Blockchain is a distributed shared ledger that records business transactions in an unbroken chain that is visible to all parties involved in a transaction. As it offers permanent and tamper-proof recording of transactions on a distributed network, blockchain technology has the potential to disrupt financial industry applications. Blockchain has numerous applications in areas like digital currency, trade finance, KYC, international money transfers, etc. It has a lot of potential but also security, privacy, and scalability issues that need to be resolved. You will be a master of blockchain technology by doing a Blockchain Quality Engineer online training course.
Blockchain is being extensively investigated across businesses, and several use cases are being tested. Although most use cases involve several stakeholders along the value chain or at the industry level, some use issues, such as loyalty and Know Your Customer (KYC) processes, are unique to a particular organization.
Application of Blockchain Technology in the Banking Sector in India
A blockchain is a digital, immutable, distributed ledger that continuously and progressively logs transactions. Blockchain technology can transform the global financial sector by providing a wide range of alternatives for how people deal with money and values.
The respective agreement of the network participants, commonly referred to as nodes are required for each subsequent transaction to be added to the ledger, producing a continuous system of control concerning manipulation, errors, and data quality, management, and direction.
A blockchain is made up of a series of blocks, each of which serves as a repository for data about a transaction and links to the previous block in the same transaction. These interconnected building components provide a logical chain that serves as the primary transaction's conduit.
On the Blockchain, all data is exchanged as generic copies. Participants independently verify information without a central authority. The remaining nodes continue to act or function, ensuring that there are no interruptions, even if one node fails. On the Blockchain, a transaction may only be completed if it has the unanimous approval of all the parties involved. Consensus-based regulations, however, can be changed to accommodate various circumstances.
Building blocks fix them cryptographically in the chain. This makes it ludicrous to erase, change, or copy already-created blocks before putting them on the network, as doing so would prevent the creation of actual digital assets and ensure a high level of dependability and trust. Additionally, a Blockchain's decentralized storage is well known to be exceedingly failure resistant. Blockchain eliminates the single point of failure even in the absence of a significant number of network participants. Data kept on a blockchain is persistent.
1. Public Blockchain: Bitcoins
All public blockchains are open source. In other words, everyone can participate in this blockchain. Join the transaction facilitated by the Blockchain, each member can view the newly inserted blocks, and everyone can therefore take part in the consensus on the procedure by which blocks are added to the merely the current status of the chain.
Faster Payments and Digital Currency
Cryptography is used to make faster transactions more secure and safe and to control the generation of new units of currency in cryptocurrency, which serves as a medium of exchange. The most well-known digital coins include Bitcoin, Ethereum, Ripple, Litecoin, and others. Due to user control over their transactions, cryptocurrencies help combat identity theft. Because the transactions are final and cannot be undone once they are, they shield the operator from the risk of fraud and misrepresentation.
Additionally, it makes it possible to send and receive money at any time, from anywhere in the world, without worrying about centralized authority. All participants can see the instantaneous verification of the transactions.
Converting into decree money involves relatively little transaction cost. Digital currencies do have some limitations, though. Digital currency is becoming more and more necessary. This will increase digital currency risk, fraud, and volatility.
2. Permissioned Blockchain: Trade Finance Application
A recognized blockchain differs from a public blockchain in that only a small number of carefully chosen nodes are given the authority to vouch for a transaction. The ability to read the blockchain may be restricted to participants only or may be made public.
Loans and Credits
The development of blockchain technology plays a crucial part in reducing the difficulties of the conventional lending process, particularly in the identity verification process. On the other hand, Blockchain is built on distributed ledger technology, which secures and decentralizes consumer data. It functions simply by storing client data in distributed ledgers rather than centralized databases, lowering cybercrime's danger.
Blockchain technology makes client profiling precise, secure, and private. Additionally, without compromising the privacy of the clients, information and transaction records are accessible to all network participants. The distributed ledger technology avoids duplicate record maintenance, which lowers the cost and time associated with the process.
Additionally, since blockchain is predicated on immutability, no party may alter the transactions that are recorded in the distributed ledger. But if a mistake is made when keeping the record, it must be added to error reversibility, which is always apparent.
With the introduction of blockchain, the loan and borrowing process is assured of trust, security, and efficiency. Credit risk assessment is enhanced by the transparency, accuracy, and timely recording of financial data.
3. Private Blockchain: Loyalty Application
Private blockchain means that only one organization is allowed to write. Database administration and auditing are important applications or specific sections of one entity. In this case, granting the public the right to read or validate is unnecessary.
4. Blockchain Application by Government Banking Bodies
The blockchain is used in government banking institutions. The real-time gross settlement, as opposed to settlement at the end of each day, is the ongoing process of recording interbank payments in central bank records. Blockchain helps central banks handle RTGS faster with greater security because it significantly increases transaction volume and network resilience.
Application of Blockchain Technology in the Financial Services Sector in India
For years, blockchain technology in the financial services industry has been praised for its flawless capacity to bring productivity, time efficiency, and transparency to the ecosystem. Simply said, blockchain lowers the likelihood of operational hazards and data breaches.
Capital Market
- Issuance
- Trading and sales
- Settlement and clearing
- Post-trade infrastructure and services
- Asset maintenance
- Custody
Asset Management
- Fundraising
- Table management cap
- Asset management transfer agency
- Administration of funds
Payments and Remittances
- Locally made retail payments
- Settlement of domestic wholesale and securities
- International payments
- Stablecoins tokenized fiat and cryptocurrencies
Trade Finance
- Bills of lading and letters of credit.
- Financing arrangements
Insurance
- Processing and payment of claims
- Specified contracts
- Markets for reinsurance
Compliance
- Locally made retail payments
- Settlement of domestic wholesale and securities
- International payments
- Stablecoins tokenized fiat and cryptocurrencies
Reserve Bank of India’s Activities Around Blockchain
But how is blockchain technology in Indian banking making its way?
The Reserve Bank of India (RBI) has been closely monitoring advancements using blockchain technology. A workshop involving all the stakeholders, including academics, bankers, regulators, and technology partners, was held in July 2016 by the Institute for Development and Research in Banking Technology (IDRBT), the technology research arm of the RBI, to explore the potential use of blockchain in the Indian banking and financial sector.
In addition to members of the central bank, IBA, NPCI, CCIL, ISI, State Bank of India, Punjab National Bank, Bank of Baroda, ICICI Bank, HDFC Bank, Axis Bank, Citi Bank, Deutsche Bank, Infosys, TCS, IBM Research, Deloitte, and MonetaGo, the working group also included experts from these organizations. In the process, the workshop attendees joined together to produce a White Paper outlining the technology, issues, worldwide experiences, and potential adoption areas in India's financial sector.
The whitepaper lists several benefits of blockchain technology, including cost savings, efficiency, and transparency. With the active involvement of NPCI, banks, and solution providers, the Institute also created a Proof of Concept (PoC) on the applicability of Blockchain to a trade finance application. The specifics of this PoC are described in the White Article, which was also emphasized in the paper.
Challenges - Blockchain Technology in Banking and Financial Services
Although blockchain technology has a lot of potential, it also faces several difficulties that could slow down its implementation. The difficulties include:
1. Interoperability
Competing blockchain systems lack a global standard for technology. To make the blockchain compatible with the larger web and to incorporate it into current procedures and operations, greater interoperability is required. Parties can achieve operational viability if they are connected to the same blockchain network. Interoperability problems are getting worse as more blockchain networks compete with one another.
2. Privacy
The nature of blockchain technology requires that all users of the system share data publicly. There are several issues with transaction privacy on the blockchain because the data is made available to everyone. Private blockchains are far more secure but have problems interacting with other blockchains.
3. Security
Because blockchain uses sophisticated cryptography, it should be incredibly difficult to attack. Cybersecurity attackers need to have a lot of computational power to commit any security breach. There must be multilevel security in place, including infrastructure security, protection from insider threats, protection from cyber attacks, and authorization of parties accessing the blockchain. Depending on the type of transaction, blockchain systems can be permissioned or permissionless.
4. Scalability
As blockchain applications increase in popularity, a larger blockchain database is needed, coupled with quick access to the database. It will be crucial for a transaction to be processed quickly and accurately for it to be profitable. Blockchain technology has to process data quickly to handle the massive amounts of data that the existing system handles.
5. Encryption
The encryption of blockchain data is fraught with complications. Anybody can access the encrypted data if the key is made public, and it is hard to recover the Blockchain unlocking key once it has been lost. Blockchain technology uses encryption, but there is a risk that this might be cracked through security flaws if people figure out new ways to manipulate or abuse the data.
6. Electricity Use
Using blockchain technology requires a significant amount of energy. There is a significant carbon footprint created by technology. It demands much more processing power than the fastest supercomputers in the world.
7. Legal Framework
There is no national or international legislation governing blockchain technology or its applications. Even though numerous countries throughout the world are investigating blockchain applications, more clarity is still needed about the legal implications of blockchain technology.
The restrictions mentioned above or difficulties can diminish interest in the promise of blockchain; however, they can be resolved with time and continued blockchain development.
List of Banks Using Blockchain Technology in India
The list of banks using blockchain technology in India is divided into private and public:
| Private Banks Using Blockchain Technology | Public Banks Using Blockchain Technology |
|---|
- IndusInd Bank
- Yes Bank
- RBL Bank
- IDFC Bank
- South Indian Bank
- Federal Bank
- HDFC Bank
- ICICI Bank
- Kotak Mahindra Bank
- Axis Bank
- IndusInd Bank
| - Bank of Baroda
- SBI
- Canara Bank
- Indian Bank
|
The Global Scenario
The banking sector is devoting resources to researching how blockchain technology may affect their industry globally. Leading banks in the US and Europe are working with start-ups and innovation hubs to investigate blockchain applications. A blockchain firm called the R3 consortium collaborates with over 100 banks, financial institutions, regulators, and trade organizations.
Commercial applications of blockchain technology in India's banking and financial sector are also being developed. Santander Bank has identified about 25 use cases focusing on international payments and smart contracts. Forty-five internal use cases are being experimented with by Barclays Bank. Like Bitcoin, Citibank has also developed its cryptocurrency called Citicoin.
Numerous financial institutions, including UBS, Deutsche Bank, JP Morgan, and the Bank of America, are being developed blockchain applications.
The USA and Europe dominate the blockchain innovation landscape, as shown in the accompanying graph. 49.2% of all blockchain transactions worldwide are made in the United States. According to a 2016 CB Insights review of venture capital investment, Asia poses a threat to this dominance.
It demonstrates that Asia, powered by China, increased its stake from 14% in 2015 to 23% in 2016. With a population of 70% unbanked, Sub-Saharan Africa offers tremendous potential for blockchain applications in alternative payment methods.
Asia is quickly establishing itself as a world leader in blockchain solution testing and venture capital investment. China, which has the biggest financial system in the world, dominates bitcoin trading worldwide.
Conclusion
The adoption of blockchain technology in the financial services industry is still in its infancy. Future innovations that we anticipate are interoperability and advancements in transaction processing. The courses on Blockchain technology will become more beneficial for financial organizations as a result of these upgrades.
According to a report by Research Dive, the financial industry will benefit greatly from the global blockchain market in the future, mainly because banking and financial institutions are increasingly using blockchain applications in payment processes to offer secure transfers and international exchanges at lower costs.
And the disruption will continue as IoT developments, which are revolutionizing several industrial sectors, continue to grow. Blockchain use in the banking and finance industry will speed up transaction processing, get rid of paperwork, and create a safe environment.
But blockchain is also anticipated to create more cost-cutting options. It can facilitate customer journeys and encourage secure data exchanges. You can brighten your future by taking KnowledgeHut Blockchain Quality Engineer online training.
