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.
Transaction reconciliation systems at present do not result in immediate notification. But using blockchain, all parties on the chain will be immediately notified about a transaction. 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. Blockchain potentially has far-reaching implications for the financial sector, and this is prompting more and more banks, insurers and other financial institutions to invest in research into potential applications of this technology. Market participants in other securities markets are exploring the usage of blockchain or distributed database technology to provide various services such as clearing and settlement, trading. Indian securities market may also see such developments in the near future and, therefore, there is a need to understand the benefits, risks and challenges such developments 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. In blockchain, from the source system it will try to match the transactions, so one can immediately verify any transaction using blockchain.
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.
If my bank wants to lend to a borrower, need to know what all he has borrowed from other institutions as well. For that, the CIBIL score at present, but that data is prone to human error.
Another big challenge is the trust between banks. ICICI Bank is giving correct information only because we feel that we should trust each other. There is no tangible backing of that trust. Once blockchain comes in, that trust will be backed up by clear tangible proof.
For example, Axis Bank in Hong Kong gave loans to Nirav Modi only because they trusted what was coming from PNB Mumbai. Had it been on blockchain, those clear entries would have been there that show whether the information is correct or not. That is one way such frauds can be prevented.
Blockchain is not a panacea for all issues facing the banking system today. A blockchain company that works closely with financial institutions. However, blockchain is an ideal technology to ensure proof of integrity to the data and reduce incidents of fraud.