The Internet Financial System, or IFS, is apparently what it seems, an alternative financial system on the Internet. The term was popularized by crypto venture capitalist Chris Burniske on Twitter. While its exact form has yet to be determined, it would generally comprise a more digital version of the traditional financial system, in combination
with DeFi.
The growth of Web3 and the creation of a more interactive Internet experience, including the growing desire to create digital identities for people and decentralized autonomous organizations (DAOs), means that changes will need to take place in the current system.
Why IFS is a better term than DeFi
The problem with the term DeFi is that it’s somewhat exclusionary. No matter how much potential there is in blockchain and digital assets, not all people around the world will want to use digital assets like Bitcoin. However, they will want access to the same financial services that DeFi users can access
.
These services already exist in the form of traditional online banking services, but the reality is that there is a limited set of functionality for those services. You can’t just take out a loan with just a few clicks or lend money to someone else. Combining the advantages of DeFi, such as smart contracts, with the traditional financial services available would help a large part of the population to take better
financial control.
What could IFS be in the future?
The form of IFS in the future could take many forms. Assuming that many countries launch a CBDC using blockchain registries as their backbone, they could, if they so wish, offer exactly the same services as DeFi. Bank customers could provide guarantees to a lending platform provided by the bank to take out a loan without having to go through traditional roads. DeFi could exist as its own separate sector that works with Web3 and the
crypto sector.
Depending on the willingness of governments to embrace digital assets in the long term, they could instead work with Web3 and DeFi service developers to create an all-encompassing IFS. This type of system would probably have a bit more regulatory oversight than the current DeFi system, but it would make processes such as filing taxes related to the interaction of digital assets, among other things, much simpler
.
What advantages would IFS have over traditional finance?
There are four main advantages that IFS would have over traditional finance. They are: transaction speed/regulation, decentralization, accessibility and transparency. We’ll give a brief explanation of each one below
.
Transaction/settlement speed
When using an IFS system, or even the current DeFi system, transactions and settlements would take much less time. In the current financial system, transactions like a bank transfer or a payment on something like a loan or credit card, aren’t even close to instant. Part of the reason for this is the ‘hours’ in which the traditional financial system works.
Many transactions are only processed during bank hours, and it often takes days for these types of payments to be validated and applied to the relevant accounts. With an IFS system, these transactions would be almost instantaneous. You would be able to actually pay a credit card bill the day it’s due without it taking two days to process and incur
interest.
Decentralization
Taking control of the financial system out of the hands of a small number of parties and instead giving control to users is one of the principles of DeFi. As seen with what happened in the United States when some banks failed, you might not be able to take your money when you need it. You are also at the mercy of these same banks when you want to get a mortgage or loan. Creating a wider range of financial services options for people around the world would benefit many. Of course, this assumes that governments will also create truly decentralized services or allow DeFi to continue operating
.
Accessibility
At present, if you want to open an account with a bank, take out a loan, a mortgage, or even just pay a bill, it can be difficult. This is especially true for those in less developed nations or outside urban centers. An IFS system would allow those who are not banks to have a bank. You could take out a loan simply by adding collateral to a smart contract or allowing an AI financial app to access your financial background without having to talk to an advisor and provide them with any sort of information. Instead, it would all be part of your online identity.
Transparency
The ultimate benefit of an IFS system would be its transparency. In the current financial system, anyone outside of those who work for the bank has no real idea what they are doing with customer funds. There’s no way to dig into a bank’s transaction history and assess what they’re doing for risk management purposes. With blockchain, everything is accessible. Ordinary people look at blockchain data and can make assessments and assertions about what is happening. Perhaps if similar supervision were available for banks, bankruptcies could be further avoided. In an IFS system this would (ideally) be possible
.
