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Source: The post The Finternet or Asset tokenization for global financial systems has been created, based on the article “Asset tokenization can revolutionize financial systems” published in “Live mints” on 24 April 2024.
UPSC Syllabus Topic: GS Paper 3- science and technology-Awareness in the fields of IT, Space, Computers, robotics and GS Paper2- Governance-Important aspects of governance, transparency and accountability, e-governance.
News: The article discusses a new idea called ‘the Finternet’ that could change how money and assets are managed globally. It suggests using digital technology to connect different financial systems and make transactions faster, cheaper, and safer.
For details information on Tokenisation read Article 1, Article 2
What is the Finternet?
The current financial system, with separate regulatory environments for different transactions, has become inefficient as transactions grow more complex. It is slowing operations, increasing costs, and restricting competition and innovation.
Finternet aims to connect different financial systems globally using modern technology.
The Finternet is a proposed digital framework by the Bank for International Settlements.
Tokenization is at the core of the Finternet, where assets are represented as digital tokens with standardized rules.
These tokenized assets can be transacted on a unified ledger, a shared digital system for managing various financial assets.
What are the benefits of the Finternet?
Cheaper transactions: The Finternet reduces costs associated with financial transactions.
Faster transactions: Transactions become quicker due to streamlined processes.
Safer transactions: Reduced reliance on intermediaries decreases the risk of fraud.
Reduced counter-party risk: Tokenized assets enable direct trading among holders, minimizing counter-party risk.
Automation of complex agreements: Complex financial agreements can be automated and executed directly without intermediaries.
Development of new financial instruments: The Finternet allows for the creation of new financial products and investment opportunities.
What are the challenges of the Finternet?
Tokenizing real-world assets: Challenges arise in tokenizing tangible assets like art pieces, which lack public registries.
Double-spending problem: Ensuring that tokenized assets cannot be sold simultaneously offline and online is a significant challenge.
Legal requirements: Adapting legal frameworks to accommodate tokenized assets, especially for movable assets, presents hurdles. It is because, tokenizing real estate requires statutory amendments to convert government registers into tokenized ledgers.
Public registries: For assets like land titles, converting existing public registries into tokenized ledgers may require substantial effort.
Comprehensive tokenization: Ensuring all assets are tokenized and recorded on the unified ledger is a complex task that requires careful planning and execution.
Question for practice:
Discuss the concept of the Finternet, including its proposed digital framework, core principles, and the benefits it offers for global financial systems.
