Blockchain technology is gaining popularity among Indian states and banks due to its potential to improve transparency
Banks are exploring blockchain-based trade financeprojects to facilitate a safe and secure banking environment by ensuring greater traceability of money flow
The RBI's move toward blockchain-based trade financing is a significant step toward disrupting the banking industry in the coming years
How RBI And Indian Banks Are Piloting Blockchain Trade FinancingBlockchain technology is gaining popularity among Indian states and banks due to its potential to improve transparency.
The most prominent issue today’s banks are facing is money laundering frauds, which are wiping away thousands of crores of rupees, putting the taxpayer’s money at stake. Along with other banks such as HDFC, ICICI, and SBI, the Reserve Bank of India (RBI) is interested in developing a proof-of-concept blockchain project aimed at trade financing.
We’ve recently seen an increase in the number of fugitive borrowing scams. Be it Vijay Mallya’s case or Nirav Modi’s hiatus with Punjab National Bank through Letters of Credit (LOC), the Indian government is still trying to bring them back to India. As a result, controlling such frauds becomes even more critical for banks. For this reason, banks are exploring blockchain-based trade finance projects to facilitate a safe and secure banking environment by ensuring greater traceability of money flow.
Why Are Central Banks Keen On Blockchain?
When compared to traditional banking services, blockchain technology is based on the principles of decentralisation, cryptography, and consensus, which can ensure greater trust in transactions. Since it uses a shared digital ledger, it can significantly reduce fraud by increasing the visibility and transparency of transactions throughout a supply chain between members of a business network.
Another characteristic of blockchain is that the transactions recorded on it are immutable, which means they cannot be deleted or changed because each block must be validated before being added to the blockchain. To tamper with the transaction records on a blockchain, an individual or group working together would have to control the majority of the system, which is extremely difficult. Participants can also view the history and transfer of assets, which can help easily identify fraudulent transactions, double purchases, and errors in approval.
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Unlike traditional services, which require a great deal of manual labour, blockchain can automate some of those manual processes, such as payments or loan issuance, making life easier for banks. Seeing its potential, central banks are keen on adopting blockchain to make banking services more transparent, efficient and cost-effective.
How Are Central Banks Aiming To Use Blockchain?
After thorough testing, the central bank intends to incorporate blockchain technology into its core banking system and use it to demonstrate real-world use cases. By using blockchain, banks hope to improve the trade finance lending process by accessing new markets across countries. This will in turn enable faster and simpler peer-to-peer transactions, which are effective for both international businesses and consumers.
The proof-of-concept blockchain project is going to harness the blockchain technology where ‘blocks’ of transaction data are stored in ‘chains’ with peer-to-peer access, which can prevent tampering with documents such as the letter of credit (LoC) by issuing digital versions. As a result, fraud will be greatly reduced. IBM, Corda, and Belgium-based SettleMint are providing technical assistance to shape the project.
Cryptocurrencies and blockchain are two technologies that are gaining traction around the world. Despite its opposition to cryptocurrencies, the RBI is enthusiastic about the potential of blockchain technology. According to the latest proposal from the RBI for its central bank digital currency (CBDC), the same technology will be used there as well.
Take Away
Blockchain is being adopted in a variety of industries these days, and all industries rely on the banking industry to conduct transactions. As a result, the banking industry must be vigilant and keen in tracking transactions to ensure that there is no room for fraud. The RBI’s move toward blockchain-based trade financing is a significant step toward disrupting the banking industry in the coming years.
It can also automate compliance processes, drawing on immutable data records for faster and more accurate reporting. Furthermore, blockchain enables the near real-time transfer of funds between financial institutions, removing friction and accelerating settlement.
Under the pilot, the banks including HDFC Bank, ICICI Bank and Axis Bank will open on-chain Nostro accounts with JPMorgan's branch in Gift City to create a private intra-correspondent banking network.
Blockchain-based smart contracts automate and enforce contract terms without the intervention of intermediaries, reducing processing times and costs. With smart contracts, banks can utilize DeFi platforms for various applications, including loan agreements, insurance claims processing, and derivative contracts.
While the technical underpinnings of the technology can be intimidating to a large section of policy and decision makers – simply and functionally, blockchain can enable ease of collaboration for enterprises and the ease of living for our citizens by bringing in transparency across government and private sector ...
Financial institutions can use blockchain to eliminate the layers of multiplicity. With its single ledger system, it allows banks to reduce the layers, reduce the room for errors, and ensure increased security.
The Digital Rupee (e₹) or eINR or E-Rupee is a tokenised digital version of the Indian Rupee, issued by the Reserve Bank of India (RBI) as a central bank digital currency (CBDC). The Digital Rupee was proposed in January 2017 and launched on 1 December 2022.
The blockchain application co-created by ICICI Bank 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.
Blockchain Foundation of India is a community effort in India supported by biggest crypto exchanges in India (CoinSecure, Bitxoxo, Unocoin etc) along with the government and industry players like Microsoft, PwC, Religare, GSK etc.
Blockchain can streamline banking and lending services, reducing counterparty risk, and decreasing issuance and settlement times. It allows: Authenticated documentation and KYC/AML data, reducing operational risks and enabling real-time verification of financial documents.
Ranchi: Jharkhand is the first state to use blockchain technology for distribution of seeds to farmers to curb the menace of middlemen, stated agriculture secretary Abu Bakr Siddiqui on Wednesday, saying farmers are getting seed based on one-time password (OTP) sent on their mobiles.
Due to the adoption of blockchain technology, there will be a reduction in the interest rates which are being charged by the banks. This will encourage the general public to take more loans and advances from the banks eventually leading to an increase in investments and GDP in the country.
Synopsis. P. Vasudevan, an executive director at the Reserve Bank of India (RBI), stated that cryptocurrencies lack underlying value and therefore cannot be considered as currencies.
For example, RBI introduced a scheme to combat loan fraud wherein it cooperated with HDFC Bank, ICICI Bank, and State Bank of India to build a proof-of-concept blockchain project focusing on trade financing.
However, the government does not recognise cryptocurrencies as legal tender or coin and intends to curb their use in financing illegitimate activities or within the payment system.
Technology. In parliament, Finance Minister Pankaj Chaudhary said the CBDC, currently in the trial phase, has components based on blockchain technology. “It's part DLT [distributed ledger technology] and part API [Application Programming Interface],” said the senior official. “We are testing various technologies.
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