Blockchain Technology Adoption in Banking & Financial Services Industry

The buzz and hype around Block Chain seem to be gradually fading. However, it is not to be interpreted as its loss of relevance.  Industry pundits see this phase as a path of descent towards the ‘Trough of disillusionment’ in the Gartner Hype cycle. It will soon head towards the ‘Slope of Enlightenment’, with more and more practical use cases emerging.

Satoshi Nakamoto, the yet to be identified author of the initial technical paper on Bitcoin, came up with the idea of Block chain in 2008, at a time when world was facing an unprecedented economic crisis marked by the crash of multiple financial conglomerates in the US. Block chain was seen as an answer to the problem of mounting trust deficit in the conventional financial and banking system. Block Chain was seen as a technology capable of setting a new world order by redefining the terms – trust and intermediation. It was found to be capable of bringing in a paradigm shift from Centralized to Distributed authority. Instead of creation of trust on centralized authorities, blockchain enables instilling trust through distribution of control and by setting up numerous watchful eyes to oversee and validate every transaction happening.

Characteristics of Blockchain

Taking reference from a publication by PWC, the following is the checklist of figure out whether a business problem is blockchain-able or not.

1. Are there multiple parties involved in sharing data and all participants need up to date views of common information?
2. Do multiple parties update data to take actions that need to be recorded?
3. Is there requirement for verification to trust the actions that are recorded and for validation?
4. Are there intermediaries that add complexity to the problem and whether the removal of intermediaries reduces cost and complexity?
5. Are the interactions time sensitive and any reduction in turn-around time has business benefits?
6. Are transactions created by different participants depend on each other?

If answers to four or more of the above questions are ‘Yes’, then the problem can be potentially addressed using Block Chain technology. Otherwise, we cannot consider the scenario as a true use case for Block chain.

A distributed ledger of transactions and cryptography form the foundation stones of Blockchain. Two key attributes of the distributed ledger are immutability and provenance. If any block in the chain has to be modified, it will have an impact in all the previous blocks and can be done only after all or majority of the nodes verify and have consensus. This constraint makes it tamper proof and practically immutable. The other key feature ‘Provenance’ refers to the chain’s ability to trace any transaction to its root or origin by traversing through the chain.

There is no trusted central authority, like a Bank, here, but the trust element is woven into the underlying technology protocol of the system. Cryptography and computational processing power play very important roles in this. The authentication in Blockchain is done by solving complex cryptographic puzzles and the same involves enormous computing capabilities. The consensus is achieved through any of the two mechanisms – Proof of Work (PoW) or Proof of Stake (PoS). In PoW, system validates whether significant amount of work is done in terms of solving highly complex computationally intensive puzzles and in PoS, a more economical alternative, it is based on the stakes held in a pre-determined way. Blockchain platforms also provide algorithmic logic to initiate actions on ‘If This Then That’ basis and these are termed as ‘smart contracts’, which get triggered on meeting certain pre-defined conditions.

Based on the ownership and how the consensus is managed, Block Chain systems are categorized into three types – Public, Private and Federated. A Public Blockchain is one in which anyone can participate in creation, update and audit of the transactions involved and it complies with all the standard definitions mentioned above. Some of the largest blockchain networks existing at present like Bitcoin, Ethereum etc are of this category. A blockchain created and managed by individuals or organizations with membership and consensus policies defined by them is classified as a Private Blockchain. Such systems do not provide a decentralized platform in its true sense; however they also offer the advantages of transparency, cryptographic security and immutability. There is a third category which is a hybrid of the two, where consensus is managed by a group of companies. R3 Corda blockchain platform setup by a consortium of Banks and Financial services is an example.

Indian Experiments and the Estonian Experience

Many of the Indian states have started ambitious projects on Blockchain platform implementation. Andhra Pradesh is leading the pack with the implementation of a blockchain based system for storing farmland records and for vehicle lifecycle management systems in advanced stages. The government is also partnering with Hitachi to set up an online citizen governance platform. The Telangana government has signed a MoU with Tech Mahindra and is collaborating with IIIT Hyderabad and C-DAC to build a state-level Blockchain platform. It is also collaborating with NITI Aayog, the central planning governance body, for blockchain in governance. The Maharashtra government has signed an MoU with the Swiss government to share ideas on Blockchain technology for its application in several registries such as land, health, vehicles, government schemes etc. The Rajasthan government has partnered with Mumbai-based Auxesis group to implement a Blockchain solution in electronic health records and land registration. The Assam government is collaborating with Nucleus Vision to set up Blockchain solutions for governance process and other citizen-facing applications. NITI Ayog has initiated PoCs in pharmaceutical supply chain and fertilizer subsidies.

While most of the Blockchain projects happening in the world are largely in PoC stage, there is one country which has already put the technology into production use in a variety of applications. That is Estonia. Since 2012, blockchain has been in production use in Estonia to protect national data, e-services and smart devices both in the public and private sector. Estonia uses blockchain technology to enforce the integrity of government data and systems. Estonian Information Systems Authority is an integral service provider for the Government, guaranteeing the access to the blockchain network for the State Agencies via the X-road infrastructure. Selected State Registries backed by the blockchain technology are: Healthcare Registry, Property Registry, Business Registry, Succession Registry, Digital Court System, Surveillance/Tracking Information System, Official State Announcements and State Gazette.

Limitations and Potential Roadblocks

Despite being a brilliant concept which enables excellent process efficiency and transparency, the blockchain has many problems and shortcomings. Performance issues top the list, given that the blockchain has to perform all validations that a regular platform does and has to additionally perform multiple tasks such as Signature verification, Redundancy related actions, attaining consensus etc. For instance, Mastercard and Visa can process 30,000 to 50,000 transactions per second, while the Bitcoin blockchain can process only eight.

The cryptographic security approach and consensus protocols like Proof of Work involve huge amount of resource and energy consumption. For every transaction, a very large number of nodes have to give their nods of approval, which in turn make it computationally humongous. The power demand is therefore very high. Due to very high energy requirements, costs are proportionately high.

The scale problems would potentially give rise to more ‘Private’ blockchains, than public ones. It might lead to interoperability issues, given that there are no protocols presently defined for interoperability.

From a talent perspective, it is important to have a combination of skills to design and implement a blockchain system. The blockchain way of solution may call for a re-modelling of the business operations to fall in line with blockchain protocols. There is a paradigm shift from the Application dominated space to a Protocol dominated space. At present, there is no sizable pool of resources with such skills available on demand.

With the industry giant like Google claiming to have attained ‘Quantum Supremacy’, there are larger implications on cryptography based security protocols. Quantum computing can revolutionize, and at the same time, pose serious threats to cryptography based security protocols on the hind side. The data security or any security breaches by employing quantum computing is still a far cry, at this stage. However, looking at the velocity in which technology disruptions happen, emergence of such security threats have to be paid close attention to.

How does the future look?

Let me quote Vitalik Buterin, co-founder of Ethereum Blockchain, here– “Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly”. This statement conveys the essence of how blockchain can disrupt any business with intermediary operations.

In addition, the decentralized, trust-building and secure nature of the blockchain technology can help mankind to solve some of the big global problems in a way we have never thought of before blockchain. The technology is still in the process of maturing. According to industry experts, it may not take more than a decade for its wide spread adoption.