Blockchain: Ready to embrace, Indian banks?
Despite the immense possibilities of the technology, it is not expected to go viral in India for some time as there is confusion and little understanding of its scope as a business solution
When I first heard of blockchain, I did not know whether it was a “block of chains” or a “chain of blocks”. “Block” in blockchain, I understand now, is a group, connected in a well-defined way, publishing and populating information uniformly and simultaneously at all the blocks. And “chain” is a multi-form connector that has its own intelligence as well as originality. Blockchain originated as a ledger for bitcoins, or the currency for the digital and virtual world. Any currency requires universal recognition of its value and location and features that cannot be replicated. Counterfeiting must be recognisable using easy tools. All these features were translated into the ledger for bitcoins, known as distributed ledger in blockchain parlance.
In common currency, exchange of value takes place with physical exchange. In bitcoins, the exchange of value occurs as ownership information is instantly published everywhere in all connected blocks using what is called cryptographic hash functions. Now, how to prevent counterfeiting or fraud currency, which is called “security feature” in currency? Here it is done by generating a unique value (hash value) for each message of transaction. The technology ensures that this value tag cannot be duplicated and any tampering becomes immediately evident, through the “magnification” features of the technology.
So far, so good. However, something weird is happening today. Blockchain, primarily developed as a ledger, is assuming the cult status of a platform. Innovators are finding many uses of the unique features of the framework to devise multiple approaches for solving real-world problems of the financial world. Permutations and combinations using the key utilities embedded in this technology have assumed the velocity of a rapidly spreading viral fever and is impacting everyone. All want to ride the bandwagon. Indian banks, financial firms and information technology companies providing products and services are no exception. For example, State Bank of India is today doing proofs of concept for half a dozen uses in different spheres of banking, either on its own or in collaboration with national and international players. More on that later.
What are the key features of a blockchain framework that everyone is trying to use? Information and data sharing capabilities inside the network are a key capability. The sharing can be user-defined, peer-to-peer or, top-down or bottom-up in a hierarchical fashion. The second is the smart contracting feature, which is known as transaction owing to the bitcoin origin. These are essentially a set of business logic to verify transactions through programmable logic. It could be one-to-one, one-tomany or, many-to-many in its most complex format. Third, of course, is the tamper-proof distributed ledger or record-keeping. Confidentiality and consensus in the form of non-discretionary and simultaneous information is the other feature. All of these lead to efficiency, savings on cost and transparency — key foundations of the financial world. Recipes, therefore, are developed using these ingredients for use in the real world.
The main uses so far have been in the remittance and trade finance arena, given the necessity of information flow that needs simultaneous and exact similar notification in the value chain. In case of remittance, these are the remitter, remitter’s bank, settling bank, beneficiary, beneficiary’s bank, nostro bank, etc. In case of trade finance, the “to be notified” entities are the LC opening bank, negotiating bank, discounting entity, shipper, insurer, etc. Each one of the recipients could be defined as a block, and chained through programmed protocol. The efficiency and speed of closing of transactions are the USPs of the technology. In blockchain, a typical trade transaction cycle comes down from 10 days to two. Newer uses are in the field of trading in currencies, stock and options trading, AML (anti-money laundering) and fraud monitoring, consortium funding-related information exchange, etc. The hyped-up possibilities have generated a feverish pace of attempts to adopt the technology. The banking and finance sector has been at the forefront of this race.
In India, large banks such as the SBI have adopted multiple projects with multiple partners to test the possibilities. SBI, while exploring international collaboration and networking in this space with bodies like R3, Ripple and MonetaGo, has already initiated experiments in trade finance, consortium information, outward/inward remittance, asset tracking, record management, e-KYC, etc. A few beta versions are ready for testing and closed-user group deployment soon. SBI is also working with technology majors such as TCS and IBM and start-ups like Prime chain to take blockchain adoption to the next level by using their hyper ledger and BC technology.
Sadly, however, in India as well as globally, most of the projects are at the stages of experimentation, trial, beta and proof of concept. The reasons for the technology not being ready for production are manifold. All these are the loose, un-explained ends and the “unsolved” nature of blockchain technology. First, so far, the “hack-proof” claims have not been well established. Scalability is another sore point. In India, like markets, where volumes, transaction concurrency, peak loads, downstream consistencies are key success factors, blockchain has not been able to establish enough used cases. As diverse uses and private blockchains proliferate, security protocol standardisation continues to be a challenge. Lack of interoperability, service and support are nagging issues.
At the forefront of the blockchain dilemma is the confusion and lack of understanding that it is not a complete business solution, only a basic protocol to ease information flow and improve transparency and efficiency. Therefore, the fever around riding the bandwagon of blockchain is expected to remain mild and not go viral in India for some time to come.