ICICI Bank recently made an announcement about the successful transactions it had executed in international trade finance and remittances by making use of blockchain technology in partnership with Emirates NBD, a famous Dubai based bank. Notably, it was India’s first banking transactions on blockchain.
It was in the year 2008 that a crypto-currency called bitcoin was invented by a cryptographer by the pseudonym Satoshi Nakamoto. The digital currency that allows people to perform peer-to-peer transactions without taking in the help of any third party such as the banks gained almost instant popularity after its launch. While the enthusiasm eventually died after the governments of various countries decided not to recognize the digital currency, but the underlying technology of blockchain ended up finding a lot of takers in the banking sector.
What exactly is blockchain technology?
To put it simply, a blockchain is basically an anonymous online ledger that makes use of a data structure to make the process of transaction an easier and simpler process. It provides users the ability to manipulate the ledger in a safe way without seeking the support of a third party.
While a bank’s ledger has connections to a centralised network, a blockchain is anonymous as it helps in protecting the identities of the users. This is what makes the technology of blockchain a safer way to carry out transactions than any other existing processes.
Blockchain’s algorithm reduces the dependence on people to verify the transactions. This technology, which is currently being used for recording various transactions, has the true potential of completely disrupting the financial system in the near future.
How does it work?
The blockchain technology enables two parties that have no prior connection with each other to agree that something is true even without the presence of a third party. Instead of jotting down entries into a single paper sheet, a blockchain is a distributed database that is capable of taking in a number of inputs and then place them into a block. Each block is then ‘chained’ to the next block by making use of a cryptographic signature. This makes using blockchains as a ledger which can be accessed by anyone with permission to do so, a possibility. If everyone involved in the process is pre-selected, the ledger is ‘permissioned’. If the process is open to the whole wide world, then the ledger is termed as unpermissioned.”
Where all it can be used?
The blockchain technology is primarily being extensively used by almost all the major banks in the world. This is because they can make use of the technology for money transfers, record keeping and a number of other back-end functions.
The blockchain technology replicates the paper-intensive international trade finance process as an electronic decentralised ledger, that results in giving all the entities involved, including the banks, the ability to access to a single information source.
Not only this, it also allows them to easily track documentation and authenticate ownership of assets digitally, as an un-alterable ledger that too in real time.
Infosys and TCS, two of India’s biggest IT firms, are making use of the mechanism of blockchain to give birth to core banking platforms for banks.
Other than the financial sector, the technology has several other applications. For example, the government of Honduras has put all of its land records on a public ledger – the blockchain. This means, whenever there is a change in ownership, it will get recorded publicly.
The Australian Securities Exchange recently made an announcement about its decision to move Australia’s equities clearing and settlement system on to the blockchain technology.
In October last year, Nasdaq’s Linq was born, which is a solution that enables private companies to digitally represent share ownership by making use of blockchain-based technology.
Now, the big question, is the technology safe to use?
One of the things that makes blockchain different is, that it enables two entities to successfully execute a transaction without the help of any intermediary. It allows financial institutions to carry out and verify transactions discretely without any human intervention whatsoever.
The transactions’ electronic ledger is maintained continuously and verified in ‘blocks’ of records. With cryptography’s help, the tamper-proof ledger is then shared between the parties on computer servers.
The blockchain architecture has serious potential in significantly reducing the costs and currently present inefficiencies in the financial sector.