“If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has”, says the famous economist John Maynard Keynes.

I was reminded of this quote while reading about the recent $1.8 billion scam in one of India’s major public sector banks. A matter of grave concern for various stakeholders, including the government, financial institutes, various industries and every citizen of India, questions are being raised on the safety of public money residing in the banks.

Can the traditional banks and the banking system be so easily hoodwinked by the connivance of a few individuals and bank employees? The ease with which the scam was perpetrated for 7 long years and the mind-numbing figures involved are not easily digestible.

Aren’t financial services the lifeline of every economy? Such incidents tarnish the image of the banking system and have much wider implications.

So, can blockchain help prevent such scams in the banking industry?

Owing to decentralization, no single authority has complete control over the blockchain, hence there is no central point of failure and all the stakeholders of the system operate it in a state of consensus, making all transactions transparent (visible to all). The risks that come with data being held centrally are thereby eliminated.

Before we talk of blockchain further, let’s understand some common terms used in international trade and finance:

LoU: Letter of undertaking. A bank guarantee issued for overseas import payments where the issuing bank, unconditionally agrees to repay the principal and interest on the importer’s loan.

SWIFT: Society for Worldwide Interbank Financial Telecommunication . It provides a network that enables financial institutions worldwide to send & receive information about financial transactions through messaging in a secure, standardized & reliable environment. The majority of international interbank messages use the SWIFT network.

CBS: Core Banking System. A banking service provided by a group of networked bank branches where customers may access their bank account and perform basic transactions from any of the member branch offices.


  • Current estimates of the scam - Rs 11,300 crore
  • Issuing bank will have to settle the LoUs with receiving banks immaterial of the scam
  • Share market investors lost more than $3 billion in 3 sessions
  • Credibility of bank takes a huge plunge
  • Questions raised on the entire banking system

Could blockchain have helped avoid this?

Blockchain ensures a tamper-proof ledger that organizations and counter-parties can use to record financial transactions and store immutable records of data. In crux, blockchain provides a higher level of security and transparency to transactions.

In the trade and finance ecosystem, it is essential to have financial transactions recorded in an immutable manner.

Blockchain based smart contracts can help detect and prevent such frauds in the banking, trade and finance sector. Smart contract or blockchain contract or digital contract, in case of banking, is a solution capable of digitally facilitating, verifying or enforcing the negotiation or performance of a contract.

Blockchain resolves issues related to lack of trust between counterparties and can be used to create a tamper-proof ledger that organizations can trust as a record of transactions i.e. to record financial transactions, movement of physical or digital assets, or simply to store an immutable record of data. In short it provides higher levels of transparency and security to transactions.

  • Preventing issue of fake LOU’s – In a blockchain, all parties involved in the transaction on the platform authenticate the transaction and have access to the ledger. Hence, it is impossible to make the transaction without the knowledge of all the participants, regulators and auditors.

Additionally, these transactions are made using “smart contracts” where permissioned network of nodes will validate the transactions only when certain conditions are met.

This implies that the LoU is issued only when all required conditions such as the collateral and cash margin are satisfied.

When all parties share collective intelligence on a single platform and the collateral is digitized, it will not be an easy task to initiate the same transaction more than once.

By integrating the core banking system with blockchain, wilful defaulters and security breaches can be instantly identified.

  • Integrating the blockchain protocol to update the CBS real-time – The scam was a result of multiple systemic failures to detect simple manual malpractices when instructions were given to the bank through SWIFT. With blockchain, they would’ve been easily spotted and prevented. Using an API and a distributed ledger, any transaction executed via the protocol would be updated on the CBS instantly. This would’ve resolved or brought to notice the miscommunication between the bank’s internal controls, auditors and regulators.

While technology has empowered us to avail financial services at our fingertips, there are several limitations with regards to transparency, security and trust related to these transactions.

Blockchain will be the game changer by allowing tamper-proof transactions while making them faster, cheaper and lower cost of services. But this will require participation from governments, financial institutes and the stakeholders at large.

The views expressed in this article are not those of Fortune India.

The author is the cofounder of Singapore based XinFin Hybrid Blockchain.

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