The Indian government is getting more serious about using blockchain technology into the growing digital economy of the country.
Blockchain technology has emerged as the talk of town, especially after the recent rollout of the budget. While announcing the Union Budget 2018-19, Finance Minister Arun Jaitley stated that the government was looking at adopting blockchain tech for disrupting and streamlining various sectors. While the sprawling financial services landscape seems to be the foremost sector to benefit from this revolutionary technology, other industries also seem poised to benefit from it.
Recently, the Karnataka Government has decided to use the blockchain technology and is planning to bring out a White Paper on ‘Blockchain Use in Governance’ as a prelude to a separate policy.
The technology is believed to more efficient and more secure. One of the key benefits of using block chain technology is that the data is decentralised which reduces the risks from cyber exploits. Some of the popular cryptocurrencies that use block chain technology are bitcoin and ether.
What is Blockchain Technology?
A blockchain is an anonymous online ledger that uses data structure to simplify the way we transact. Blockchain allows users to manipulate the ledger in a secure way without the help of a third party.
A bank’s ledger is connected to a centralised network. However, a blockchain is anonymous, protecting the identities of the users. This makes blockchain a more secure way to carry out transactions.
The algorithm used in blockchain reduces the dependence on people to verify the transactions. This technology used for recording various transactions has the potential to disrupt the financial system.
A blockchain is a digitized, decentralized, public ledger of all cryptocurrency transactions. Constantly growing as ‘completed’ blocks (the most recent transactions) are recorded and added to it in chronological order, it allows market participants to keep track of digital currency transactions without central recordkeeping. Each node (a computer connected to the network) gets a copy of the blockchain, which is downloaded automatically.
Blockchain not only records a transaction or data but also verifies the same. For the past few years, blockchain has become a new horizontal for verticals like supply chain, smart contracts, file storage, IPs, Energy management, AML, stock trading, governance, land registrations and more to count.
Originally developed as the accounting method for the virtual currency Bitcoin, blockchains – which use what’s known as distributed ledger technology (DLT) – are appearing in a variety of commercial applications today.
Currently, the technology is primarily used to verify transactions, within digital currencies though it is possible to digitize, code and insert practically any document into the blockchain. Doing so creates an indelible record that cannot be changed; furthermore, the record’s authenticity can be verified by the entire community using the blockchain instead of a single centralized authority.
The adoption of blockchain by India’s banks could help avert frauds such as the one at Punjab National Bank as the disaggregated and transparent nature of the technology, which updates information across all users simultaneously, would have ensured that various officials would have instantly been alerted to the creation of the letters of undertaking (LoUs), according to bankers and blockchain specialists.
Blockchain, a distributed ledger technology originally developed as an accounting system for the cryptocurrency Bitcoin, is being researched across the banking and financial services industries for the potential benefits it may offer in an increasingly digitised business environment.
Central banks including the U.S. Federal Reserve and the Reserve Bank of India have been examining the technology to understand the regulatory challenges it may pose.
SBI was convinced of blockchain’s utility, especially its potential to improve internal fraud monitoring, and had already implemented it in its reconciliation systems and in several cross-country payment gateways.
Blockchains are immutable and distributed ledgers, which means that anything recorded on them cannot be changed or deleted, and is instantly uploaded to all users on that blockchain.
Blockchain technology is like the internet in that it has a built-in robustness. By storing blocks of information that are identical across its network, the blockchain cannot:
– Be controlled by any single entity.
– Has no single point of failure.
Bitcoin was invented in 2008. Since that time, the Bitcoin blockchain has operated without significant disruption. The internet itself has proven to be durable for almost 30 years. It’s a track record that bodes well for blockchain technology as it continues to be developed.
Given the potential of this distributed ledger technology (DLT) to simplify current business operations, new models based on blockchain have already begun to replace the expensive and inefficient accounting and payment networks of the financial industry.
While banks were initially hesitant to explore these technologies because of their concerns about potential fraud, they have started looking into how the blockchain might provide generous cost savings by allowing back-office settlement systems to process trades, transfers and other transactions much faster.
Last year, ICICI Bank announced that it successfully executed transactions in international trade finance and remittances using blockchain technology in partnership with a Dubai based bank Emirates NBD.
In 2008, a cryptographer who goes by the pseudonym Satoshi Nakamoto created a crypto-currency called bitcoin. Bitcoin is digital currency that allows you to perform peer-to-peer transactions without the help of a third party such as banks.
Although the enthusiasm around Bitcoin waned after several governments refused to recognise the crypto-currency, but the underlying technology of blockchain has been hailed by the banking sector.
Advantages of Blockchains:
Efficiencies resulting from DLT can add up to some serious cost savings. DLT systems make it possible for businesses and banks to streamline internal operations, dramatically reducing the expense, mistakes, and delays caused by traditional methods for reconciliation of records.
The widespread adoption of DLT will bring enormous cost savings in three areas, advocates say:
– Electronic ledgers are much cheaper to maintain than traditional accounting systems; the employee headcount in back offices can be greatly reduced.
– Nearly fully automated DLT systems result in far fewer errors and the elimination of repetitive confirmation steps.
– Minimizing the processing delay also means less capital being held against the risks of pending transactions.
– In addition, some smaller number of millions will be saved by shrinking the amount of capital that broker/dealers are required to put up to back unsettled, outstanding trades. Greater transparency and ease of auditing should lead to savings in anti-money laundering regulatory compliance costs, too.
Blockchain’s removal of almost all human involvement in processing is particularly beneficial in cross-border trades, which usually take much longer because of time-zone issues and the fact that all parties must confirm payment processing.
Blockchain systems can set up smart contracts or payments triggered when certain conditions are met. The blockchain cotton transaction mentioned above, for example, used a smart contract that automatically made partial payments when the cotton shipment reached specific geographic milestones.
Blockchain — a protocol for exchanging value over the internet without an intermediary — has the potential to transform multiple industries and make processes more transparent, secure and efficient. Financial players are the first movers to capitalise on this technology infrastructure. Several industries and governments are waking up to the disruptive potential of this technology.
Banking Sector and Blockchain Technology
Banking is one amongst the foremost sectors that stands poised to be disrupted with blockchain technology. Since this technology presents the immutable, secured, and encrypted ledger, the same has huge scope of adoption in the banking and financial services sector. It will not only offer accuracy and security, but will also aid the government in expediting financial inclusion.
All major banks are experimenting with blockchain as they can use it for money transfers, record keeping and other back-end functions.
The blockchain application replicates the paper-intensive international trade finance process as an electronic decentralised ledger, that gives all the participating entities, including banks, the ability to access a single source of information.
It also enables them to track documentation and authenticate ownership of assets digitally, as an un-alterable ledger in real time.
Indian IT service providers like Infosys and TCS have been throwing their weight around blockchain technology. Both these companies are using blockchain mechanism to create core banking platforms for banks.
Blockchain Technology and India
India has also been quick to realise the potential of blockchain in good governance. The Andhra Pradesh government is setting up a Blockchain Centre of Excellence and inviting startups and experts to set up the country’s first blockchain state. Other states like Maharashtra, Karnataka, Kerala and Rajasthan are following the lead.
Blockchain has the potential to streamline land records, asset registries, auto records, voting records, national identity, financial transaction records and traceability. All these can eliminate corruption on a large scale and bring the large informal sector into the formal economy.
The NITI Aayog-led IndiaChain plans to implement a full-fledged blockchain infrastructure to compliment IndiaStack and leverage ‘electronic Know Your Customer’ (eKYC) using Aadhaar. This is expected to positively affect subsidy distribution, regulating land records, small and medium enterprise (SME) financing, court cases and other big challenges being faced now.
GoI has allowed interoperability among prepaid payment instruments. This means that users will soon be able to transfer funds from one mobile wallet to another. This collaboration and ‘co-competition’ will widen the reach and provide a homogeneous environment to drive digital payments industry into the next phase.
More significantly, these measures will ensure that payments are safe, secure, authorised, efficient and accessible as the propensity for highspeed mobile internet with affordable data plans accelerates migration to digital.
Interoperability will undoubtedly improve the credibility of a wallet, making it a virtual bank through which one can transfer money anywhere. It will bring more liquidity into the system and boost consumer confidence in the fast-growing economy.
Collaboration between banks and fintech startups coupled with blockchain technology are creating new financial segments globally. An increasing tech-savvy millennial population, the need for superior customer experience, ease of payment, and cheaper and faster alternative being offered by ubiquitous fintech players are driving the adoption of digital payments.
In fact, global payment revenues in 2018 are expected to total $2.3 trillion( about the size of Indian economy), representing 43% of banking revenues. The payment landscape is undergoing unprecedented transformation and companies are altering their archive systems with a strong focus on data analytics.
Payments have witnessed increased use of consumer data to provide value-added services. In insurance, too, there is increased usage of advanced data techniques and analytics to identify and quantify risks. Fintech startups are using artificial intelligence (AI) to improve and expand credit offerings, insurance options and personal finance services.
Internet of Things (IoT) is being applied through telematics that allow for monitoring of, say, driver behaviour for car insurance. Similarly, home insurance customers with connected technologies can be provided potential threats in real time.
GoI has proposed a two-percentage-point discount in GST for consumers who make digital payments. This is a good move that will automate workflows, encourage good accounting practices, ensure tax compliance and spark a new approach towards digital inclusion.
With these trends, India should transform into a knowledge-driven economy through a digitally empowered society. Much sooner than the world expects.