Banking Article, Banking Finance 2020, Banking Finance October 2020

B L O C K C H A I N T E C H N O L O G Y

Abstract

Blockchain is one of the most talked-about emerging technologies in today’s digital space along with AI – Artificial Intelligence, ML – Machine Learning, IoT – Internet of Things, Big Data, Edge/Cloud Computing that is capable of, if implemented and accepted worldwide, bringing about a huge change in the way communications/transactions are carried out in any form and in any industry.  Though some of the forward-thinking organizations have started using this technology, large-scale adoption will change the way things are being perceived today.

The definition of Blockchain as per Wikipedia is “a growing list of records, called blocks that are linked using cryptography.  Each block contains a cryptographic hash of the previous block, a timestamp and transaction data which is generally represented as a Hash/Merkletree”.he term “Blockchain” (previously Block Chain) can be simply defined as the term itself denotes – a chain of blocks.  It is a distributed form of ledger keeping where each individual node maintains all the chain of blocks or transactions preceding it.  This latest technology is the buzz word of all the industries today including the Banking and Financial Sector, where the utility is far-reaching and huge.

Blockchain is widely believed to be invented by a person (or a group) going by the name of Satoshi Nakamoto in 2008, whose identity is unknown, particularly for the purpose of cryptocurrency “bitcoin”.  In his original paper, Satoshi Nakamoto used the words block and chain separately, but it later became popular as a single word blockchain.

Blockchain technology can neither be attributed to an organization nor thought of as an application, but only a new way of data documentation on the internet. The technology helps in developing different blockchain applications, for example, social networks, messengers, games, exchanges, online shops and many such more.  In other words, it is very much like the present-day internet and that’s why is also being called as “The Internet 3.0”.

The forms of the information recorded on a blockchain can be many like transfer of money, ownership, a transaction, an agreement between two parties, etc.  To establish the authenticity of the transaction, it requires confirmation from several devices on the network such as computers.  Once an agreement is reached (called consensus) between all the devices in the network, the information/data is stored on a blockchain that cannot be disputed, deleted or modified without the knowledge/agreement of all the participants.

In other words, the blockchain is resistant to alteration of data by its design and is a distributed open ledger to record transactions between parties in a permanent way that is verifiable and efficient.  It is managed by a peer-to-peer network that follows a common protocol for communication and validation.  Once any data is recorded, it cannot be altered retroactively without touching all the subsequent blocks.  This, in blockchain, mandatorily requires the approval of all the participants/stakeholders in the network.

A simple representation of how Blockchain/Bitcoin works, Source: Google Images

Why Blockchain?

Advantages

The main reasons for the popularity of this technology are Decentralisation, Transparency, Security and Immutability.

Decentralisation/Distributed: Approach to distributed storage and verification of data and no need for a Central Authority – since the data is stored in many devices on a network of nodes, it’s highly resistant to failures (both technical and physical).  Each node in the network replicates and stores a copy of the database, thus preventing a single point of failure.

Transparency: In a distributed ledger, all the participants in the network share the same data which can be updated only through consensus.

Security: Transactions in a blockchain must be agreed upon before they are recorded and later encrypted and linked to the previous transaction.

Immutability: Ability to remain unaltered and indelible.

Disadvantages

Experts and observers of the technology point out that there are many disadvantages also in the blockchain like usage of excessive energy to function, limitation in scalability, not being completely indestructible, can grow very large over time and lead to storage constraints and vulnerable to 51% attacks (if one entity manages to control more than 50% of the computing power, will allow them to meddle with the transactions).

 

Types of Blockchain

There are three primary types of blockchains.

  1. Public: These are designed as fully decentralized, which are open-source, allowing anyone to participate as users, miners, developers. All the transactions on public blockchains are fully transparent and anyone can examine the transaction details.  , Bitcoin, Ethereum, LiteCoin, etc.
  2. Private: Also known as permissioned blockchains, where the participants need consent to join the network. The transactions, being private, are only available to the participants in the ecosystem.  , Hyperledger, Corda, Hashgraph, etc.
  3. Hybrid: A combination of private/permissioned and public blockchains where it has both the benefits like privacy (private), security and transparency (public). , Ripple, Dragonchain, etc.

Present Status of Blockchain

Though initially started for cryptocurrency, bitcoin, there are a multitude of usages of this technology and many organizations are either experimenting with this technology or in the process of collaborating to know the extent to which their purposes can be served.

The following organizations have already made significant progress in the implementation of the Blockchain technology or exploring the possibility in their operations.

  • FedEx
  • IBM
  • Microsoft
  • MasterCard
  • Huawei Technologies
  • Bank of America
  • Facebook
  • Oracle
  • SAP
  • Samsung and many more

  

Blockchain in India

Public blockchains, as discussed earlier, can solve many Indian problems such as providing data security, reducing corruption, eliminating middlemen, improving the delivery of service by Governments and Organizations, etc.  But the current scenario in India is more focused on the consequences of misuse of this technology (particularly cryptocurrencies) rather than understanding the potential the blockchain technology can offer.

Having said that, our Government is also not neglecting the technology and the advantages it can offer for Indian scenarios.  In fact, it has hosted the International Blockchain Congress in association with some state governments for helping the adoption of the technology in India.  Reserve Bank of India also has setup a research unit in 2018 to study the new and emerging technologies (including blockchain) that can help in creating a cashless banking system.

Blockchain in BFSI Sector in India

Some Indian companies, like Bajaj Finserv, is using blockchain technology for providing the services like travel insurance, claim settlement to improve customer service (like settlement of claims in the case of flight delays even before customer request).

In Banking, JP Morgan, along with seven top Indian Banks like ICICI, Axis has brought the blockchain technology platform that enables payments to reach the beneficiaries faster.  The platform, named Interbank Information Network (IIN), is aimed at providing secure information exchange for cross-border payments which significantly reduces costs and time taken to complete a successful transaction.

State Bank of India, along with ICICI, DCB, Kotak Mahindra, Federal, Deutsche and UAE Exchange, in collaboration with Primechain Technologies, has started a platform – BankChain to explore the possibilities of shared KYC/AML, cross border payments, peer-to-peer payments and security controls.

 

Conclusion

Blockchain Technology that brought about the technological revolution in recent times has very high potential applications in various industries and sectors.  While few were first in adopting this technology in their operations, many are still sceptical and are in the process of exploring the possible ways that suit their requirements.  Though it became hugely popular with cryptocurrency applications, the adoption of the technology globally in different sectors can transform the way operations are carried out.

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