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Blockchain Can Reduce Inefficiencies & Prevent Frauds in Banks

Blockchain is an incorruptible digital ledger of economic transactions that uses data structure to simplify the way we transact and can be programmed to record not just financial transactions but virtually everything of value. It is a more secure way to carry out transactions, as a Bank’s ledger is connected to a centralised network. Experts believe that Blockchain architecture can significantly bring down the costs and reduce inefficiencies in the financial sector. Blockchain technology updates information across all users simultaneously. If Blockchain technology had been adopted by Punjab National Bank (PNB) and everything had been linked to Core Banking Solution (CBS), including the foreign banking system and SWIFT, it would have ensured that various officials would have instantly been alerted to the creation of the letters of undertaking (LoUs), then something like the recent fraud involving Rs 11400 crore fraudulent transactions at PNB’s Brady House branch in South Mumbai could not have happened. In that case firms of diamond jewellers Nirav Modi and Mehul Choksi allegedly acquired fraudulent letters of undertaking (LoU) to secure overseas credit from other lenders. As the SWIFT system was not connected to CBS in PNB, the LoUs were not recorded in its books and therefore were undetected for a long time.

As a consequence Reserve Bank of India has now set an April 30, 2018 as the deadline for all banks to link the SWIFT (Society for Worldwide Interbank Financial Telecommunications) with their CBS.

  • 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.
  • Algorithm used in blockchain reduces the dependence on people to verify the transactions.
  • Blockchain technology used for recording various transactions has the potential to disrupt the financial system.
  • Blockchain enables two entities that do not know each other to agree that something is true without the need of a third party.
  • 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.
  • The ledger is termed ‘permissioned’, if everyone in the process is pre-selected, and
  • The ledger is called ‘unpermissioned’, if the process is open to the whole world.

Satoshi Nakamoto is the name used by the unknown person or people, a cryptographer, who designed Bitcoin and created its original reference implementation in 2008. Bitcoin is digital currency that allows you to perform peer-to-peer transactions without the help of a third party such as banks. As part of the implementation, they also devised the first Blockchain database. A global network of computers uses Blockchain technology to jointly manage the database that records Bitcoin transactions. That is, Bitcoin is managed by its network, and not any one central authority.

Although several governments refuse to recognise the crypto-currency, but the underlying technology of Blockchain has been hailed by the banking sector.

Infosys and TCS, the Indian Information Technology service providers, are using Blockchain mechanism to create core banking platforms for banks. State Bank of India has already adopted Blockchain in its reconciliation systems and payment gateways and all other major banks are experimenting with Blockchain as they can use it for money transfers, record keeping and other back-end functions.

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