Last year, ICICI Bank announced that it successfully executed transactions in international trade finance and remittances using blockchain technology in partnership with a Dubai based bank Emirates NBD.
In 2008, a cryptographer who goes by the pseudonym Satoshi Nakamoto created a crypto-currency called bitcoin. Bitcoin is digital currency that allows you to perform peer-to-peer transactions without the help of a third party such as banks.
Although the enthusiasm around Bitcoin waned after several governments refused to recognise the crypto-currency, but the underlying technology of blockchain has been hailed by the banking sector.
What is blockchain technology?
A blockchain is an anonymous online ledger that uses data structure to simplify the way we transact. Blockchain allows users to manipulate the ledger in a secure way without the help of a third party.
A bank's ledger is connected to a centralised network. However, a blockchain is anonymous, protecting the identities of the users. This makes blockchain a more secure way to carry out transactions.
The algorithm used in blockchain reduces the dependence on people to verify the transactions. This technology used for recording various transactions has the potential to disrupt the financial system.
How it works?
According to Sunny Ray, Co-founder and President of India's leading bitcoin blockchain company, Unocoin, "blockchain enables two entities that do not know each other to agree that something is true without the need of a third party. As opposed to writing entries into a single sheet of paper, a blockchain is a distributed database that takes a number of inputs and places them into a block. Each block is then 'chained' to the next block using a cryptographic signature. This allows blockchains to be used as a ledger which is accessible by anyone with permission to do so. If everyone in the process is pre-selected, the ledger is termed 'permissioned'. If the process is open to the whole world, the ledger is called unpermissioned."
Why are banks interested?
All major banks are experimenting with blockchain as they can use it for money transfers, record keeping and other back-end functions.
The blockchain application replicates the paper-intensive international trade finance process as an electronic decentralised ledger, that gives all the participating entities, including banks, the ability to access a single source of information.
It also enables them to track documentation and authenticate ownership of assets digitally, as an un-alterable ledger in real time.
Indian IT service providers like Infosys and TCS have been throwing their weight around blockchain technology. Both these companies are using blockchain mechanism to create core banking platforms for banks.
Where can it be used?
Use of blockchain technology is not limited to the financial sector. It is being used in many other areas. For example, Honduras government has put all land records on a public ledger - the blockchain. The minute there is a change in ownership, it gets recorded publicly.
The Australian Securities Exchange (ASX) announced this year that it would move Australia's equities clearing and settlement system on to blockchain.
In October 2015, Nasdaq unveiled Linq, a solution enabling private companies to digitally represent share ownership using blockchain-based technology.
Is it safe?
The USP of blockchain is that it allows two parties to execute a transaction without any intermediary. Blockchain allows financial institutions to execute and verify transactions discretely without any human intervention.
The electronic ledger of transactions is continuously maintained and verified in 'blocks' of records. With the help of cryptography, the tamper-proof ledger is shared between parties on computer servers.
Experts believe that blockchain architecture can significantly bring down the costs and reduce inefficiencies in the financial sector.