SAURAV JAIN

PGDM-2018-2020

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Blockchain in Banking:

All we hear today is about the buzzword “cryptocurrrency”, and to understand this term
we need to understand what is “Blockchain”.

The current electronic system or we can now say the traditional system relies on 3rd
party for transfer of money from one person’s bank account to other person’s bank
account; the 3rd party is also called as the clearing house. Below image gives the right
picture of how traditional system worked.

The problem in such setup is the centralization part or the 3rd party involvement. Data
regarding the user and the transaction is given to this 3rd party which can create a
problem. If at any point the bank is hacked then the dependent participant’s records get
exposed. The participants would have to keep faith in the privacy and security
maintained by such intermediaries. This is not it, in exchange of providing the service,
the intermediaries charges high fees and also takes time for transaction execution in
some cases. Therefore the current electronic systems that count on centralized
institutions for their business transactions are inefficient, expensive and vulnerable.

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This lead to the idea of decentralized system!

The key motivation for the probable applications of blockchain technology in financial
services is to attain cost savings, security, and enhancing the efficiency of services. The
fundamental advantage of blockchain technology is the distributed ledger’s capability to
share information in a secure way and provide for the unchangeable data transfer –
confirming data integrity.

What is Blockchain?

To understand Blockchain we need to know what cryptocurrrency for example bitcoin is.
Bitcoin is a decentralized electronic currency that uses rules of cryptography for
regulation and generation of units of currency. Now coming to blockchain, blockchain is
a technology that enables moving of bitcoin or other cryptocurrrency.

The key motivation for the probable applications of blockchain technology in financial
services is to attain cost savings, security, and enhancing the efficiency of services. The
fundamental advantages of blockchain technology are the distributed ledger’s capability
to share information in a secure way and provide for the unchangeable data transfer –
confirming data integrity. Problems solved in whole were as follows

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 • Money transfer without 3rd party involvement
• Time reduced
• Less money

We will need to learn a few more terms to understand this concept in full,

Open ledger – chain of transactions that is open in public

Distributed ledger – when the ledger is distributed, is stored at different nodes

Miners – special nodes which can hold the ledgers

Impact on Banking Sector

Blockchain allows transparency and also is decentralized system, meaning anyone in the
world using the system can know what’s going on which is completely opposite to
today’s banking system. For customers blockchain provides the means to do
transactions easily, way more faster than the traditional system and also the reduced
cost. All banking system is disrupted because blockchain challenges the very core of
banking sector which is the trust factor, now no intermediary is needed so no trust
issues will be seen.

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 Blockchain applications in banking

i. Smart Contracts – Smart contracts enable self-execution of contractual

agreements between parties and help exchange assets in a transparent way. With
the help of blockchain, smart contracts allow autonomy & security as your
documents are cryptographically encrypted, allows backup as data is duplicated
at all nodes, allows precision and lessens manual errors.
Projects underway: Deutsche bank applied smart contracts to lifecycle
management of corporate bonds. This enabled them to evaluate both the
technical and legal competences of the technology and closely observe the
lifecycle management events and transfer of ownership of bonds.

ii. Fraud Reduction – The essence of blockchain technology is the dispersed

framework and transparency wherein data is duplicated at each node and verified
by miners. Since the data at each node will pass through the validation checks, it
will avert the entire system from security threats. However, in order to realise

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 this, banks need to collaborate with regulatory bodies and FinTechs to develop a
reliable solution.
Projects underway: Emirates Islamic Bank, UAE has deployed
blockchain technology to avoid cheque fraud. Santiago Exchange in Chile aims to
integrate blockchain technology across Chile’s financial sector to minimize errors
and fraud

iii. KYC and online identity management – According to a report by Goldman

Sachs, banks can attain 10% reduction in personnel with the implementation of
blockchain in KYC process. If online identity management is moved to the
blockchain, customers will be required to register once on the blockchain and
choose their medium of authentication and the parties with whom their identity
can be shared.
Projects underway: One such experiment in improving bank’s
potential to verify customer identity using blockchain was carried out by IBM and
Credit Mutuel Arkea. The first project of Indian blockchain consortium
Bankchains is a blockchain for integrated KYC, Anti-Money Laundering and
Counter Financing of Terrorism.

iv. Trade Finance – As per the International Chamber of Commerce (ICC), more
than 80% of international trade uses trade finance products such as Letters of
Credit. This involves certain challenges such as mistrust and unknown solvency
of trading partners. Blockchain in trade finance will help in overcoming the
trade-off between low cost and high security often faced by the standard finance
products. It can enable secure collaboration at low process costs.
Projects underway: Open Trade Docs, a Singapore based start-up, is
in the proof of concept (PoC) phase for securing trade documents in the
blockchain by digitizing them. A London based company, Everledger, has created
a tracking process for diamonds which provides insightful data to manufacturers,
wholesalers, retailers, banks, insurers and other regulatory bodies across borders.

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Despite the strict jurisdictions surrounding the banking sector, financial institutions
have begun to realize the potential of blockchain technology by seeing the popularity of
crypto currencies in today's markets. The big giants of the banking sector have already
started to carry out the tests to discover possible cases of use of this decentralized
technology for their business processes.
In addition, some of the organizations are also investing heavily in such
research and testing by startups to develop solutions based on blockchain. With
Blockchain entering the current scenario, you can solve many problems and make the
system more transparent, easy to access and reliable

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