Blockchain technology was founded by a group or a person known as Satoshi Nakamoto for bitcoin transactions. Blockchain is a technology which involves distributed ledgers. The transactions are hashed to create a block which is then linked to the chain of blocks. These are secure in nature due to the hashing thus making it difficult to hack. The creation of blocks by hashing and decoding these transactions is done by miners. Blockchain technology is widely used in the cryptocurrency transactions due to their cryptic and secure nature. While there is a debate on the future of cryptocurrencies, the technology of Blockchain is welcomed in multiple industries like financial services / banking, healthcare, retail, manufacturing and industrial to name a few.
When we look at the banking industry, multiple areas are being considered as candidates that can significantly benefit from blockchain. They are loan contracts / syndication, trade finance, payment transactions, clearing and settlement. These are some of the areas where multiple parties are involved in each transaction. The turnaround time of such transactions using blockchain is drastically reduced, the reason being the authenticity of the transactions due to hashing. This can also be attributed to the use of smart contracts. Smart contracts are getting popular for transactions where there are contract terms. Smart contracts trigger events / settlement to happen if a condition mentioned in the contract is met. This in turn paves the way for process automation where banks are struggling to get rid of some of the mundane processes. Few reasons for banks to invest heavily in blockchain technology is its secure nature, automation, reconciliation, audit and reduction in risk. For making blockchain transactions more secure, private key can be exchanged between nodes / banks on a need to know basis, where only these nodes can view the information.
Even though the features of blockchain such as security, smart contracts are exciting, the downside to this is the energy consumed to make the block secure. The scalability of blockchain may hit a roadblock in the future due to its high energy consumption, which may make it an expensive proposition to adopt. This can be mitigated by using blockchain only for specific transactions based on banks’ discretion – the value of a transaction, the parties involved in a transaction such as large corporates, or the criticality of a transaction. Blockchain-as-a-service (BaaS) has also garnered sizeable interest. Yes, cloud providers have started offering blockchain as a service (BaaS) to companies / banks who do not wish to invest in infrastructure and developers. BaaS offered on cloud, paves way for banks to use the cloud infrastructure for transactions involving blockchain, thus reducing the capital investment for banks.
Going by the recent trends, the blockchain technology is here to stay. Banks can adopt blockchain by forming a consortium and use the technology to reap the benefits. There are untapped areas in banking that can benefit tremendously from the blockchain technology. One of them is Aadhaar validation, each time a verification is done with UIDAI, the same can be achieved using smart contract within blockchain technology.