How will Blockchain transform India’s banking system?

What is blockchain?

• Blockchain was invented by Satoshi Nakamoto in 2008 to serve as the public transaction ledger of the cryptocurrency bitcoin.
• “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
• Don & Alex Tapscott, authors Blockchain Revolution (2016)
• Picture a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of the blockchain.
• Information held on a blockchain exists as a shared — and continually reconciled — database. This is a way of using the network that has obvious benefits. The blockchain database isn’t stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralized version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.
• Blockchain, or the decentralised ledger technology, promises to completely transform the banking industry by making some of its core processes much more efficient, secure, and transparent.

Breaking the chain: Leveraging blockchain to facilitate a shift from antiquated systems to agile processes.

1. India’s centralised banking system can benefit a great deal from blockchain technology as it will:

• help banks automate their inter-organisation processes.
• Substantially improve existing operating systems. When these operating systems are powered by blockchain technology:
a) banking processes will require the minimum intervention of regulating bodies,
b) monitoring assets and performing compliance-related tasks will become much simpler, quicker, and efficient as compared to the current systems.

2. Blockchain‘s ability to mitigate fraudulent activities, especially with respect to financial transactions, has gained significant attention from the financial services industry, considering how criminal activities affect financial intermediaries like stock exchanges and money transfer facilitators each year.

3. This technology can eliminate some of the major cybercrimes being perpetrated online today against financial institutions.

4. Blockchains can store any kind of digital information, including computer code that can be executed once two or more parties enter their keys. Therefore, another major implication of this technology is that it will allow financial institutions to create smarter contracts, which can be programmed to create additional contracts or execute a pre-determined set of financial transactions once a certain set of criteria has been fulfilled. Such self-executing smart contracts will be particularly helpful for banks to execute loans, manage loan repayments, and even undertake recovery actions in cases of defaults.

5. Furthermore, banks and financial institutions end up spending millions of rupees each year on ensuring compliance with Know your Customer (KYC) and customer due diligence regulations alone. Although intended to verify the source of a transaction and identify instances of money laundering, KYC verifications are repeated every time an organisation needs to validate the details of a client, making it a delayed and cumbersome processWith Blockchain, however, one organisation can access the independent verification of a client undertaken by another organisation, thereby eliminating the need to verify the details all over again. For banks and financial institutions, then, the benefits such as reduction in administrative costs for compliance departments would be significant to overlook for financial institutions.

6. Then there’s the payments space where blockchain’s potential for disruption is simply massive, as it can facilitate greater security and lower costs for banks to process payments, whether between two or more organisations, clients and or even between banks. The transfer of value, especially when it comes to cross-border transactions is often an expensive and lengthy process. Blockchain can make this entire process quick and seamless through a digital ledger system with end-to-end verification undertaken through a decentralised system.

Regulators in India, while worrying about the potential threats of virtual currencies, have largely overlooked the potential of its underlying technology–Blockchain and the decentralised ledger system. These technologies have the ability to address several key issues faced by India’s banking and financial systems, and we need to find ways on how to capitalise on this opportunity and make the most of it.