A few weeks ago, the State Bank of India announced Bankchain, an initiative to share information between banks on blockchain that would help to reduce fraud.
Blockchain is a distributed digital ledger (or database) of transactions. Some other examples of distributed ledger technology (DLT) include Ripple, Ethereum, and Hyperledger. What makes this ledger special is that it is shared by a vast network of people (or computers) that must validate and approve every transaction through consensus. Once a transaction is written into the ledger, it can neither be changed nor recalled. That is the first layer of safety. Second, a hacker can't get at it because there is no single point of vulnerability; this is because the ledger exists on millions of computers and to break it open the hacker would have to breach it on each one of them. This is why the distributed ledger is considered impenetrable.
If the bank account details, unique identification number and registered mobile information of every Indian were put on blockchain, it would pave the way for a completely safe digital environment...
The flip side of DLT is that its transactions are anonymous. To prevent miscreants from exploiting this for wrongful dealings, Central Banks around the world are asking banks to conduct KYC and other investigations to identify and approve all users beforehand. With that, every transaction can be traced to the last mile if necessary. What's more, a digital identity, once established on blockchain, cannot be changed unless the entire network approves it. Digital identity management is hence one of the primary use cases of DLT, and banks such as HDFC and Axis are already exploring it.
Another way in which blockchain curtails fraud is the smart contract. A smart contract is a digital contract that is automatically enforced when certain conditions are fulfilled. All the documents required for the contract are digitised and put on blockchain, where the network validates them. By doing away with paper documentation, the smart contract straightaway eliminates document fraud, and also the risk of loss during transit. Now, only genuine users with established identity and ownership can transact, and that too in full view of the blockchain network. A huge use case for the smart contract is property dealings. Digitising land records on blockchain would foil the intentions of fraudsters misusing a General Power of Attorney or access to title documents to lay false claim to property. In addition, a smart property contract would curb tax evasion by making make the terms of transaction open and transparent to the regulatory authorities.
Actually, the above scenario can be extended to all types of assets with interesting consequences. Take art, for example, where it is important but also difficult to establish genuineness. If a community of experts were to join up on blockchain to confirm the credentials of artwork, it would facilitate buying and selling. What's more, those only interested in art as an investment could buy a "share" of a painting and sell it once it appreciated, on blockchain itself.
A year ago, the then deputy governor of the Reserve Bank of India stated the intention to leverage blockchain to address fraud. This is possible by enforcing a mechanism wherein a paper check is also recorded on blockchain with a unique reference number known only to the genuine issuer. Before making a payout, the receiving bank can verify the paper check against its blockchain credentials to establish its genuineness.
There are many other use cases like these for using distributed ledger technology for managing risk, corruption and fraud. The Institute for Development and Research in Banking Technology, a think tank set up by the RBI, has published a long list of potential blockchain applications in a recent white paper. This and the RBI deputy governor's statement are indications of the authorities' keen interest in the technology. Other government initiatives are also indirectly laying the groundwork for blockchain adoption. These include JAM—Jan Dhan, Aadhaar and Mobile—an ambitious set of initiatives to provide a bank account, identity and mobility to every Indian, and the Unified Payments Interface (UPI) initiative that will revolutionise digital payments in the country. If the bank account details, unique identification number and registered mobile information of every Indian were put on blockchain, it would pave the way for a completely digital environment and safe, secure and transparent transactions.