3 Reasons Why Blockchain Is The Next Big Change For Indian Financial Markets

07/09/2016 11:40 AM IST | Updated 08/09/2016 8:30 AM IST
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Ever since the proof of concept of bitcoin came up in 2009, it has been fiercely discussed and debated by central banks, traders, market regulators, and almost every business around the world that was looking for a low cost, highly secure and transparent mechanism for financial transactions. To start with, central banks and market regulators were not in favour of a currency that was not backed by any government or financial assets but operated purely on encryption algorithms that verified the transfer of funds. On the other hand, it was cautiously welcomed by businesses and traders. And the tug of war went on...

Blockchain is a peer-to-peer public ledger maintained by a distributed network of computers. There is no need for any central authority or intermediaries.

Less than a decade later, and the focus has moved on from unregulated cryptocurrency to blockchain, the core technology behind it. For the uninitiated, blockchain is a peer-to-peer public ledger maintained by a distributed network of computers. There is no need for any central authority or intermediaries. Instead, a distributed messaging protocol creates a shared ledger between trading parties. Every transaction that has valid sources of funds and a valid recipient goes into a new block which is time stamped. The concerned parties (miners) enter the transaction in a linear and chronological order in the record. To ensure the security of the process, these parties solve a certain puzzle before they access the data in the record. Each block includes the hash of the prior block in the blockchain, linking the two. If the asset is to be transferred to any other party in the future, a new block is created with a timestamp and is linked to the previous block, therefore the name -- blockchain. A complete chain contains records of every transaction ever executed regarding the underlying asset. This information can be used to track all transactions at any point in history.

While bitcoin-based transactions are not approved by the Reserve Bank of India (RBI), there are numerous other areas where blockchain can be of immense benefit. Below are some of the reasons why blockchain can be the next big change for Indian financial markets.

Diverse usage

Blockchain often finds association with cryptocurrencies such as bitcoin. However, the concept of distributed ledger can be easily replicated in several other industries such as real estate, insurance, brokerage, rent and leasing etc. Every transaction has an underlying asset, i.e. stocks, piece of land, or a commodity. Using blockchain, we can create a digital block that carries information about its ownership in an encrypted format. No one except the authorized parties can alter or counterfeit the information in the block, making the transaction absolutely safe and credible. Therefore, high-volume corporate transactions can benefit from blockchain. As the technology matures, it can be gradually replicated in the retail environment.

According to a report by Santander, blockchain can help banks cut their IT infrastructure expenses by about $15 to $20 billion per annum by 2022.

No counterfeiting

Counterfeited assets are a critical challenge in the Indian scenario. The losses due to a fake paper trail can be unimaginable. At present, for any transaction, reconciliation is required to ensure that the transaction is genuine. Scattered records, different record-keeping mechanisms, multi-layered approvals for every step make it difficult and expensive to verify the real ownership of any asset. Blockchain cuts through this clutter as all the information is readily available in the block and can be verified anytime.

Cost effectiveness

According to a report by Santander, a British bank, blockchain can help banks cut their IT infrastructure expenses by about $15 to $20 billion per annum by 2022. Indian banks are not too much behind the curve. The RBI has repeatedly suggested that Indian banks need to either develop their own capabilities or form alliances with competent technology vendors to leverage the potential of blockchain. Moreover, the RBI has recently constituted an internal committee of banks, fintech ventures, and other participants in the ecosystem, to share their recommendations about regulation of blockchain. In all probability, there could be a centralized India-specific blockchain owned by the RBI and all the Indian financial institutions may participate in the system. This will eliminate the current need for intermediaries and result in reduced transaction cost and time. Moreover, there will be much more transparency in the ecosystem.

To sum up, blockchain technology can pave the way for new business models by revolutionizing the existing complex and expensive systems and transaction processes for several industries. However, this requires more collaboration between these industries and the respective regulators. Taking cues from global developments, the ice has been broken in India.

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