Hopefully you have followed our story on Blockchain in Part 1 & Part 2 as well. What started with ICICI Bank and Yes Bank; now seems to have taken a major systemic push with IDRBT releasing its report on blockchain applicability for Indian banking post their POC (proof of concept) testing.
While we will recommend every interested individual to go through the full IDRBT document (refer Source), here we will put in the key takeaways. Remember the document also provides a good peak into what the technology means and the pros & cons of having same leveraged for financial services industry.
Key Takeaways on leveraging BCT (blockchain technology) for India BFSI:
- Fraud Prevention, Cost Savings, Operational Efficiency and Transparency are 4 main advantages outlined
- The fundamental aspects of BCT, distributed ledger, consensus in transactions & usage of hash pointer (data integrity, tamper evident etc) will make fraud much more difficult.
- Similarly near real time monitoring & settlement of transaction will bring cost saves to FX & other payments processes (reconciliation will also be much faster & easier).
- Crunching of process time can bring down both TAT & cost while distributed network means better resiliency.
- Immutability of the blocks (& transactions forming it) and better auditability adds to transparency.
- Lighter blocks with hash pointers to the actual supporting documents/ files, which will be stored separately & securely in digital format
- “Permissioned” blockchain architecture seems to be the way forward, at least for now. What it means, that instead of everyone having access to mining (append new blocks to the ledger) or validation of transactions/ blocks, there will be restricted authorized set of people/ stakeholders/ blockchain participants who can either be mining or validating.
- Use cases discussed globally are: Trade finance, cross border payments, capital market trading, Loan syndication, bond trading, supply chain financing
- IDRBT recommends a phased journey:
- Within bank, a blockchain for internal purpose. This will create awareness and acclimatization, as well
- Start from low complexity to more complex use cases: For e.g. centralized KYC (secure distributed database of client information) >> cross border payments >> syndication of loans >> Trade finance >> Capital Markets. Smart contract can be embedded in most of them as well.
- Central Bank/ RBI: Start looking at digitization of currency (not to be confused with bitcoin) but this will be digitization of Indian Rupee. This will be more to align to the bigger ‘cashless’ agenda that is being pursued vigorously by the current Govt.
- The POC was done on ‘Domestic Trade finance letter of credit’ and it was found to be quite successful and extendable easily for a few more use cases
- Security, Privacy & Scalability will remain key aspects to success of the blockchain and further maturity of the same. Security has to be appreciated at a broader level covering ledger, network, transaction, ecosystem, smart contract. Privacy will become an important consideration in the ‘permissioned world’ as the players will be known. Scalability will be a factor driven by the inherent architecture; the kind of use case will define the block size & block generation time, similarly on validation mechanism. Ultimately the architecture to be implemented has to take a balance viewpoint between security, privacy & scalability.
Our feeling is that bitcoin may not become a reality in India but we may see more focused efforts by RBI & the banks on leveraging BCT for ‘digitized currency’ and other mentioned ‘use cases’. While, as earlier reported, likes of ICICI, Axis, Yes Bank have already gone live with BCT in a few of these use cases. Others may follow suit as the advantages in terms of able to crunch the cost & time for processes (simplifying the process significantly) looks very promising. But a more wide scale usage will need:
- Lessons from these baby steps to be fed back into the system for correction/ modification, as necessary
- Maturing of the technology further to effectively address the concerns with respect to privacy, security & scalability and striking a right balance
- More players adopting it to will make the use cases more stronger as the advantages are better placed in a multi stakeholder, multi geography scenario and banking ultimately is a strongly interconnected ecosystem
As usual, keep watching this space for more developments on BCT and adoption of the same in Indian banks. Are we going to see a PSU bank going live with a use case soon following in footsteps of ICICI, Axis & Yes bank? Keep watching.
- IDRBT: Whitepaper on “Applications of Blockchain Technology- To Banking & Financial Sector in India”: Jan 2017
- Other important references made by IDRBT and otherwise helpful standalone:
- “The fintech 2.0 Paper: rebooting financial services” by Oliver Wyman, 2015
- “Blockchain in Capital Markets” by Oliver Wyman, Feb 2016