Implementation of Blockchain in Indian Banking Sector

The blogpost is Part-4 of the Cryptocurrency Series taken up by the Centre. The present post is authored by Mr. Bhanu Jindal, Third Year Law Student at National Law University, Jodhpur.

Introduction

Blockchain is an open and distributed ledger, which is capable of being programmed and executing smart contracts, which records transactions between two parties in a verifiable and immutable manner. Blockchain Technology [hereinafterBCT”] is fast gaining popularity as it is the foundation of cryptocurrency operation. However, that’s not what its usage is limited to. It can completely transform the banking services on account of its high security and transaction transparency, decentralized operation, reduced the cost of processing, and fostering innovation of new products and services.

In the recent past, there has been gradual augmentation of BCT in the Indian banking sector that can be attributed to leading banks like ICICI Bank, Axis Bank and Yes Bank, which have been at the forefront of blockchain efforts in the country and are pioneering digital revolution in the sector.

Benefits of BCT to Banking Sector

The utility of BCT in the banking sector is truly significant since it provides ample opportunities for growth and innovation. Firstly, BCT helps in saving a significant amount of time by automating the process of verification, eliminating the need for seeking confirmation from multiple parties, minimising errors and duplication of records. It further quashes the role of a central authority since transactions are immediately validated, cleared and settled.

Secondly, BCT helps in reducing costs incurred by banks while complying with Anti-Money Laundering and Know Your Customer [hereinafterKYC”] norms. At present, KYC norms are required to be conducted by each bank and then uploaded to a central registry. However, with the introduction of BCT, this duplication shall be removed and all client details will be available in a decentralized ledger, which can be accessed by all banks. It further helps in saving costs by eliminating overhead costs to intermediaries by fostering direct transactions, and saving losses incurred by frauds and Non-Performing Assets.

Thirdly, BCT has the ability to provide a safe and secure environment for financial transactions by way of mitigating the risk of fraudulent activities and ensuring data privacy &impenetrable security. It maintains an irreversible record of transactions in a chronological order which brings more transparency in business transactions.

Adoption of BCT in India

India’s centralised banking system can profit substantially from adoption of BCT as it will not only help banks to automate their inter-organisation processes, but also substantially improve external frameworks. No doubt, owing to the aforementioned benefits, Indian Banks have already started experimenting with and employing BCT to solve prevalent problems in the sector.

Axis bank started cross-border payments using BCT after partnering up with fintech company Ripple in 2017. ICICI Bank announced way back in 2018 that it had already successfully engaged with over 250 corporates on its blockchain platform for transactions in domestic and international trade.

In September 2019, seven Indian lenders including ICICI Bank, Axis Bank, Yes Bank, Canara Bank and others, joined the JP Morgan’s Interbank Information Network (IIN) which is a peer-to-peer blockchain-based platform that fosters exchange of information in real-time and enables faster and secured cross border transactions. More recently, in June 2021, fifteen Indian banks joined hands to make a new company, Indian Banks’ Blockchain Infrastructure Co Pvt Ltd (IBBIC), which would use BCT to process letters of credit by verifying data using invoices on GST and e-way bills. This venture is among the firsts of its kind in Indian banking sector and has been approved by the Reserve Bank of India (“RBI”) as well.

In January 2021, the Ministry of Electronics and Information Technology (MeitY) released a draft National Strategy on Blockchain. The draft strategy identifies the potential and challenges for the adoption of blockchain in India, smart contract applications, the societal impact of the technology and the role of government. It recommends a regulatory approach for implementing BCT and advises the government to promote such technologies and formulate regulations which check the functions of the technology but do not hinder the adoption or innovation of the same. Following this, the RBI also made it public that although it has certain concerns regarding cryptocurrencies, it is working on implementation of BCT in India on account of the benefits offered by it.

Thus, the Indian banking sector is going through a transformative period with respect to the implementation of blockchain and although is in a nascent stage, its outlook of widespread growth and adoption is promising.

Challenges

Blockchain technology has enormous potential; however, there are certain challenges in the adaptation of this new technology. The first and foremost challenge is of jurisdiction. Since the nodes of a blockchain can be located anywhere across the globe, BCT simply crosses the jurisdictional boundaries of any legal system.  This poses a plethora of complex legal issues related to contracts, banking, trade, and most importantly, taxation. Every transaction on the blockchain, thus, will amount to opening the Pandora’s Box since in case of any dispute, it will fall under the jurisdiction of every state where the node is operational.

Secondly, although BCT is extremely secure, it is still a publicly distributed, decentralized and unregularized ledger of personal data sufficient to reveal someone’s personal details. This is conflicting with the privacy needs of the banking sector as according to the law, the transactions must be kept secret and in any case, dispensing all information of transactions undertaken by a bank is ill-advised.

Thirdly, if data localization requirements are imposed under the Personal Data Protection Bill, 2019, it will be a huge roadblock for the implementation of BCT. The government will need to consider revisiting its stance on data localization for making the most out of BCT. Lastly, the government has a paradoxical stand on cryptocurrencies and BCT. The truth is, the advancement of one is impractical without the other. Therefore, it is essential that the government works along with other stakeholders such as the RBI, to facilitate innovation in all types of blockchain applications.

Conclusion

Blockchain has the capacity to become an indispensable part of many businesses since it offers scalability, security, and significant reduction in time and cost. Adoption of BCT, in banking processes can lead to minimum intervention of regulating bodies, giving banks autonomy to monitoring assets and performing compliance-related tasks, and make financial transactions simple, expeditious, and more serviceable.

The Indian Banking sector is ready to absorb this technology and benefit from it considerably in the coming years. It is already on the path of achieving great innovative success in the area and shows great potential for BCT in the coming years. However, all this is plausible only when an efficient regulatory regime is created that both fosters innovation and regularizes the impact of BCT on the sector. 

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