Blockchain Could Have Blocked Nirav Modi

by February 27, 2018 0 comments

Blockchain Technology Can Help Avoid Scams

There has been some unrest among people regarding the safety of their money deposited in the banks due to the recent turn of events related to bank frauds.

“Financial services are the lifeline of any growing economy and such incidents could tarnish the image of the banking system with much wider implications.”

Sandesh Hegde, Partnerships & Alliances Head, XinFin

The above statement made by Sandesh Hegde, Partnerships and Alliances Head at XinFin, is very true and financial industry has always tried its best to keep the transactions and currency exchange process as secure as possible because the risks involved are too big.

For example, letters of undertaking (LoU) is a devoted trade finance instrument which includes buyer credit services also. It is important because many times importers may refuse payment after shipment delivery or exporters might not make timely delivery after getting an early payment. Similarly, there are SWIFT (Society for Worldwide Interbank Financial Telecommunication) IDs and CBS (Core Banking System) to ensure that international banking is secure and efficient. However, not all these techniques are scam-proof which is evident if we follow current events.

Also, if this would have been older times no one might be questioning the bank security measures but in the recent era, there is a way to have a more robust and transparent banking system which could avoid such incidents in future. Yes, we are talking about Blockchain.

Blockchain Is the Next Big Thing…and it’s already here!

The Blockchain is also known as distributed ledger technology or DLT which maintains records of transactions and exchanges and enables point-to-point tracking of data. Blockchain’s decentralized system offers transparency for any transaction recorded the network.

Decentralization eliminates the need for intermediaries or central regulators as no single authority has complete control over the network. Also, it removes the chances of a central point of failure as the whole system functions in the state of consensus.

Blockchain Can Help in Keeping the Money Safe

Blockchain can solve the trust issues between counterparties with its distributed and scam-proof ledger which store all kinds of records like financial transactions, exchange of physical or digital assets, or common trade-related data. In a nutshell, Blockchain can offer a very transparent and secure network for domestic and cross-border transactions. Following are few examples in which blockchain can help financial industry –

  • No more fake LOU’s

With Blockchain, everyone in the network can access the ledger and each transaction has to be authorized by all members of the network. Hence, it is asset replication is difficult. In Blockchain powered smart-contracts, a permissioned system of nodes will only authenticate transactions if pre-defined terms, called as triggers, are satisfied. This would guarantee that a LoU is issued once all mandatory circumstances for the issue are fulfilled.

  • Real-time CBS update is possible with Blockchain

In the recent bank scam, the CBS was not updated even though the instructions were exchanged with another bank through SWIFT by the bank employees.

Blockchain protocol and API together will update the ledgers with executed transactions details in a real-time. This will resolve the challenges related to missing information due to miscommunication between two different systems.

LoU: A bank guarantee issued for overseas import payments where the issuing bank, unconditionally agrees to repay the principal and interest on the importers loan.

SWIFT: Society for Worldwide Interbank Financial Telecommunication provides a network that enables financial institutions worldwide to send & receive information about financial transactions through messaging in a secure, standardized & reliable environment. The majority of international interbank messages use the SWIFT network.

CBS: Core Banking System a banking service provided by group of networked bank branches where customers may access their bank account and perform basic transactions from any of the member branch offices.

The long term solution that banks can look at for prompt detection and prevention of fraudulent transaction is by deploying a blockchain based system, even other experts also do agree with this. Blockchain consensus is dependent on the entire ecosystem and not an individual. Hence, it would reject such a transaction immediately, since in normal circumstances, it is only one/few individuals who are responsible for the fraud and not the entire network of the bank. It also provides effective protection against fake LoUs.

Sameer Dharap, VP, Blockchain Applications, XinFin

Sameer Dharap, VP, Blockchain Applications at XinFin states, “Today there is a growing risk and decreasing trust in the current finance and trade ecosystem, and it is imperative to have solutions that can record financial transaction in a trust-less and yet secure, irrevocable system. Blockchain is that solution because it comes with amenities like smart contracting, real time cross border payments and such issues can be avoided at a larger global trade finance market.”

The Blockchain is an underlying layer which offers security and transparency in transaction processing and currency exchange. Hence, an effort is needed from existing regulating entities also including governments, financial institutions and financial industry to reap the benefits of Blockchain.

“Blockchain technology can successfully prevent process frauds in banks, because no one single authority has full control over the movement of assets. If the core banking system is integrated with blockchain, any breach of limits can be immediately tracked and stopped. In the PNB fraud, only one officer had authority to execute the transaction end-to-end, so the fraud was not detected as it bypassed the core banking system.” Says Prasad Ajgaonkar, CEO, iRealities Pvt. Ltd (The company specializes in offering technological innovation, digital services.).

Harshil Mathur, CEO & Co-Founder, Razorpay

Advocating the Blockchain usage, CEO & Co-Founder of Razorpay, Harshil Mathur says, “A blockchain based system also provides high traceability with the records of transaction being made available in the transaction history, throughout the lifetime. This makes the system transparent and auditable, hence more immune to frauds.”

Software Companies should work with the relevant business function team to understand and identify the dependencies. Most of the conventional systems have maker, checker and authorizer concepts embedded, however, analytics based audit hooks and rule based cross platform reconciliations are seldom implemented.

Vikram Pandya, Director-Fintech, SP Jain School of Global Management

Agrees with the same Vikram Pandya, Director Fintech of SP Jain School of Global Management also expresses his thoughts, “With advent of machine learning, banking software can do realtime data analytics and notify the management about suspicious patterns.  Software firms should also start offering blockchain based solutions to bring more transparency and efficiency to some of the processes where dependency of value chain is higher. RegTech should be part of the software offering. Internal controls should be embedded within the system and checklist based approach should be implemented.”


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