- The RBI may pursue digitisation of the Indian rupee using blockchain
- A white paper published by the RBI’s research wing showcases a successful proof-of-concept study on the use of blockchain technology
- The paper recommends the use of blockchain in BFSI to improve speed, accuracy and transparency of transactions
Looks like all the chatter from the RBI around studying blockchain technology (BCT) in the Indian financial sector wasn’t just noise.
The RBI’s research arm, the Institute for Development and Research in Banking Technology (IDRBT), has successfully concluded proof-of-concept (POC) studies using BCT for trade finance applications. This POC was run in concert with the National Payments Corporation of India, an umbrella organisation for all retail payments systems in India, and banks like SBI, HDFC, Citibank and Deutsche Bank.
Blockchain is a data structure that helps create a shared digital ledger of transactions
Blockchain is a data structure that helps create a shared digital ledger of transactions. With no central authority to regulate it, individuals can manipulate the ledger to update new transactions. Relying heavily on cryptographic components, blockchain ensures that once some data is recorded in the ledger, it is extremely difficult to manipulate or modify it. Cyptocurrencies like Bitcoin are possible because of this decentralised, shared framework, but the applications are wide ranging.
A white paper published by the IDBRT that details this study also indicates the RBI’s keenness to embrace the technology for India’s banking, financial services and insurance (BFSI) sector. It appears that the RBI is pushing ahead relentlessly with the Indian government drive to go ‘cashless’.
We are likely to see centralised KYC, cross-border payments, loan syndication, trade finance and capital markets applications on blockchain soon
The white paper also gives an indication of the roadmap for the adoption of BCT in the BFSI sector, besides calling out that the “information sharing” aspect of blockchain will have ready applicability here. As a first step, it recommends banks set up and use BCT internally, followed by inter-bank adoption. We are likely to see centralised KYC, cross-border payments, loan syndication, trade finance and capital markets applications on blockchain soon.
A few banks have moved forward rapidly in the last few months. ICICI announced the use of blockchain for international trade and remittances in October 2016, followed by Yes Bank announcing the use of the technology for vendor financing application. A few days ago (January 9), Axis Bank announced its foray into BCT for cross-border remittances. It seems that RBI’s preferred BCT roadmap is already well on its way.
The more disruptive application of blockchain technology is likely to be its use by the RBI to digitise the Indian currency
But, the more disruptive application of BCT is likely to be its use by the RBI to digitise the Indian currency. The white paper strongly urges the RBI to consider this: “Blockchain has matured enough and there is sufficient awareness among the stakeholders, which makes this an appropriate time for initiating suitable efforts towards digitising the Indian Rupee through BCT.” If this transpires, India would join a small group of countries already exploring it, including Canada, UK, Norway and Sweden.
Today, digital transactions are just placeholder transactions that trigger a series of activities across multiple organisations to record, clear, settle and reconcile the transactions. But, when currency is digitised using blockchain, it is likely to be treated truly on par with physical cash — money changing hands means instantaneous settlement. If the RBI uses BCT to digitise the currency, it could effectively mint digital money into circulation just like physical cash today.
When currency is digitised using blockchain, it is likely to be treated truly on par with physical cash — money changing hands would mean instantaneous settlement
However, there are several concerns here. The RBI could potentially monitor and track ownership of funds and assets and their transactions at will. This is a significant loss of privacy compared to a cash-based transaction (or even current digital transactions).
Additionally, a central bank created blockchain would mean there are likely multiple versions of blockchains across countries (and perhaps countless variants of blockchains from private organisations), essentially recreating siloed global financial ecosystems. This defeats the promise of blockchain to offer a global platform that any individual would be able to have access and control.
One hopes that BCT is well thought through before we go down this path. However, the RBI’s recent record doesn’t inspire a lot of confidence.