Blockchain, a form of digital ledger technology (DLT), is a linearly linked information-containing block secured by cryptography and shared between participants. Blockchain technology provides a secure and naturally decentralised framework, integrating data processing and security into an algorithmically enforced protocol.
Blockchain technology is the bedrock of cryptocurrencies and has multiple other utilities and advantages in finance, record maintenance, payments, etc. While countries and banks worldwide have mixed perceptions about cryptocurrencies, they have started realising that blockchain technology has proved advantageous to the financial sector. Blockchain technology can reduce infrastructure costs, improve security and data quality of transaction information, increase efficiency and faster settlement, and provide transaction transparency.
The utility of blockchain technology extends from merely keeping a record of financial transaction entries to the automatic implementation of the terms of multi-party agreements with digital contracts. With a shared database running a blockchain protocol, digital contracts auto-execute, and all parties validate the outcome immediately without a third-party intermediary requirement.
Financial contracting in India
Under the current regulatory regime, regulated financial institutions are required to adhere to anti-money laundering and know your customer (KYC) compliances, which have monetary and time-based implications. Blockchain technology may aid in eradicating the duplication of effort and assist in the smooth running of such compliance processes.
Blockchain technology can also help address and mitigate issues cropping from identity management, as the data would be saved securely on the block of blockchain technology, and it would be difficult to tamper with such ledgers.
The government of India and the Reserve Bank of India (RBI) have recently started acknowledging and monitoring the effects and impact of blockchain technology in the financial sector. To this effect, the RBI released a regulatory framework for fintech companies in August 2019, allowing market participants to test new products, services or business models with customers in a live environment, subject to certain safeguards.
The RBI also published an article titled, “Distributed Ledger Technology, Blockchain and Central Banks” in February 2020, to explain how DLT and blockchain technology shall be utilised, the recent developments to blockchain technology, and its applicability to central banks across India and globally.
In sync with initiatives undertaken by the RBI, several private and public banks have also co-joined their efforts to reap the benefits of blockchain technology and DLT by partnering and investing in the fintech sector, for example: The State Bank of India tying up with JP Morgan to use their blockchain technology; ICICI Bank, Axis Bank and Yes Bank joining the Interbank Information Network launched by JP Morgan; and Axis bank working in sync with Ripple to use their blockchain technology to reduce customers’ transaction costs and time taken for payments, and to make cross-border payments faster and more efficient. Blockchain technology is also being used for digital lending, and a recent example of that is the State Bank of India, HDFC Bank, ICICI Bank, South Indian Bank and IDFC First Bank investing in the equity shares of fintech company IBBIC to provide DLT solutions in the financial sector.
In addition to catering to financial inclusion, blockchain technology has contributed to the ease of doing business as DLT has been used to simplify lending to micro, small and medium enterprises (MSMEs). Eleven banks, including a few prominent names, are a part of the consortium of banks launching the country’s first blockchain-linked funding for MSMEs.
At the state level, blockchain technology is being used in the management of land ownership records and healthcare. Andhra Pradesh and Telangana have started using blockchain-related solutions for land registry and electronic health records, while Assam and Sikkim use it to help their tribal population secure ownership titles to their lands.
Banks and fintech players are exploring the various utilities of DLT. With the considerably developed features and complexities in offering solutions, there are opportunities for blockchain technology to become more ubiquitous in the future. The RBI, other banks and several fintech players are coming together to explore blockchain technology and DLT in the financial services sector in the form of pilot projects, thereby paving the way for a new economy.
Anu Tiwari and Anindita Bhowmik are partners at Cyril Amarchand Mangaldas. Principal associate designate Ritu Sajnani, senior associate Utkarsh Bhatnagar and associate Shreejoyee Bhattacharya also contributed to this article
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