How Blockchain could’ve prevented the PNB Fraud

What happened at Punjab National Bank (PNB) was the result of numerous systemic failures to detect simple human malfeasance. These failures could have been easily spotted and prevented with a fraud mitigation blockchain platform. It’s surprisingly common for the information settlement mechanism like SWIFT (Society for Worldwide Interbank Financial Telecommunications) to be on a separate ledger from the payment settlement mechanism which is the system more likely to be scrutinized by the bank’s internal controls, as well as the various audits, including inspection by regulators.

With a distributed-ledger solution, information such as the Letters of Undertaking (LOUs), receipts, invoices, shipping documents, tax filings, and assessments of client risk and creditworthiness are connected directly to the payments. If a bank uses a distributed-ledger platform that accommodates information settlement, then the payments and all of the associated information are available to all of the participants in the transactions, as well as to the regulators and auditors.

The participants in the transactions on distributed-ledger solutions have real-time access. Any change would trigger a red flag throughout the system, with automated warnings and controls to all parties. In fact, financial institutions from across the world have increased interest on the possibilities of blockchain. Major banks are experimenting with different use cases and regulators are trying to identify its myriad roles in the business landscape. While blockchain is still a new technology, a lot of progress has been made at large in the past one year alone.

In India alone, institutions are working with distributed-ledger platforms to monitor transactions, prevent double financing and tampering, enable efficient credit and risk governance, register land records, among other use cases.

Can blockchain transform the current banking system – in terms of safety and security?

The appropriate approach is not to transform the entire banking system because blockchain is not a cure-all for all issues facing the banking system today. However, that being said, blockchain is an ideal technology to ensure the proof of integrity to data and reduce incidents of fraud. In a private permissioned blockchain, regulators, payment processors and auditors have real-time access to transactions, making it much easier to identify any attempted fraud or hack. A blockchain based platform mitigates fraud by establishing a network and securely sharing details about transactions between institutions in real time. The system allows institutions to maintain the privacy of valuable customer data while automatically detecting any elements of a fraud, small or large.

Will the adoption of blockchain tech by banks transform customer experience (b2c)? If so, how?

The customer experience of banks in India is currently hindered by banks’ ability to be technologically adapt to the numerous new digital initiatives being introduced. By integrating a blockchain technology solution with existing legacy systems, it can be easier, faster, and cheaper for banks to implement new digital solutions. The introduction of blockchain systems can also facilitate reconciliation and prevent various types of fraud, bringing down the cost of services. Once banks implement these technologies, they can provide new products faster and cheaper, thus improving the overall customer experience.

Can banks implement blockchain into its back-end technology – complete overhaul or a minor tweak?

While some blockchain advocates have been proposing entire system overhauls, financial services firms are quite reluctant to "rip and replace" the existing technology. The best approach right now would be to integrate blockchain technology into the existing infrastructure. Ultimately the result may be the decommissioning of legacy technology, however immediately trying to eliminate or replace an existing technological component is usually met with stiff resistance.

Much of the generally available blockchain technology demands a complete systems overhaul, potentially requiring years and large capital expenditures. However, there are solutions specifically designed not to supplant existing core banking processes. Rather, it seamlessly and quickly integrates with existing systems and regulatory structures while providing the additional functionality which only a Blockchain can provide.

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

The author is the founder and CEO of MonetaGo, a US-based blockchain company.