The world over, organisations are leveraging Blockchain to manage corruption, risk, and fraud. As banks adopt the technology, it’s important to remember that it is possible to unlock the blocks if all parties collude to game the system. Blockchain works if human intervention is removed, and for that, we need every aspect of record keeping to go digital for the Blockchain system to work.
Banking institutions in India have hit an all-time low. Gross bad assets, where neither interest nor principal is repaid by the borrower, of nine of the country’s 21 nationalised banks averaged around 15 percent last year.
The high burden on bank balance sheets isn’t the only thing the government has to contend with. Scams and swindles abound, including case in point being that of celebrity jeweller Nirav Modi, accused of allegedly scamming Punjab National Bank (PNB) of Rs 11,300 crore.
Now, questions are being asked whether the government should fast-track Blockchain distributed ledger systems to verify every large loan transaction with a borrower, in the future, during the early stages of engaging with the bank.
But first, what is a Blockchain? And how could it help in scenarios such as these?
Settlement and payments are going to go peer-to-peer in a Blockchain ecosystem. A Blockchain is nothing but a distributed ledger where each party is in sync while executing a transaction; the narrative is that everything will be transparent.
How does it work? Whenever a person or a company applies for a high-value loan, things such as land titles, assets, and other letters of undertaking need to be verified. Each information exchange between different parties in a bank over documents submitted, by the party, becomes a block. Every time additional information is submitted, more blocks are created and verified with a token system where all parties have to agree whether the documentation is right. Any changes to documentation are subject to approval by all parties in the transaction, and are encrypted in the form of tokens.
According to PWC, $10 trillion of the global GDP will be on Blockchain by 2030 – that is about 10 percent of the global GDP. It makes sense when you think that India is a $2 trillion economy and $20 billion is lost on tracking land titles each year.
Sudhin Baraokar, Head of Innovation, SBI, says, “I just hear a lot of stories around digital technologies disrupting banks. But we, at SBI, got 27 banks together and work in an ecosystem already. Our stakeholders need outcomes; that’s when Blockchain becomes mainstream. You need to be able to show them that Blockchain can handle a scale of transactions in new business lines such as crowd-based funding and P-2-P lending.”
A study by the Association of Certified Fraud Examiners states that a typical organisation loses 5 percent of revenues to fraud each year. Fraud and scams can go undetected in a business for long, and here's where Blockchain can make all the difference.
Since the Blockchain is distributed, immutable, and can be permissioned, it is being used to prevent scams in real industries.
So, could Blockchain save the day?
Nirav Modi, 48, was already being investigated by the CBI for a Rs 280 crore fraud, in 2017, after a complaint by Punjab National Bank. Now would Blockchain have stopped this man from scamming the system? It doesn’t seem likely!
Banks accept Letters of Undertaking, where the party gives a personal guarantee to make good the loan if the business fails, from parties which practically don't come on to banks’ digital records. These are ad-hoc arrangements that the party and the banks create. Nirav apparently had eight such letters issued.
So, the intrinsic problem is that people “game” technology to get money. Once money is in the borrower’s account, Blockchain or no Blockchain, the system can always be gamed by incumbents. The important question is “are we ready for a transparent India”?
The block about Blockchain
The Nirav Scam must be a case in point for banking to make documents go digital. But it’s important to remember that nothing can stop a criminal mind from unlocking the blocks.
Rajesh Dhuddu, SVP, Quatro, which tailors solutions for the needs of the global financial industry, says, “Today, there is uncertainty in establishing how the whole thing works because they have not been able to tell how the exchange of records happens.” He adds that Fortune 500 companies have still not moved to Blockchain because of the lack of understanding of the technology.
According to Gartner Inc., the business value-add of Blockchain will grow to slightly more than $176 billion by 2025, and will exceed $3.1 trillion by 2030. That’s why IT services are betting big on it. It is going to be part of their cloud and platform offering. All IT services companies constitute less than 10 percent of their revenues from the cloud. With global corporations betting big on security, AI, machine learning and analytics, all these services can be built on Blockchain-as-a-service.
One needs to look at the history of Blockchain and how it has evolved to form a view on the future of Blockchain. Just believing that it’s the panacea to all the problems in the world isn’t the way to go.