In October 2016, ICICI Bank successfully executed transactions in international trade finance and remittance using blockchain technology, in partnership with Emirates NBD from the Middle East. This was the first transaction using blockchain in India. This allowed all the parties—an importer, the bank from Mumbai, the exporter and Emirates NBD from Dubai—to track and authenticate ownership of assets digitally and execute the trade finance transaction in real time. The entire transaction was completed in a few minutes using blockchain technology, as against a few days under normal circumstances. So, what exactly is blockchain technology?
Blockchain is an open, distributed ledger that can record transactions between parties efficiently, in minutes. Blockchain also has the potential to eliminate error and detect fraud by providing a decentralised digital repository to check and authenticate the veracity of the transacting parties.
Another aspect of blockchain is that it allows us to move towards ‘trust less’ from ‘trusted’. Let me explain. As mentioned above, blockchain, a type of distributed ledger system, when sufficiently secured, makes it impossible for a single party, or group of parties, to reverse transactions, once recorded on the database. This eliminates the need for trusted intermediaries to authenticate and settle transactions. Contracts or records, stored on blockchain, or authentic digital ledgers, eliminate the need for a central intermediary to provide trust in the system. This is important for increasing transparency while providing ease of compliance and reporting. No wonder, legislators, regulators and governments are realising the potential for distributed ledgers through technologies like blockchain.
There are certain challenges though, including security and privacy of data stored on public blockchain and permitted ledgers, as well as regulation and legal framework. In the US, the state of Vermont is taking initial steps to recognise blockchain contracts in its courts. There is a long way to go before legal and administrative hurdles across the world can be overcome.
Blockchain is an incorruptible digital ledger that can be programmed to record not just financial transactions but virtually everything of value. No wonder, this was used in creating the Bitcoin phenomenon. Bitcoin, as we know, is virtual currency and not permitted by the Reserve Bank of India (RBI) due to several issues.
R Gandhi, deputy governor of RBI, while speaking at the FinTech Conference 2017, rightly pointed out the issues and risks associated with virtual currencies. He said, “Blockchain, the foundation for Bitcoins-like innovations, is touted to be the death knell of currency. I believe its potential is being overstated. We can see that in these types of solutions for virtual currency, there is no central bank or monetary authority. They pose potential financial, operational, legal, customer protection and security-related risks. Virtual currencies, being in digital form, are stored in digital and electronic media; (they) are prone to losses arising out of hacking, loss of password, compromise of access credentials, and malware attack. Payments by virtual currencies are on a peer-to-peer basis. No established framework for recourse to customer problems, disputes and chargebacks is feasible. There is no underlying or backing of any asset for virtual currencies. Value seems to be a matter of speculation. Legal status is definitely not there.”
Virtual currency, like Bitcoin, was just one of the innovations based on the blockchain technology. Hence it would be better that we do not mix virtual currencies (application) with blockchain (the technology).
Over the years, disruptive technologies have shown the capability to transform, wipe out, develop, shrink and turn upside down all the players from markets. With a bigger push for digital economy, innovative technology like blockchain can certainly offer better solutions for transactions in a transparent, effective and time-bound manner. But it will need not just push but also legal and regulatory framework to make the use of blockchain successful and productive.