Ask CryptoVantage: What’s the Internet Financial System (IFS)?

What is IFS?

The Internet Financial System, or IFS, is ostensibly what it sounds like, an alternative financial system on the internet. The term has been popularized by crypto venture capitalist Chris Burniske on Twitter. While its exact form is yet to be determined, it would generally encompass a more digital version of the traditional financial system, in conjunction with DeFi.

The growth of Web3 and creation of a more interactive internet experience, including the increasing desire to create digital identities for people, and decentralized autonomous organizations (DAOs), means changes will need to come to the current system.

Why IFS is a Better Term Than DeFi

The issue with the term DeFi is that it’s somewhat exclusionary. No matter how much potential there is in blockchain and digital assets, not every person around the world will want to use digital assets like Bitcoin. They will however, want access to the same financial services which DeFi users can access.

These services already exist in the form of traditional online banking, but the reality is that there is a limited set of functionality to those services. You can’t just take out a loan with a few clicks, or loan out money to someone else. Combining the benefits of DeFi, such as smart contracts, with the traditional financial services available would help a large portion of the population take better financial control.

What Could IFS Be in the Future?

The shape of IFS in the future could have many forms. Assuming many countries launch a CBDC using blockchain ledgers as the backbone, they could, if they so desired, offer the exact same services that DeFi does. Banking customers could provide collateral to a lending platform provided by the bank to take out a loan without having to go through the traditional avenues. 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 over the long-term, they could instead work with developers of Web3 and DeFi services to create an all-encompassing IFS. This sort of system would likely have a little more regulatory oversight than the current DeFi system, but it would make processes such as filing taxes related to digital asset interaction much simpler, among other things.

What Benefits Would IFS Have Over Traditional Finance?

There are four main benefits that IFS would have over traditional finance. They are: transaction/settlement speeds, decentralization, accessibility, and transparency. We’ll give a brief explanation of each below.

Transaction/Settlement Speeds

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 such as a bank transfer, or making a payment on something like a loan or credit card, isn’t even close to instantaneous. Part of the reason for this is the “hours” that the traditional financial system works.

Many transactions are only processed during banking hours, and it often takes days for these sorts of payments to be validated and applied to relevant accounts. With an IFS system, these transactions would be nearly instantaneous. You’d be able to actually pay a credit card bill the day it’s due without it taking two days to process and incurring interest.

Decentralization

Taking the control of the financial system out of the hands of a small number of parties and instead giving the control to users is one of the tenets of DeFi. As seen with what happened in the US as some banks failed, you may not be able to take out your money when you need it. You’re also at the mercy of these same banks when you want to get a mortgage or loan. Creating a more wide array of financial services options for people around the world would benefit many. Of course, that’s assuming governments even create truly decentralized services or allow DeFi to continue to function.

Accessibility

As it currently stands, if you want to open an account with a bank, take out a loan, 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 un-banked to have a bank. You could take out a loan by simply adding collateral to a smart contract, or by allowing an AI financial app to access your financial background without having to talk to an advisor and provide them with all sorts of info. It would instead all be part of your online identity.

Transparency

The final benefit of an IFS system would be its transparency. In the current financial system, anyone outside of those working for the bank has zero real idea what they’re doing with customers’ funds. There’s no way to dig into a bank’s transaction history and evaluate what they’re doing for risk management purposes either. With blockchain, everything is accessible. Everyday people watch blockchain data and can make assessments and assertions as to what’s occurring. Perhaps if there was similar oversight available for banks, failures could be further avoided. In an IFS system this would (ideally) be possible.