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Blockchain has the potential to unlock multiple hidden benefits for fintech, banks and the digital payments space. Blockchain provides a secure information storage mechanism, whereby a distributed ledger maintains records in segregated blocks or nodes. Thus, even if a particular node is vulnerable to attack, the rest of the data stays secure. A World Economic Forum study predicts that 10% of global GDP would utilize blockchain by 2025. Clearly, the promise of blockchain seems huge and relatively unexplored.
How blockchain works
Let’s understand how it works. Blockchain technology comprises a series of secure digital records, interconnected in a digital network. The data and transactions, stored in a decentralized, tamper-proof repository are encrypted through a public and private key. The subsequent information block verifies the past data and integrates the data history of the previous chain component and encodes an additional layer of security. This results in a vast pool of data sets that can accommodate additional information, at any point in time, in an unlimited sequence. Blockchain can be effectively utilized to transparently record the entire sequence of events in a series.
Blockchain can be categorized based on certain features i.e. based on accessibility and based on participation. An EY study categorizes this into the following buckets:
• Who is eligible to access and read the information stored in blockchain
° If access is open to all, it is structured as a public blockchain
° If access is specific to individuals, entities, or groups of parties, it is defined as a private blockchain
• Who is eligible to participate i.e. submit or verify the transactions recorded in the blockchain
° If there are no authorization criteria, or in other words, anyone can submit and verify transactions, it is called a permission-less blockchain
° If authorization is mandatory, then it falls under permission-based blockchain
Thus, this translates into 4 broad blockchain categories – public permission-based, public permission-less, private permission-based, and private permission-less. The choice of which one to adopt depends on the use case and the end-user requirements. The diagram below depicts the broad differences:
Comparison between centralized system, public blockchain and private blockchain
Source: Financial Times
A blockchain is characterized by certain key features – decentralised, secure, distributed, and immutable. Backed by these features, the blockchain maintains the records of transactions occurring between different nodes.
1. Decentralised: Unlike the traditional centralised hub and multi-spoke model, blockchain runs in a decentralised manner. Thus, for the addition of each additional block to the ledger, the multiple nodes in the network need to collectively decide on the approval. Owing to a multi-authorization mechanism instead of central control, the blockchain system is secure as it becomes difficult to change the characteristics of the entire network.
2. Secure: Blockchain makes use of an additional layer of security by way of cryptography i.e. a unique mathematical algorithm that encrypts the information to prevent misuse or unauthorized access. Through a consensus mechanism, each node interacts with other nodes to ensure a collective protective mechanism.
3. Distributed: Each node in the blockchain maintains detailed records of past transactions. While this increases the record volumes, it acts as a safeguard against the possibility of tampering or unauthorized changes to the records. The hacker would be able to penetrate the network only if the data stored in most of the nodes are changed, which is very difficult to do, owing to the availability of minute historical records.
4. Immutable: This means unchangeable. In other words, once a record has been included in the blockchain, it is almost impossible to alter, delete or manipulate the entry in any manner. Thus the records attain a kind of permanent nature. An entry may be updated by adding an entire new block as against altering an existing record.
Key applications of blockchain
• How digital payments can benefit from blockchain
With burgeoning digital payments transactions owing to the thrust on a digital-first economy, there has been a simultaneous spate in payments frauds. Blockchain technology enables a secure, transparent technology framework with capabilities to process payments transactions at minimum unit costs and quick turnaround time.
• Transforming the fintech space with blockchain
A critical domain where blockchain can do wonders is records maintenance and database management. For example, blockchain can provide a tamper-free, secure mechanism for a comprehensive repository of credit scores, repayment history, and track records of borrowers. This would considerably reduce credit risk and improve underwriting quality.
• India’s Banks: leading the way in blockchain adoption
Recognizing the immense benefits of deploying blockchain, recently, 15 Indian banks have entered into a collaboration and formed a separate entity i.e. Indian Banks’ Blockchain Infrastructure Co Pvt Ltd (IBBIC) to strengthen trade-related finance through a secure digital network. Previously in 2017, a consortium of Indian banks had partnered under the aegis of BankChain to expand the application of blockchain with 8 live projects till date.
Here are some key advantages that may be realised with blockchain:
1. Time savings: Since payments is a highly trust-driven business i.e. an intermediary say a payments player, bank, etc that completes the transaction between the buyer and the seller. In the case of SWIFT payments, the presence of multiple third parties could result in a delay in payment processing owing to verification and processes by a centralised authority. However, with a decentralised blockchain mechanism, multiple approvers would be deployed across the nodes. A Wipro study highlights the savings in time for digital payments processing by embracing blockchain. Currently, fintech SWIFT global payment transfers require 24-48 hours while SWIFT message approval needs minimum of 24 hours. With blockchain, the entire global payment transfer time can be minimized to less than 30 minutes.
2. Secure architecture: Currently, most payments infrastructure is designed in a centralised manner with a hub and multi-spoke model. This makes the system vulnerable to attacks – the hub may be identified and targeted, resulting in a complete breakdown of the entire model. However, a distributed blockchain under a decentralised system mitigates this risk as the entire system is able to function in an uninterrupted manner.
3. Early detection of risks: The distributed ledger system in blockchain strengthens transparency and enables prompt monitoring and red-flagging potential issues with early detection. This is because the data is shared amongst multiple authorized users in a certain network.
4. Robust design: Blockchain makes use of encryption technology ad cryptographic signs that are cross-checked and validated by users at the nodes. In the event of an attack with unauthorised attempts to alter the data, the signature credentials no longer remain valid. These steps make each record immutable and tamper-proof.
Use cases of blockchain across sectors
Source: NASSCOM AVASANT Report (2019)
Blockchain is capable of providing data security as well as ensuring user privacy. As per a Statista report, over 47 Mn users are using blockchain-based digital payments systems. How far and how soon blockchain is able to achieve widespread adoption, only time will tell.