2023), Ardic Alper et al (2019), D'Silva et al (2019) and Tiwari et al (2022)).
Aadhaar: Issued to more than 1.3 billion individuals through its biometric-based, verifiable identity mechanism, Aadhaar embodies ubiquity and user-centricity. By facilitating the onboarding process for customers who don't need to be physically present, Aadhaar reduced transaction costs from $15 to $0.07, expanding access to bank and non-physical accounts across the board. This infrastructure has dramatically accelerated financial inclusion in just nine years, enabled universal bank accounts, and bridged traditional gender and age disparities in financial participation – a task that would otherwise take decades to complete.
Unified Payments Interface (UPI): As a model of interoperability and a unified system established by the Reserve Bank of India and the National Payments Corporation of India, UPI has revolutionized digital payments, enabling integrated transactions across person-to-person, person-to-merchant, and government-to-person (see Box A). UPI facilitated 117.6 billion transactions ($2.2 trillion) in 2023, highlighting the scalability of digital payment systems and the critical role of digital payment infrastructure in democratizing financial services and promoting inclusion. Leveraging Aadhaar and digital payments, India's Direct Benefit Transfer (DBT) not only optimized the delivery of benefits programs, but also achieved significant fiscal savings by reducing vulnerabilities by more than $30 billion.
Account Aggregator (AA): The AA system advocates for user-centricity and modularity, giving individuals and entities sovereign control over their financial data. This enables individuals to use their data as "digital capital" to access financial services. Since its launch, AA has facilitated more than $2.4 billion in loans, demonstrating the potential of consent-based, machine-readable data to expand financial inclusion and reduce fraud. This is an example of how multiple financial regulators (Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, Pension Fund Regulatory and Development Authority of India, and Ministry of Finance, India) and market players (through the Sahamati Foundation) have joined forces to drive an interoperable and unified ecosystem across multiple sectors to serve users.
Open Networks: The implementation of Open Exchange Networks (OTNs) such as Digital Commerce (ONDC) through Open Networks, especially in commerce, mobility, and other areas, reflects lower transaction costs and barriers to entry, thereby fostering an environment conducive to innovation, competition, and market expansion. ONDC, based on the Beckn Protocol, is a pioneer of a major shift in the transactional economy, demonstrating how open, protocol-based systems can fundamentally change market dynamics and foster inclusive growth.
Together, these DPI components highlight the benefits that can be achieved through the strategic application of the underlying digital principles highlighted in this article. For policymakers, these examples provide strong evidence of the dramatic and far-reaching successes that can be achieved in financial inclusion and the broader economic landscape. These achievements can be achieved through a deliberate implementation of digital infrastructure.
From vision to reality
In this section, we outline a promising tool that can lead us to achieve this goal: a token-based financial system, backed by a unified ledger. We begin by describing the concept, its economic and financial rationale, and the underlying technical architecture. Following this high-level conceptual overview, we will elaborate on what the architecture of the financial Internet might look like in practice. Finally, we discuss the regulatory, legal, and governance issues that authorities need to address for a unified ledger and the broader financial internet to function effectively in a real-world environment.
3.1 Unified ledger as a tool for improving the financial system
The unified ledger provides a "common place" (i.e., a shared, programmable platform) where digital currencies and other financial assets coexist. They are designed to provide a qualitative leap over the existing financial infrastructure by seamlessly integrating transactions and opening the door to entirely new types of economic arrangements.
The concept of a unified ledger does not mean "one ledger rules everything" – a single ledger that contains all financial assets and transactions in the economy. Depending on the needs of each jurisdiction, multiple ledgers can be coexisted. Application programming interfaces (APIs) can connect these ledgers to each other, as well as to other parts of the financial system beyond the financial internet. The functionality of individual ledgers may evolve over time, and ledgers may even be consolidated as the scope overlap expands.
The role of the Unified Ledger may also vary from jurisdiction to jurisdiction. In economies where individuals already have access to a wide range of relatively efficient and competitive retail financial services, the primary role of a unified ledger may initially be to improve the efficiency of wholesale financial services. In jurisdictions with lower levels of financial inclusion, particularly in many emerging market and developing economies, the unified ledger may be more focused on retail.
Unified Ledger has two defining characteristics. First, they combine all the components needed to complete a financial transaction – financial assets, ownership records, rules governing their use, and other relevant information – in one place. Second, money and other financial assets exist as executable objects on the ledger. This means that they can be electronically transferred using pre-programmed "smart contracts". Together, these design features enable individuals and businesses to transfer money and other assets securely and reliably, reducing the need for external authentication and verification processes, or reliance on external clearing, messaging, or settlement systems.
The structure of the financial Internet can be described in terms of a series of building blocks (Figure 4). The unified ledger itself will contain digital representations of central and commercial bank currencies and other tokenized financial assets. In a given ledger, different types of assets will exist in separate partitions owned and operated by their respective operating entities, which we call token managers. The ledger will also include information required for operations, such as data needed to ensure the secure and lawful transfer of money and assets (such as digital identities and laws, regulations, and rules governing transactions), as well as real-world information from outside the ledger. At the same time, a diverse ecosystem of trust and value service providers will help verify the identity of system users and their financial assets, and remain secure.
Individuals and businesses will interact with the ledger through the app. These applications can exist in many forms and allow users to transact within a single ledger, between ledgers, or with assets that exist outside of the financial internet. For example, an individual's e-banking application might record tokenized deposits that exist on a unified ledger while recording non-tokenized deposits that exist in a traditional database. These applications will allow users to execute transactions directly, or through smart contracts, allowing for greater flexibility and customizability than the current financial system offers.
This expansion of the way we interact means that the provision of financial services will be more flexible and responsive, better able to adapt to the specific needs of individuals and businesses. For example, smart contracts can automatically execute trades based on preset conditions, such as automatically buying or selling a stock when a certain price point is reached, or automatically triggering a loan when a certain financial metric is met. This ability to automate and pre-program greatly enhances the efficiency and precision of financial transactions.
In addition, since these apps provide a unified interface, users can easily manage and track their holdings of various types of assets, whether traditional or tokenized. This transparency not only gives users more control over their financial health, but also helps them better understand and utilize their financial resources.
Overall, through these applications, the Financial Internet provides individuals and businesses with a more dynamic, connected, and user-friendly platform for financial services, thereby driving innovation in financial technology and financial inclusion.
Although the unified ledger can contain any financial asset in principle, tokenized money is a core requirement. Money provides the basic unit for representing transactions and, as a means of payment, it represents one of the parties to almost all financial transactions.
In today's financial system, the monetary system of the unified ledger system will have two levels. Central bank money represents the first tier, and commercial bank money represents the second tier. The settlement of the accounts of commercial banks on the balance sheet of the central bank is the final guarantee of the finality of any financial transaction. Therefore, wholesale central bank money is the necessary basis for any unified ledger. Tokenized wholesale central bank money will play a role similar to that of a reserve in today's financial system, but with the enhanced functionality that comes with tokenization. Some central banks may also choose to issue tokenized central bank money in retail form – the digital equivalent of today's paper money – to provide users with additional options.
Commercial bank money will exist in a unified ledger in the form of tokenized deposits. These assets will provide a natural retail complement to wholesale tokenized central bank money. As with today's financial system, commercial bank money will serve as the primary means of payment for most individuals and businesses. It will be supported by the same institutional arrangements as existing ones, including supervision, supervision, deposit insurance, and settlement on the central bank's balance sheet, thus ensuring monetary unity.
In addition to the currencies of central banks and commercial banks, the unified ledger can, in principle, contain an almost unlimited variety of other financial and non-financial assets. All that is required is that these assets exist in tokenized form. There are costs involved in tokenizing assets as well as benefits. One can think of tokenized candidate assets as being on a continuum (Figure 5; At one end of the spectrum are asset systems that require frequent manual workflows and have complex legal and regulatory frameworks. Residential real estate may be an example. Tokenizing these assets will face multiple challenges, although the potential benefits of doing so successfully will be significant. At the other end of the spectrum are financial assets in digital, mostly automated systems with streamlined processes and clear legal and regulatory frameworks. Government bonds are an example of such assets, at least in advanced economies. While these assets have the lowest cost of tokenization, the benefits they may bring are smaller than some others, as they are already relatively fast, cheap, and convenient to trade. The portfolio of assets present on the unified ledger may evolve over time. It may also vary depending on the specific needs of each jurisdiction, as well as its institutions and legal arrangements.
To understand the transformative possibilities of a unified ledger, consider a simple financial transaction: Maria decides to buy a security (such as shares in a company). In today's financial system, this seemingly basic transaction will require a complex exchange of information between multiple parties (Figure 6). Maria would start the process by contacting her agent. The broker will then buy the shares or direct the trade through a market maker. At this point, several other parties may need to be involved to execute and settle the transaction. For example, a central securities depository would be responsible for the electronic management of securities. They in turn must verify the identity of the participants in the transaction and ensure reconciliation with relevant third parties (e.g. clearing agents) and confirmation of what is being settled. A similar process will occur on the other side of the transaction for the seller. This "billing cycle" can take several days, and a lengthy chain of information creates multiple points of failure.
In a unified ledger system, the situation is very different. All relevant transaction data and asset information, such as ownership, transaction rules, and execution logic, will be stored on a unified ledger, so it can be processed and settled instantly on a shared, programmable platform. Here's how a unified ledger system might simplify the process:
1. Instant processing and settlement: Maria's transactions can be completed at the moment the order is submitted, as the Unified Ledger updates ownership and transaction status in real-time. This reduces transaction delays and the complexities associated with traditional clearing and settlement processes.
2. Fewer Parties: Since all the necessary transaction and ownership information is in the same place, the need for multiple intermediaries and verification steps can be reduced or eliminated. For example, there is no longer a need for a central securities depository to manage and confirm securities separately, as the unified ledger itself provides this functionality.
3. Increase transparency and reduce points of failure: A unified ledger provides a more transparent system where every step of a transaction can be monitored in real-time by all parties involved, reducing information asymmetry and potential misunderstandings or errors.
4. Utilize smart contracts: Transactions can be executed automatically through smart contracts that can be programmed to automatically trigger and complete transactions when certain conditions are met, such as automatic purchases when the price of a stock reaches a specific level that Maria is willing to pay.
5. Cost Reduction: By reducing the need for intermediary services and related administrative processing, a unified ledger has the potential to significantly reduce transaction costs and make financial services more cost-effective.
In these ways, the unified ledger not only simplifies the financial transaction process, but also improves efficiency and security, providing participants in the financial markets with a faster, more straightforward, and less costly way to transact.
In addition, the transfer of securities is only one part of the transaction. Another part of the transaction will involve the banking system (Figure 7). As part of the stock transaction, Maria sends a payment request to her bank, which is called Bank A (step 1). The bank responds by deducting the transfer amount and any fees from Maria's account (step 2) and sends a payment instruction to the settlement system (step 3). The settlement system debits the settlement account of Bank A and credits the bank of Maria's broker, i.e. the account of Bank B (step 4). It then sends a credit note with a reference number to Bank B (step 5). Next, send a confirmation with a reference number to Bank A (Step 6). Bank B must ensure that Maria's broker has an account and perform any KYC or AML/CFT checks (step 7). If any of these checks fail, then Bank B will need to send a reversal request to the settlement institution (step 8a). Otherwise, Bank B will credit Maria's broker's account (step 8b) and send a message confirming the account adjustment (step 9). In some systems, additional approval and confirmation messages are required (steps 9 and 10). If Maria and her agent live in different countries, there will be multiple correspondent banks involved. Each message takes time, creating a delay between the execution of the transaction and the settlement. A single failure at any point in the chain is enough to prevent a transaction from being completed. In fact, any action that has been taken must be undone, which is a costly process that involves manual work.
In a unified ledger system, this situation will be greatly simplified. All relevant transaction data and asset information, such as ownership, transaction rules, and execution logic, will be stored on a unified ledger, so it can be processed and settled instantly on a shared, programmable platform. This will dramatically reduce the number of steps required, eliminate communication delays, and reduce the likelihood of errors or failures. For example, Maria's payment instructions can be executed directly in the unified ledger in the form of a smart contract, allowing the transfer of funds from her account to the broker's account to be completed in real time. This straightforward and automated processing not only improves efficiency, but also enhances the security and reliability of transactions, reducing the complexity and potential errors that are common in traditional financial transactions.
Now, let's consider how this transaction will proceed on the unified ledger. All the assets involved in the transaction – the securities being traded, the bank accounts of Maria and her brokers, and the reserves held by the bank in the central bank – can, in principle, exist on the same ledger. In addition, these assets will be tokenized so they can be programmed. Normally, all the information stored in the database of a financial institution is contained in the token and can be modified through a smart contract. The execution of the transaction will prompt the simultaneous movement of stock tokens to Maria's digital wallet, a change in the number of tokenized deposits in Maria's account, and a transfer of wholesale central bank money from Maria's bank to the bank of the individual who sold her securities (Figure 8). If all assets exist on the same ledger and are governed by a common set of governance arrangements and security protocols, the need for information flow will be greatly reduced, and the execution, clearing, and settlement of transactions will take place simultaneously.
This kind of transaction on the unified ledger brings several key advantages:
1. Instantaneity and synchronicity: The execution, clearing, and settlement of transactions can occur in near real-time, eliminating the delays that occur in the traditional financial system due to waiting for multiple steps to complete.
2. Reduce intermediaries: Since all transaction data and asset information are stored directly on a unified ledger, there is no need to transfer funds and information through traditional banks and other financial institutions as intermediaries.
3. Enhanced security: With a unified security protocol and governance structure, transactions and assets can be more effectively secured and the risk of fraud and errors can be reduced.
4. Cost Reduction: Reduces the need for multiple intermediaries and formalities common in traditional financial transactions, thereby reducing transaction costs.
5. Improved transparency and traceability: Records of all transactions are kept in a unified ledger, providing a complete audit trail and enhancing the transparency and trust of transactions by regulators and users.
In this way, the unified ledger will not only provide a more efficient and secure trading mechanism, but will also spur further innovation in the financial markets, providing more flexible and customized financial services for individuals and businesses.
A unified ledger has the potential to solve many of the pain points in the current financial system.
Financial services will become faster, safer, and more transparent. With less reliance on external verification and information transfer, the delay between transaction execution (where the user agrees to buy or sell a financial asset or enter into a financial contract) and settlement (where the asset transfer actually occurs) can be significantly reduced. Eliminating lengthy information chains will also reduce the likelihood of errors in financial transactions. These transactions can now be recorded, tracked, and transferred on a single platform. In addition, if errors occur, they will be easier to identify and correct because the unified ledger creates a single, permanent, tamper-proof history of transactions, enhancing trust and transparency. In addition, all aspects of a financial transaction can be completed simultaneously and conditionally, i.e., the transaction will only take place if certain conditions are met.
Regulatory compliance will be simpler. The programmability of the asset will make it possible to embed compliance with relevant rules and regulations into the tokens and trading instructions in the system. In other words, the policy will exist as code. At the same time, verifiable digital identities and seamless data transfer across ledgers will greatly simplify the process of complying with KYC rules for financial institutions.
At the same time, a unified ledger can also enhance user privacy and control over data. The information of users and their transactions can be digitally protected. This information may only be shared with other users or financial service providers on a strictly "need-to-know" basis, subject to the user's consent.
In addition to improving existing processes, a unified ledger will also enable entirely new financial products. Enhanced efficiency and verifiability will make financial services that are not available in today's financial system viable, whether because they are too costly or because the information needed to provide them is too fragmented. Bringing multiple assets to a shared ledger will allow them to be combined in novel ways, giving users access to financial services that better meet their needs and desires. Services will also be more flexible, and the composability of asset tokens will make it easier for financial institutions to provide low-value services.
Box D: Use Cases for Unified Ledger and Tokenization
Many interesting real-world applications involve the tokenization of assets. These assets range from financial securities to physical assets such as commodities or real estate (BIS (2023)). This framework is designed to stimulate imagination of real-world applications of the Unified Ledger:
Investments and Government Bonds: Imagine an individual in India, Aarav, who discovers that investments, including government bonds, have been revolutionized by a unified ledger. This system democratizes access to financial assets, allowing Aarav and his family to own a fraction of the bond, allowing them to build wealth in their limited savings. This significantly expands the investor base and enhances market liquidity. The Genesis project at the Bank for International Settlements Innovation Center explores this potential in the context of green bonds.
Access to credit: Then consider Lee Min-su's small bakery in Seoul, a beloved local business. Tokenized lending apps can dismantle the financial barriers that have long hindered their development and reduce the cost of loan origination. Her loans are automatically managed, from disbursements to collateral management, with the help of alternative data to better insight into credit risk. This is not a distant dream, but the Dynamo project of the Bank for International Settlements Innovation Center is already moving in this direction.
Insurance: Imagine Carlos, a coffee farmer in Brazil, benefiting from the transformed insurance through an on-demand microinsurance policy offered on a unified ledger. These policies provide Carlos and his community with customized conservation plans that allow them to better cope with the uncertainties of agriculture. Dynamic insurance policies use real-time weather data and adapt to changing risk profiles, bringing hope and security.
Cross-border payments: Finally, imagine Sofia, a nurse from the Philippines who works in the United States. With the advent of tokenized currencies, Sofia is relieved to know that her hard-earned money can be sent home more efficiently, safer, and more economically than ever before. The process was seamless, ensuring that her family was supported in a timely manner. The Agorá project at the Bank for International Settlements Innovation Center is exploring how tokenized commercial bank deposits can improve the speed, cost, and reliability of cross-border currency transfers.
The story of Aarav, Lee Min-su, Carlos, and Sofia may just be the beginning of a new era brought about by the unified ledger and tokenization. This emerging technology sector promises to lead a future full of entrepreneurial innovation. The potential applications are limitless.
A unified ledger can also enhance financial inclusion, especially in emerging market and developing economies (EMDEs). By reducing costs, they will reduce the significant barriers that currently prevent many people from entering the financial system. By centralizing multiple assets in one digital location, they will enable individuals and businesses to take advantage of a wider range of financial services. Financial services will become more accessible – individuals holding tokenized bank deposits on a unified ledger will have easier access to other savings instruments. The presence of a physical infrastructure like a bank branch will no longer be such a restriction on access to financial services, as the unified ledger will exist in digital form and can be accessed in a variety of ways through a variety of devices. And, as individuals will be able to better control and share their data, the lack of verifiable identity documents or credit history will no longer be such a limitation on access to finance. Box D discusses potential use cases for Unified Ledger and highlights ongoing work to bring these use cases to life.
3.2 The actual construction of the financial Internet
Now, we're going to dive into some of the specific design and technical aspects of the financial internet. We start by providing an in-depth description of the unified ledger, which will serve as the core of the system. Then, we discuss the steps needed to secure the system.
User-centric financial internet
Universal access to high-quality financial services for our users is at the heart of our vision. This acquisition is only possible if users – whether individuals or businesses – are placed at the heart of financial interactions. The key attributes of such a user-centric system are summarized in Table 1, providing a blueprint for a digital economy that truly belongs to and serves users.
The financial internet represents all the key components and underlying technologies that come together to form a solution for a unified ledger and bring together users in a unified way. It builds on existing legal frameworks within countries and internationally, and serves as a digital extension of traditional legal frameworks. By aligning with laws and regulations, the financial internet adapts to the established principles of permissible behavior as well as the consequences of non-compliance, ensuring that operations comply with national and international standards. It leverages existing infrastructure, including identity systems, digitally signed certificate systems, connectivity, registries and registries, and digital public infrastructure, as well as any other reusable services available within the jurisdiction.
Given these solid foundations, let's take a look at the end-to-end process for users in this system.
Start the user's journey
Our journey starts with our users, whether individuals or businesses, who aim to manage their assets easily and securely. Once in the financial internet, users can create accounts on any unified ledger of their choice. They can also create multiple accounts on multiple unified ledgers. Each account is linked to a globally resolvable virtual address that is human-readable. Users can set up multiple such addresses (temporary or permanent) depending on their use case, and on multiple ledgers if needed. Users provide their virtual address to others in order to issue or request tokens in their accounts. In this ecosystem, users are given unparalleled control over their assets. They have the flexibility to create and manage multiple accounts and sub-accounts, customize authentication and authorization protocols for each account, and conduct a wide range of transactions across the financial internet. This control and flexibility underscores the user-centric spirit of the financial internet. This ensures that users are not only participants but also active architects of their financial journey.
Key features of the user-centric financial Internet
The Unified Ledger Agreement – the mechanism for ensuring seamless interoperability between ledgers – is the cornerstone of the system. It allows users to open accounts on any ledger and facilitates transactions between ledgers. The protocol ensures the integrity and consistency of transactions between different ledgers, providing finality of transactions through strong technical safeguards, ensuring that once a transaction is completed (e.g., an asset transfer), it is secure and irreversible.
In financial transactions, it is important to establish a trusted user identity. Trusted identity is essential for both natural and legal persons, relying on verifiability, using digital signatures to accurately verify the identity of participants. Such identities are portable and persistent, making them functional across different platforms. This ensures consistency and adaptability to updates over time. Self-describing identities simplify access, eliminate the need for external verification, make systems more inclusive, and bridge the gap between technical capabilities and geographic locations.
In addition, identity is at the heart of the enforcement of rules and policies within the system, which requires identity management to be directly linked to features such as traceability, accountability, and observability. The "submit once" approach should be used, especially in response to the redundancy of submitting KYC and other identity documents that can be attached to the user's profile for reuse. Users can tokenize their assets by token custodians. Tokens within the financial internet are digital representations of assets that facilitate the ownership, transfer, and management of value in a digital format. These versatile tokens can represent a wide range of assets from traditional tangible assets such as real estate and art to intangible assets such as intellectual property and company shares, as well as inherent digital assets such as digital currencies or virtual goods, which exist on a unified ledger. Managed on a unified ledger and settled atomically, these tokens ensure full execution of transactions, reducing the risk of partial transaction failures and enhancing the security and trustworthiness of the system.
Each token on the financial internet is not just a digital representation of an asset, but also carries detailed core data and metadata that describes its features and functions, as well as the rules governing its use. The core data contains basic information about the token, such as its type (e.g., utility, security, or token), ownership details, and transaction history. At the same time, metadata provides additional context and specifications about the token's functionality, including verifiable credentials, proofs, and any specific rules or regulations that it must comply with. This metadata may outline transfer restrictions, holder eligibility criteria, or compliance requirements based on jurisdictional laws or industry-specific regulations. By embedding core data and detailed metadata, tokens within the financial internet provide a rich multi-dimensional digital asset that can interact seamlessly across the digital ecosystem. This structure ensures that each token not only represents value, but also comes with a complete set of information that enables secure, transparent, and regulated interactions, enhancing the utility and governance of digital assets within the unified ledger ecosystem.
The tokenization process is at the heart of the financial internet. This is where assets are tokenized, converted into digital tokens by token managers – entities that can range from central banks and commercial banks to asset managers and private companies. These digital tokens represent a direct link to the user's assets, encapsulating the principles of ownership, value, and trust in digital form. Each token is governed by a set of rules and regulations, ensuring that each transaction meets the strict compliance and security standards set by the token custodian. For example, tokenized deposits may be subject to regulations regarding KYC, transaction limits, and cross-border restrictions, while tokenized shares may be subject to specific securities laws detailing the permitted buyers and sellers. Detokenization, in turn, allows users to convert digital tokens back into their original or traditional asset forms or other digital formats, unlocking their value for both traditional and digital uses. The system is supported by a robust import and export infrastructure, ensuring a seamless transition of assets between the digital and traditional economies. Tailored to the specific needs of different asset types, this setup deftly handles the complexities of regulatory and registration requirements, effectively blending traditional economic systems with digital-first areas.
Token managers play a key role in ensuring compliance with these tokens. Token custodians may also maintain their own private or shared ledgers outside of the financial internet, allowing synchronization between the unified ledger and their own ledgers. This flexibility promotes easy adoption, as token managers can issue tokens to users independently of the financial internet's internal asset management standards. It also provides a mechanism for token replication and recovery in case tokens are lost. This holistic approach makes the digital economy more accessible, safer, and friendlier, adapting to a wide range of digital and traditional asset transactions. In addition, users have the right to manage the tokens they create, acting as their own token stewards. However, a key feature of the financial internet is that users can only produce tokens for themselves and not others. This ensures that users cannot produce unauthorized tokens on behalf of other token managers.
When transacting in the financial internet, a range of trust and value-added services enhance the user's trading experience. These services are provided by entities such as certifiers, validators, custodians, and guarantors, and they inject additional security and credibility into the token. They play a key role in building a foundation of trust within the ecosystem, making transactions safer and more reliable. Trusted data plays a central role in the transition to a digital-first financial landscape, with transaction information becoming transparent, immutable, and directly verifiable. This transformation is a departure from traditional approaches and establishes a framework where data integrity is critical. Trusted data encompasses a wide range of financial interactions, from transaction history to asset ownership records, ensuring that every piece of data is securely recorded and tamper-resistant. The reliability and security of this data is essential for the detection and prevention of financial crime, enhancing regulatory compliance and fostering trust among participants. It supports the development of predictive analytics and risk management tools that make it possible to take proactive preventive measures against fraud and other financial irregularities.
Trusted identity and data are the cornerstones of facilitating dynamic contracts, significantly enhancing the network effects associated with asset tokenization. Smart contracts securely and efficiently automate the execution of agreements between parties, streamlining transactions and fostering trust in the ecosystem.
Users can access a variety of applications to interact with the unified ledger. On the financial internet, applications will provide individuals and businesses with versatile tools for managing a wide range of financial aspects, including banking, investment, insurance, and more. Innovative applications will emerge that will make it possible to manage different asset types such as real estate, paintings, digital assets, and shares, providing a comprehensive view of an individual's finances and asset portfolio. These applications facilitate not only traditional financial transactions (such as domestic and cross-border payments) but also unique asset classes, increasing the liquidity of personal and investment finances.
In addition, these apps will enable personalized financial planning, and AI-driven insights will provide optimal investment strategies, insurance coverage adjustments, and savings plans to fit individual goals and risk profiles. Businesses will have access to a suite of applications designed to streamline financial operations and enhance decision-making, manage cash flow, access multiple financing options, and optimize investment decisions. They will also be involved in B2B transactions, supply chain finance, and real-time invoice and payment processing. Together, we will drive a more dynamic economic environment.
Developers and entrepreneurs can develop a variety of applications on the financial internet, each focused on solving a specific problem for its target customers. By leveraging the foundational trust and solid infrastructure provided by the financial internet, they can innovate and create customized solutions that meet the unique needs of various user segments.
In these diverse interactions, applications in the financial internet will not only simplify financial management, but also introduce a level of customization and efficiency that was previously unattainable. This will enable all users to make informed decisions and achieve financial resilience and growth in a connected digital world. This, in turn, will ensure that everyone from individuals to small and large businesses, as well as society as a whole, can benefit from these advancements.
Unified Ledger: A secure, immutable, and programmable infrastructure. A unified ledger provides the ability to manage a wide range of assets, each differentiated by its legal status, market behavior, and level of security. This diversity requires a deep understanding of asset classification, from registered assets (such as real estate and vehicles, which are protected by law and provide enhanced transaction security) to unregistered assets (such as privately sold artworks, which, despite providing privacy, may face ownership verification and liquidity challenges). The distinction between regulated assets (such as publicly traded securities) and unregulated assets (including some digital tokens) highlights the varying levels of investor protection and market integrity. In addition, the distinction between certified assets (which provide assurance of authenticity verification) and non-certified assets (which lack formal verification) emphasizes the importance of establishing clear management rules to address the risk of fraud and disputes. These distinctions are critical to designing a regulatory framework that leverages the benefits of tokenization while mitigating its inherent risks.
Delving into the core features of a unified ledger, such as the different components of programmability, smart contracts, tokens, and account management, we've outlined an architecture diagram (Figure 9).
At its core, users utilize the system to perform a range of financial activities, from trading to asset management, which are enabled through a range of user-friendly interfaces and applications. The hallmark feature of this system – programmability – makes it possible to customize and automate financial operations, allowing the creation of customized financial products and services that meet the needs of different users.
A key advancement within this system is the foundation of its immutability. This feature marks a shift from traditional ledger technology, riddled with inefficiencies and vulnerabilities, to a unified, interoperable, error-proof, fraud-proof, and unauthorized modification ledger network. Immutability in the unified ledger ensures that once a transaction is recorded, it becomes irreversible, establishing a permanent, tamper-proof historical record. This shift from traditional databases, which do not guarantee immutability across organizations, to technologies that do do so, such as distributed ledgers, marks a key step forward. The feature of immutability in these ledgers emphasizes the fact that the entity providing the ledger cannot change or insert data after it has been recorded. This reliance on technology rather than people, processes, and legal frameworks to ensure record immutability marks a key evolution. Traditional databases lack this cross-organizational immutability and rely on human oversight, procedural checks, and legal protections to maintain data integrity. However, in a unified ledger, immutability is guaranteed through code, and the cryptographic methods used make the change history computationally infeasible. Each new record's link to the previous one requires exponential resources to change, making any attempt at tampering or history correction nearly impossible. In an immutable ledger, mechanisms can be implemented to block fraudulent transactions, or to issue revocable and rollback transactions as a form of compensation in the event of fraud.
The financial industry has undergone a similar leap over the past few decades, with the advent of atomicity, consistency, isolation, and durability (ACID) database technology. Initially, asset managers and financial institutions were reluctant to move from physical records to digital databases due to concerns about data integrity, security, and transaction reliability. The ACID property addresses these concerns by ensuring that transactions are processed reliably and securely: atomicity guarantees that transactions either go all or don't, consistency ensures that database rules are never violated, isolation keeps transactions independent, and durability guarantees that once a transaction is submitted, it will be permanent even if it fails. This important development makes digital databases a reliable alternative to physical records, making financial operations efficient, scalable, and accurate. This has fundamentally changed the banking and finance industry. A unified ledger with immutability guarantees is now the next logical leap in record-keeping in financial services and will shape the future.
Utilizing immutability and ensuring finality is the core feature of a unified ledger. In the legal, financial, and technological realms, finality is crucial because it provides certainty and stability, allowing parties to be confident that an action or decision is final and irrevocable. It establishes certainty for all. In a unified ledger, finality ensures that once a transaction is executed, it is irreversible, laying a trustworthy foundation for legal and economic activity. Rigorous pre-validation and fraud checks are carried out in transactions, minimizing the need for revocation and, if necessary, the authorized entity will perform compensatory actions. This process maintains the system integrity and dependencies of the unified ledger environment, increasing stakeholder confidence by ensuring that transactions are ultimately recorded and executable.
Tokens within this ecosystem can represent a wide range of assets from registered to unregistered, regulated to unregulated, and verified to unverified. Each category adapts to different types of assets and legal frameworks.
For example:
Registered tokens represent claims to legally registered assets, such as real estate or vehicles, facilitating transactions that meet specific registration criteria.
Unregistered tokens can be used for assets that do not require formal registration, such as certain types of digital art or collectibles, providing more flexible ownership and exchange.
Regulated tokens represent assets such as currencies or publicly listed stocks and bonds that are governed by specific financial sector regulations.
Non-regulated tokens include tokens that operate outside of traditional financial regulation, providing users with new forms of value exchange, such as in-game virtual assets.
Verified tokens contain verified proof of asset authenticity, such as product certification, ensuring trust and trustworthiness in digital interactions.
Unverified tokens, on the other hand, represent assets or claims that are not validated but still have value within certain communities.
In addition, the flexibility of the system extends to the nature of the token itself, which can be:
Fungible tokens, meaning they are divisible and interchangeable, like currencies, where each unit is the same and interchangeable with another unit of the same type.
Non-fungible tokens (NFTs), which are unique and cannot be divided or interchangeable, representing ownership of, for example, digital art, unique digital goods, or real-world assets with digital ownership credentials.
Holder tokens allow possession to be equated with ownership, facilitating anonymous transactions and transfer of ownership.
Non-holder tokens need to identify the owner for trading, enhancing the security and regulatory compliance of assets such as registered securities.
Tokens with a blocking mechanism can temporarily lock or restrict transactions, similar to a check being suspended, to ensure financial compliance or to comply with contractual conditions.
Non-blocking tokens provide uninterrupted liquidity and trading capabilities, similar to cash or e-checks, providing users with the ability to continuously access their assets.
In the event of asset loss, the provisions for asset and token recovery are crucial, emphasizing the importance of registered and regulated assets in providing comprehensive protection to asset owners.
Through the programmability of smart contracts. The essence of programmability within the financial Internet lies in the complex implementation of its smart contracts. These contracts are essentially executable code, automating the execution of contract agreements, eliminating the need for intermediaries and significantly reducing the likelihood of disputes. Smart contracts on the financial internet can operate with significant flexibility, both remotely and directly on the ledger, which enables a wide range of transactions and contract operations to be carried out in an efficient and precise manner. This ability is essential to ensure that financial agreements are executed exactly as intended by both parties to the contract, avoiding delays or errors that can occur in manual processes.
The smart contracts of the financial internet can manage multiple financial interactions that shift from simple value to complex conditional financial instruments and services. This automation and precision dramatically increases the speed, efficiency, and security of transactions within the ledger system.
Further enhancing the capabilities of smart contracts is the comprehensive supporting infrastructure of the financial Internet, including a rich ecosystem of contract templates, policy frameworks, and applets. This infrastructure provides developers and financial engineers with a powerful toolbox for creating and deploying customized smart contracts to meet specific transactional or operational needs. Smart contract templates provide a starting point for contract development, encapsulating common contractual arrangements and best practices. The policy framework ensures that contracts comply with relevant regulations and standards, embedding compliance directly into the transaction structure of the ledger. Applets extend the capabilities of smart contracts, enabling them to interact with external data sources, trigger events based on real-world events, or integrate with other digital services and platforms.
This innovative approach to digital contract enforcement not only underscores the financial Internet's promise of flexibility and reusability, but also highlights its potential to revolutionize the way contracts are created, enforced, and enforced in the digital age. By leveraging the programmability and automation capabilities of smart contracts, the financial internet provides a platform that can adapt to the changing needs of the digital economy, ensuring that transactions are conducted with unprecedented efficiency, reliability, and compliance.
The unified ledger records a wide range of data in detail, primarily focusing on transactions, ownership, and tokens, while also expanding its capabilities to include a variety of additional elements. Here's an extended overview of what Unified Ledger typically records:
1. Transactions: As the basis for its operation, the Unified Ledger records transaction details, including the process of transferring tokens from one party to another. These transactions include key information such as sender and receiver identifiers, the amount transferred, transaction timestamps, and unique transaction identifiers.
2. Ownership: The ledger accurately tracks the ownership of digital assets. This ensures that every transfer and change of ownership is indelibly recorded, providing a transparent and secure history of the flow of assets.
3. Tokens: The ledger includes a comprehensive record of tokens, which are digital representations of assets or rights within the system. These records cover a wide range of token types, from representing physical assets to digital rights and currencies, detailing their issuance, transfer, and participation rules.
4. Smart contracts: The unified ledger usually supports the deployment and operation of smart contracts, which are self-executing contracts with contract terms written directly into the code. The ledger records deployments, operational rules, and all interactions or transactions initiated by these contracts.
5. State Change: Involves an update of the condition or state of a digital asset or account on the ledger of records, including a change in a smart contract variable or an update of a digital wallet balance.
6. Verifiable credentials: The ability to store digital claims about entities verified by trusted issuers, which are used by the Unified Ledger for applications such as authentication, ensuring data integrity and privacy.
7. Cryptographic hashes and immutability-related data: The ledger uses cryptographic hashes as a unique identifier for blocks of data, ensuring an immutable link between them. In addition, it records data that emphasizes its immutability, including cryptographic proofs and verifications. This comprehensive approach ensures that the ledger history is complete, immutable, and tamper-proof (see Box E).
In the complex environment of financial fraud, actions such as impersonation, evasion, and harm highlight the multifaceted challenges faced by individuals and institutions (FinCen (2024)).
Impersonation fraud: Fraud uses an individual's identity to deceive. Evasion tactics bypass established standards and protocols. Compromise the security of intrusion into accounts and systems. These categories encompass a wide range of fraudulent activities, from record tampering and identity theft to cyber incidents and abuse of internal access, each of which exploits vulnerabilities for illicit gain. In this context, the financial Internet, as a powerful defense tool, provides advanced mechanisms to combat these challenges.
Fraud at the entrance: Prevent unauthorized access
Identifiability and Verifiability: The Unified Ledger improves the ability to identify users and track suspicious transactions and activities when needed, making it more difficult for impersonators to gain unauthorized access. By embedding advanced authentication mechanisms that leverage biometric data, real-time authentication, and digital signatures, the system ensures that only legitimate users can enter and protects users from identity theft.
Embed regulatory rules into code: Automating compliance through smart contracts can prevent access control bypasses. Regulatory requirements, such as KYC and Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) standards, are programmed into the system to ensure that all users meet strict standards before being granted access.
Fraud within the system: Protect against insider threats
Observability and auditability: Automated monitoring and real-time alerts on anomalous activity help detect insider fraud once a user is in the system. The observability of the system ensures that any attempt to manipulate transactions or records is immediately flagged, while auditability enhances accountability by allowing for a detailed review of behavior when needed.
Immutability and Verifiability: The immutability of records within the Unified Ledger prevents alteration, ensuring that once a transaction is recorded, it cannot be changed or deleted. This verifiability prevents internal fraud and abuse, as any fraud that attempts to tamper with records is easily detected and irrefutably traced back to the perpetrator.
Box E: Advances in cryptography and ledger technology
Cryptography, especially cryptography, is widely used in the financial sector to protect sensitive data, secure online transactions, and ensure the confidentiality and integrity of financial communications. Encryption protocols like SSL/TLS are used to protect data transmitted over the internet against unauthorized access and data breaches. Advanced Encryption Standard (AES) protects data at rest, ensuring that stored financial information is confidential and cannot be tampered with. Public Key Infrastructure (PKI) plays a key role as the backbone of encryption/security and the integrity of digital records. PKI uses an asymmetric system with two keys, where the public key is used for encryption and the private key is used for decryption. This framework secures the transmission of data and strengthens the authenticity and integrity of digital records through digital signatures.
Digital signatures, powered by PKI, inherently promote the immutability of digital transactions and records. By providing a secure way to verify the identities of transaction participants, they ensure that any data or records involved remain intact after signing. This verification process is key to maintaining data integrity, as any tampering with the content will invalidate the digital signature. Thus, this mechanism not only protects against unauthorized modifications, but also establishes non-repudiation, making it impossible for signers to deny the authenticity of their actions or signed documents, thus enhancing trust and security in digital interactions.
Standardized by the World Wide Area Network Consortium (W3C) with digital signatures, verifiable credentials, and claims, enhances the immutability and verifiability of digital transactions. These credentials include examples such as digital passports, degrees, and professional certifications, are signed by trusted issuers and can be easily verified across platforms. Verifiable claims, such as employment history confirmation or credit score verification, support these credentials by providing credible evidence of the claims made. This system ensures secure, reliable authentication and data integrity, streamlines the verification process, reduces the risk of fraud, and improves efficiency in the digital ecosystem.
Recent advancements in identity data sharing, such as Self-Governing Identity (SSI), give individuals the power to control their personally identifiable data, enabling them to share data securely and as needed. In addition to identity data, technologies like zero-knowledge proofs (ZK proofs) and multi-party computation (MPC) can also help protect privacy and confidentiality when data is shared. ZK proofs allow one party to prove to the other that a statement is true without revealing any information beyond the validity of the statement itself. MPC enhances the security and confidentiality of data sharing by allowing multiple parties to jointly compute a function while keeping their inputs private.
Beyond data sharing, we can incorporate concepts such as tokens, programmability, composability, and in some cases immutability into the regulated financial system, which stems from technological developments in hashing, Merkle trees, smart contracts, and various distributed ledger technologies such as Hyperledger, Ethereum, etc.
Taken together, these developments represent a transformative change in the way trust is built, inspiring huge network effects that unlock new interactions across various industries that redefine the dynamics of digital and economic exchange. This is an exemplary list, and we are on the threshold of many more advances. As technology continues to evolve, it's critical not to be locked into a specific solution, but to design for adaptability that ensures it can adapt to future changes and innovations. In addition, we must take advantage of the best technological advances to balance innovation with user protection, while keeping consumer protection in mind.
Respond to social engineering attacks
Educational programs and behavioral analysis: While technological protection measures are crucial, it is equally important to educate users about the risks of social engineering attacks. Behavioral analysis can be used to detect patterns that indicate social engineering, such as unusual transaction requests or atypical access patterns, triggering additional verification steps.
Multi-factor authentication and dynamic permissions: Implementing multi-factor authentication and dynamic permission settings for transactions can mitigate the risks posed by social engineering. By requiring additional authentication for sensitive operations and adjusting permissions based on risk assessment, the system prevents unauthorized transactions from being blocked even if the user is manipulated.
As noted above, the financial internet represents a significant step forward over traditional record-keeping methods that are susceptible to deceptive alterations to personal property records and other forms of financial fraud. The financial Internet provides a comprehensive solution to the common challenges of impersonation, circumvention, and compromise through advanced technological safeguards, coded regulatory compliance, and user education that emphasizes social engineering attacks. This protects the financial ecosystem from external and internal threats.
The Financial Internet aims to be an inclusive and open ecosystem that meets the needs of a wide range of participants, including individuals and businesses. This inclusion ensures that the benefits of digital financial trading and asset management are accessible to all, promoting economic participation and innovation in all sectors. For users, the openness of the system is a fundamental principle of equitable access to financial services, democratizing financial services and ensuring that individuals and businesses of all sizes or industries can leverage the financial internet for trading and asset management. However, this approach does not preclude the importance of adhering to established norms, where all participants are bound by a regulatory, legal and institutional framework that ensures the integrity and security of the system.
At the forefront of technology, making infrastructure accessible to all, encouraging a culture of innovation and collaboration. By allowing a wide range of developers and entrepreneurs to interact with and build on the protocols, platforms, and products of the financial internet, the system fosters a rich ecosystem of financial and non-financial applications. This openness not only accelerates technological advancements within the financial internet, but also ensures that the system can adapt to changing user needs and global technology trends, remaining relevant and useful.
Governance within the financial internet is carefully designed to automate regulatory compliance and enforcement at the token level through the critical role of token stewards. These stewards are guardians of compliance, weaving legal and regulatory requirements directly into the architecture of each token. This token-centric approach to governance not only makes the system's governance more effective and smooth, but also ensures that governance is flexible and responsive to the ever-changing landscape of digital assets and transactions. Each token, regardless of its nature or origin, meets the highest standards of security, legality, and transparency, underpinned by a governance model that cleverly balances the principles of openness and strict regulation.
Sophisticated technology solutions enhance the governance model. Non-repudiation ensures clear accountability for all actions within the ecosystem, strengthening the integrity of transactions. Auditability enables rigorous verification of compliance and integrity of the entire system, ensuring compliance with legal and regulatory frameworks. Observability provides stakeholders with real-time insights for resolving disputes and proactively managing issues quickly and efficiently. In addition, the innovative "policy-as-code" concept transforms complex legal and regulatory directives into executable code embedded in tokens, automating compliance in a way that has never been done before. This advanced governance toolbox ensures that the financial internet not only meets but exceeds the requirements of a secure, transparent, and compliant digital financial environment, fostering an ecosystem that fosters innovation and growth within a framework of trust and accountability.
The effective implementation of technology will be driven by use cases that benefit society. Moving towards a unified ledger requires a strategic approach that recognizes and addresses the concerns of all relevant stakeholders. The key to a successful implementation is the selection of the initial use case. These use cases should leverage resources already in society, seamlessly integrate with current habits and incentives to minimize resistance (prioritizing low-friction, high-impact initiatives), and meet the needs and expectations of a wide range of stakeholders. It is critical to identify and focus on areas where there is a common goal among individuals, regulators and market participants, facilitating a smooth transition to broad acceptance and adoption. By adopting a positive attitude, from harnessing enthusiasm to assuthing suspicion, the goal should be to demonstrate specific benefits that are relevant to all parties' interests and alleviate their primary concerns.
Real-world deployment of the financial internet, including a unified ledger, will require a robust legal, regulatory, and governance framework. Such a framework is essential to protect participants and maintain the integrity of the financial system. Without these safeguards, the financial internet will not be able to earn the trust of consumers and businesses, and society as a whole will not be able to reap the benefits that new digital financial technologies can provide. There is an urgent need for governments and other public institutions to address unresolved regulatory and legal issues. It would be unfortunate if there was no clear or outdated legal framework that unnecessarily delayed the long-overdue progress of the financial system. Work to address these issues should begin in earnest and should proceed quickly.
A basic starting point is that existing laws and regulations should apply to participants and assets in the financial Internet. The unified ledger and associated infrastructure should not provide a place to evade the law or engage in regulatory arbitrage. This means that jurisdictions do not need to create an entirely new bespoke legal framework for deploying a unified ledger. Indeed, the principle of technology neutrality suggests that authorities should seek to align the legal treatment of similar financial assets traded on different venues as far as possible. This consideration may be particularly relevant for emerging markets and developing countries (EMDEs) wishing to deploy a unified ledger, as their capacity to fully develop new legal frameworks may be limited.
Nonetheless, the development of a unified ledger does bring new legal and regulatory issues. One of the most fundamental questions is whether a central bank has the right to issue tokenized central bank money. As of 2020, the legal framework of about 80% of central banks is unclear or explicitly prohibits central banks from issuing tokenized central bank currencies (Bossu et al. (2020)). Whether or not the central bank ultimately chooses to issue a tokenized central bank currency, this uncertainty needs to be clarified. Without tokenized central bank assets at its core, the financial system of the future will ultimately rely on legacy architectures to settle financial transactions. This will undermine many of the benefits offered by the unified ledger.
In addition to the issue of issuance, the legal status of the tokens present on the unified ledger needs to be clarified. For example, in some jurisdictions, there are questions about whether tokenized deposits will be considered deposits, securities, or other forms of financial assets (Deutsche Bundesbank (2023)). This, in turn, raises questions about the tax treatment of these assets and whether they will be covered by deposit insurance if the issuing bank fails. More broadly, there is a need to scrutinize how existing legal requirements apply to assets in the tokenized environment, taking into account the additional functionality of tokenized assets. In Switzerland, for example, legislative reforms are necessary to relax the requirement for electronic signatures to accompany asset transfers before tokenized assets can be traded on a shared platform (Garrido (2023)). This example also illustrates how the shift to a tokenized financial system can help streamline previously complex regulatory requirements.
Some jurisdictions may use the deployment of new financial infrastructure, such as a unified ledger, as an opportunity to develop new legal norms. For example, they may want to introduce measures to promote greater competition in the financial industry, such as by promoting open finance or forcing interoperability.
The deployment of a unified ledger also raises a complex set of governance issues. Fundamental questions include the ownership of the ledger, which financial institutions can participate in the ledger, and decisions about the types of assets and tokens that appear on the ledger and the rules for their use. As with other financial market infrastructures, there are a variety of alternatives, ranging from entities that are wholly owned and operated by the public sector, to those that rely entirely on private sector solutions, and the role of public institutions is limited to establishing a dominant legal framework and enforcing basic investor and consumer protection measures. There are also many intermediate solutions between these two extremes. The ultimate best choice may depend on the design and functionality of a particular ledger, including the range of tokenized assets it includes. Different jurisdictions may also choose different approaches that reflect the characteristics of their own economics, financial markets, and legal and regulatory structures.
Technological advancements can help strengthen legal and regulatory compliance within a unified ledger. Because tokens are programmable, legal and regulatory compliance, including anti-money laundering and customer due diligence requirements, may be embedded in the code that controls the tokens and their transactions in some cases. An undeniable and verifiable digital audit trail within the ledger also helps ensure accountability and assists in the investigation and resolution of disputes.
But many regulatory and legal considerations go beyond technology solutions. This reflects a fundamental principle: trust in the financial system does not come from technology, but from the legal and regulatory framework that underpins it.
In many cases, there may be value in international cooperation in designing a legal and regulatory framework for a unified ledger. In fact, this cooperation at the multilateral level is essential for the ledger used to facilitate cross-border transactions. Although the challenges of developing and harmonizing legal and regulatory frameworks on a cross-border basis are greater than those in a single jurisdiction, they are not insurmountable. Previous initiatives, such as the Continuous Linked Settlement (CLS) system, have shown that with sufficient will and flexibility, it is possible to establish a governance structure for cross-border financial arrangements that is acceptable to both parties. However, until these systems are in place, authorities may face a trade-off between improving the domestic financial system in the short term and achieving greater gains in a more seamless and integrated global financial market over the longer term.
Design principles
As highlighted in the above discussion, there is no single path to building a financial Internet around a tokenized financial architecture and a unified ledger. Policymakers will be faced with many choices, including those related to the scope, technology, access, and ownership of the unified ledger. Different jurisdictions will naturally have different approaches that reflect their own unique circumstances.
However, there are some characteristics that are non-negotiable. In what follows, we present eight key design principles and explain their rationale. We believe that by following these principles, a unified ledger can strike a balance between sound governance and operational efficiency, while fostering an environment conducive to innovation and growth.
Principle #1: The main rationale for user-centric development of the financial Internet is to provide individuals and businesses with the widest possible range of financial services, in the most flexible way and at the lowest cost. The best way to achieve this is to prioritize the needs and desires of the users of the system. In most cases, user priorities should guide technical and regulatory choices, not the other way around.
Principle #2: Interoperability: It is neither feasible nor desirable to construct a single, unified ledger that encompasses all financial assets and transactions. Therefore, a unified ledger needs to be interoperable with the rest of the financial system. Ideally, this interaction should be seamless, enabling functionality between different protocols, platforms, and products. Interoperability will help to create a "network of networks" that connect the diverse professional networks that characterize the modern financial system. This interconnected framework significantly enhances the functionality and coverage of each participating network. The emergence of such complex systems requires the development of consistent standards and protocols for interoperability while maintaining the autonomy and integrity of each subsystem. This strategic, interconnected model aims to foster a more integrated and resilient financial ecosystem that responds effectively to the complex needs of modern finance.
Principle #3: Technological advances that evolvability lead to the development of a unified ledger will eventually be surpassed. Therefore, the financial internet should be able to adapt to future technological advancements while remaining backward compatible with existing systems if necessary. This evolvability will promote continuous improvement and open avenues for innovation that will enable new entrants to meaningfully contribute to the development of the ecosystem. Adopt a pragmatic "+1" approach, using existing systems as a foundation to ensure a smooth transition to more complex technologies, balancing innovation with real-world implementation.
Principle #4: Modularity emphasizes the importance of empowering architectures to evolve through discrete, independently modifiable layers that minimize disruption in the ecosystem. In addition, it is critical to provide broad programmability within the infrastructure to enable users to tailor functionality to their unique needs, fostering a highly personalized and flexible environment.
Principle #5: Scalability
Over time, the range and number of participants on the financial internet may expand. As you can imagine, this growth could be non-linear, as the introduction of new users and products enhances the value of the entire network, encouraging further growth. As a result, the unified ledger needs to be able to accommodate this growth without compromising security and functionality.
Principle #6: Division of Labor and Competition
Both public and private sector institutions have a role to play in the development of the financial Internet. For the public sector, a key objective is to provide "tracks", which may include the core infrastructure, rules and regulations that private financial institutions can operate in. A key objective is to promote healthy competition among private actors through open platforms, and a level playing field can support innovation and reduce costs for end-users by reducing rents. In this regard, policymakers should bear in mind that in today's system, inefficiencies are often the profit of some; Create an innovation-friendly atmosphere that supports combinatorial innovation, allowing for the convergence of different technologies and approaches, paving the way for breakthrough progress.
Principle #7: Inclusivity and accessibility
Innovators are eager to take advantage of infrastructure, with the ultimate goal of making financial activities universally accessible, affordable, and inclusive, ensuring that no one is left behind. In the current financial services ecosystem, several constraints have emerged that pose unique challenges, but also open avenues for innovation and improvement. Notably, the implementation of new technologies and systems has encountered high costs and operational delays, resulting in slower overall adoption. This situation inadvertently limits the empowerment of individuals in the financial ecosystem. The potential for widespread network effects—which could significantly enhance user empowerment and system efficiency—remains largely untapped. These challenges underscore the need for a reimagined approach that prioritizes affordability, flexibility, and inclusion in digital financial services. The architecture should serve any department as much as possible, be accessible on all devices, and be suitable for a wide range of purposes, from personal finances to institutional operations, while providing a choice of custodial services. It should support multiple data standards and integrate methodologies for determining asset quality, respecting existing legal norms.
Principle #8: Security and privacy
Last but not least, the security of the infrastructure is a fundamental design principle. This involves security for users and the infrastructure as a whole. First, the digital financial infrastructure should have adequate data privacy and trade secret protections, while ensuring that system integrity is maintained by preventing money laundering, terrorist financing, and fraud. In addition, strong institutional and legal safeguards should always keep the operational and cyber resilience of the infrastructure at the forefront of the mind. As discussed in BIS (2023), the public sector has a key role to play in this regard, given the public good nature of cybersecurity.
conclusion
In this article, we set out our vision for the future financial system. This vision, which we call the Financial Internet, firmly puts the users of financial services at the center. They will have access to a wider and more customized range of financial services and assets, as well as more flexibility in managing their own financial affairs. Financial services will be made cheap, secure, and done almost instantaneously. Moreover, these services will be open to everyone. The financial system will help individuals and businesses manage risk, protect their savings, and invest in a better future. While all jurisdictions will benefit, the benefits are likely to be particularly large for emerging market and developing economies (EMDEs), which are now the most prevalent in terms of access to financial services and the most likely to leapfrog to the technological frontier.
We also provide a blueprint to guide policymakers in translating this vision into reality. We identified three necessary components: an efficient economic and financial architecture, the use of cutting-edge digital technologies, and a robust legal and governance framework. We believe that the unified ledger is a promising tool for achieving these three goals. In particular, by bringing together multiple financial assets in one place, they offer the possibility of greatly reducing the need for lengthy messaging and clearing processes, thus providing users with a more efficient and reliable service.
At the same time, we acknowledge that there is considerable uncertainty about which innovative technologies are best suited to serve as the foundation of the future financial system and what they will best use. Turning the vision of the financial internet into reality requires experimentation. It is only through experimentation that we can fully understand the challenges and the best strategies to overcome them. Many central banks are involved in this necessary trial-and-error process. The lessons learned from these projects are a valuable public resource for achieving a shared vision of a more efficient, transparent, and inclusive financial future. Box F reviews a recent example, the Drex project in Brazil, while Box G reviews contributions from the BIS Innovation Center related to the Unified Ledger. Needless to say, many private sector initiatives are also underway.
Box F: Drex in Brazil: Putting a Unified Ledger into Practice
Following the widespread success of the Pix (see Box B), the Central Bank of Brazil (BCB) launched the Drex project, a project to digitize the Brazilian real. Drex is part of the broader BC# agenda that aims to promote competition in the financial system through innovation. This category also includes Pix, the Open Finance Initiative and the internationalization of the Real (Campos Neto (2023)). The Drex ecosystem includes the Drex (central bank currency), the Drex platform, its participants, and its rulebooks and regulations.
The Drex platform is a unified ledger in which wholesale tokenized central bank currencies, deposits, e-money, and treasuries coexist. The initiative is a collaboration between the Central Bank of Brazil, the National Ministry of Finance, the Brazilian Securities and Exchange Commission and the private sector. It is built on a public-private partnership and takes advantage of the current two-tier monetary system. A key component of the early stages of the project is the so-called Lift Challenge, sponsored by BCB and presented by banks, payment institutions and other market participants for selected use cases. These include the development of delivery-to-pay (DvP), payment-to-payment (PvP), Internet of Things (IoT), and decentralized finance (DeFi), among others.
While Drex may be the most advanced initiative to achieve a unified ledger, it is clearly not the only one. Other pioneers include the Bank of Korea, the Monetary Authority of Singapore, and teams from seven central banks working with the BIS Innovation Centre on the Agorá project.
A key question is how to move forward. One approach might be to adjust the different parts of the financial system sequentially and gradually, taking a series of incremental steps. This approach has its advantages, especially in jurisdictions where financial services are already quite efficient and widely available. Incremental advancements can reduce upfront costs, ensure compatibility with legacy systems, and help gain support from existing financial institutions.
But incremental fixes have their limitations. Building a new financial system on top of the old naturally limits what it can offer. Over time, these restrictions will become more stringent – as the financial system progresses, the technological frontier will move farther and farther away. As a result, we tend to support a more transformative adjustment that involves a fundamental rethinking of the financial infrastructure to ensure that it delivers the full range of benefits that digital technologies can provide.
Whatever the process, now is the time for the financial system to take the "Armstrong moment" – a small step that represents a giant leap for the financial system. To this end, public institutions can play a catalytic role in helping the development of the financial system transition from individual experimentation to co-innovation. We know where we need to go. We have the tools to get there. Now is the time to take the first step.
Box G: BIS Innovation Center's contribution to the Unified Ledger Architecture
Realizing the vision of a unified ledger requires the interplay of multiple functions and technologies to achieve the ultimate goal of seamless, integrated financial services. This complex effort is unlikely to be accomplished by a single entity or a single solution. Most likely, it will require extensive collaboration between stakeholders that leverage emerging and existing technologies.
The BIS Innovation Center stands out as a leading reference among the many institutions actively engaged in advancing financial services through the exploration of innovative technologies. Its work explores the many features required to achieve a unified ledger: interoperability, efficient and cross-asset settlement, accessibility, cybersecurity, fraud and anti-money laundering controls, functional programming of digital identities and currencies. These initiatives, both in the domestic and international contexts, benefit from public-private sector cooperation.
Regarding interoperability, the BIS Innovation Center's projects focus on connecting existing and new systems, such as central bank digital currencies (CBDCs). On the cross-border side, the Nexus project has created a blueprint to connect domestic fast payment systems. The Jura, Dunbar, mBridge and Mariana projects explored how to connect wholesale CBDCs using a common platform, while the Icebreaker project looked at using hub and spoke models to connect retail CBDCs.
Efficient settlement is explored in both CBDC and tokenization projects, as well as in traditional financial market infrastructure. In addition to the atomic settlement of cross-border payments as shown in the above-mentioned cross-border CBDC project, other experiments extend the settlement use case with payment-to-payment (PvP) capabilities, allowing foreign exchange settlement (Mariana and Agora projects for tokenized deposits) as well as delivery-to-payment (DvP) (Helvetia, Jura, and Promissa projects). Efficient settlement has also been explored in projects aimed at improving traditional FMIs (FuSSE and Meridian projects).
Regarding accessibility, the project covers a wide range of use cases. For example, in the case of retail CBDCs, the Rosalind project leverages standardized APIs to connect central bank ledgers and streamline private sector systems. The Polaris project explores the offline accessibility of retail CBDCs, which is a key requirement in many jurisdictions.
In terms of cybersecurity, the Innovation Center project helps to uncover cyber risks in the future quantum computer era (Leap and FuSSE projects) and experiments to develop a CBDC system for cybersecurity (Project Sela), or a system that protects the privacy of transactions while defending against quantum computer attacks (Project Tourbillon). In addition, the Polaris project has developed a manual that explains the cybersecurity landscape and best practices.
In terms of the use of technology, the Innovation Center project contributes to a green and secure financial system. For example, the Aurora project has helped to reduce the flow of illegal trade. The Hertha project uses AI to help identify patterns of financial crime while protecting user privacy in real-time payment systems. In terms of green finance, the Genesis project aims to reduce negative environmental externalities to the planet by understanding the process of issuing green bonds. In addition, the project explores the use of digital identities and signatures to protect privacy (Tourbillon and Aurum projects).
Finally, the power of automation through programming was explored, embedding regulatory restrictions in code (Project Mandala) and supporting trade finance (Project Dynamo).
These projects have generated, or are in the process of generating, useful experiences and solutions that can help realize the vision of a unified ledger. While some projects focus on a single feature, others combine multiple features together. Going forward, it is important to explore the challenges and opportunities of functional integration between these elements and those developed by other different entities.
Glossary
Atomic settlement: The instant exchange of assets so that the transfer of each asset occurs only when another asset is transferred.
Auditability: Attributes that allow digital transactions and activities to independently verify and audit their completeness, accuracy, and regulatory compliance.
Composability: The ability to combine different trades or operations on a programmable platform.
Central bank money: Currency issued by a central bank, such as banknotes, coins, central bank reserves, or (more recently) tokenized central bank money.
Commercial bank money: A currency issued by a commercial bank in the form of a deposit.
Confidentiality: The system guarantees that sensitive information is only disclosed to authorized users, protecting data privacy and security.
Counterparty risk: The risk that one or more participants do not provide funds or financial assets to meet the obligations of the parties to the transaction.
Cross-border payment: A payment in which the financial institution of the sender and receiver is located in different jurisdictions.
Detokenisation: The process of converting a claimed claim (expressed as a token) recorded on a programmable platform back to its original financial or non-financial asset in a traditional ledger.
Digital-first approach: A systems development approach that starts with digital technologies and puts them at the center of all business operations and customer interactions.
Digital identity: A set of information about an individual or company that can be found and used online.
Digital public infrastructure: Interoperable, open, and inclusive digital systems that are supported by technology to use and provide essential, whole-of-society public and private services.
End users: Individuals, households, and businesses that are not participants in a platform or payment system.
Enforceability: The mechanism by which the system automatically ensures compliance with legal agreements, policies, or regulatory requirements, reducing the need for manual enforcement.
Fast payment system: The transmission of payment information and the time for the recipient to receive the final funds takes place in real-time or near-real-time, and is as close as possible to a payment system that is available around the clock and 24/7.
Finality: The moment when a fund or asset is transferred from one account to another and officially becomes the legal property of the recipient.
Financial health: The extent to which an individual or family successfully manages their financial obligations and has confidence in their financial future.
Financial inclusion: The ability to access and use trading accounts and related financial products such as savings, payment cards, loans, and insurance.
Finternet: A connected financial ecosystem powered by open, interoperable technologies and protocols that puts individuals and businesses at the center of their financial lives.
Infrastructure services: Existing national or industry-specific infrastructure, including identity systems, digitally signed certificate systems, connectivity, registries and registries, and digital public infrastructure, as well as other reusable services provided within a country.
Interoperability: The ability of different digital systems, platforms, and applications to seamlessly exchange information, ensuring compatibility across different technology frameworks.
Immutability: A feature of the system that prevents modification or deletion, ensuring permanent and tamper-proof record keeping.
Ledgers: A system of record that guarantees finality and immutability, ensuring that once transactions are recorded, they cannot be modified, deleted, or reversed.
Network of networks: A set of networks, each focused on a different domain and equipped with a unique technical infrastructure, governance protocol, and user ecosystem.
Non-repudiability: A security feature that ensures that users cannot deny the authenticity of their actions, backed by irrefutable evidence such as digital signatures or tamper-proof transaction logs.
Observability: A feature of the system that provides visibility into necessary transactions and actions that is critical for policymakers, regulators, and participants to monitor operational efficiency and compliance, detect fraud, and ensure accountability within the ecosystem.
Programmability: A feature of platforms and other technologies in which actions can be programmed or automated.
Programmable platform: A technology-agnostic platform that includes a Turing machine that executes the environment and the ledger and its governance rules.
Smart contract: A self-executing application on a programmable platform that can trigger an action when some preset conditions are met.
Token: A digital representation of value in a programmable platform. Tokens can be tokenized, i.e., claims derived from a traditional ledger, or "native" tokens issued natively in the platform.
Tokenisation: The process of recording claims to physical or financial assets existing on a traditional ledger to a programmable platform.
Tokenised asset: A digital representation of an asset's claim on a programmable platform.
Tokenised central bank money: A form of digital currency denominated in a national monetary unit that is directly a liability of the central bank.
Tokenised deposit: A digital representation of bank deposits in a programmable platform. Tokenized deposits represent claims against commercial banks, just like regular deposits.
Token manager: The institution responsible for issuing (tokenization, de-tokenization), management, and synchronization of tokens with their private ledgers.
Tokenised network: A platform for operating, clearing, and settling using tokenized currency, tokenized deposits, tokenized assets, or any other form of token.
Turing machine: A finite automaton that can read, write, and erase symbols on an infinitely long tape.
Unified ledger (UL): A digital platform that brings together multiple financial assets as executable objects on a common programmable platform.
Unified Interledger Protocol (UILP): A set of open protocols that define message specifications between different unified ledgers to ensure interoperability and finality of transactions.
Verifiable identity: A digital representation of a person's or entity's identity by digital means, authenticated using an encryption method.