Bank on the chain 

Some months ago, the chief executive of JP Morgan, Jamie Dimon, was in the news because of his tirade against bitcoin and other digital currencies. Dimon, a respected banker, called these currencies a “fraud” and “just not a real thing”. Soon after, in a newsletter, Fortune said Dimon’s outburst was “perplexing”. After all, JP Morgan was one of the 86 companies that set up the Enterprise Ethereum Alliance, an open-source blockchain initiative. Blockchain is the technology that powers bitcoins and other digital currencies; the idea of the alliance was to create applications based on blockchain. So, for Dimon to rant against digital currency was somewhat puzzling.

But here’s the thing. Dimon was, perhaps, actually making a nuanced distinction between the technology and the result. His beef was with cryptocurrency, not with blockchain. In many ways, the Reserve Bank of India seems to be making the same distinction. The apex bank has not given official sanction to these currencies, but is clearing the use of blockchain by banks (including public sector banks) and financial institutions.

In February 2017, a consortium called BankChain was formed in India, with State Bank of India as its primary driver from the financial side. The blockchain technology for the consortium is being implemented by a Pune-based startup called Primechain Technologies, founded by Rohas Nagpal and Shinam Arora. Today, BankChain has over 25 members, including ICICI Bank, Kotak Mahindra, and recently, Axis and Yes Bank.

Predictably, there has been a spate of media coverage since then, lauding blockchain as the harbinger of change that banking needs. Which is all very nice, no doubt, but what does this mean? Essentially, blockchain is a secure, distributed ledger. It keeps a record of every transaction; this record is distributed to every participant in the network, and coding ensures this record is permanent and tamper-proof.

A secure ledger that records all transactions and is tamper-proof sounds like a banker’s dream come true. But, as a colleague asks, what does this actually mean? Let’s assume I’ve won a 20 kg box of chocolates in a contest. Being a generous sort of guy, I want to share all 20 kg with my colleagues in office. I could, of course, go round from desk to desk, offering chocolate to all. But I, like most people, have a boss who demands a certain amount of work done in a day. And distributing chocolates to everyone will take a few hours.

I could leave the box in the pantry, assuming people will help themselves. But modest as I am, I do want people to know that I won a prize and that I’m sharing it. I also want to make sure everyone gets their share; leaving chocolate unattended in office is not the answer. Or, I could do what most people in my office do when they want to share goodies: give it to the trusty office clerk.

Except, will the clerk ensure everyone gets an equal share of the chocolates? Will he remember to keep some aside for the people on leave that day? And will he have time to do his regular work, distribute chocolate, and enjoy his own share?

Or, I could take refuge in technology. I could create a record, shared with everyone in office, stating that I have won 20 kg of chocolate which I plan to give everyone. The information is out there. How does the chocolate reach everyone?

I can set up a smart box at the entrance or other commonly used area, put the chocolates in that, and program it to dispense a certain number of chocolates to each employee upon identification scanning. As chocolates are given, the shared record gets updated to show who has got theirs. People on leave will get their share when they return to work. My generosity has been recorded, and the chocolates successfully distributed .

Of course , I’d love to take credit for the clever, tech-enabled way of sharing chocolates. But that’s the essence of blockchain. The record that’s constantly updated and accessible by all? Shared bookkeeping in banking lingo.

Blockchain, as you see, can be used to record anything of value—money, assets, land records, stocks, contracts, and yes, chocolate. It can clearly be a vital asset to any industry. But the most uses today are in the financial industry because the need for a transparent, easily shared, yet highly secure means of information dispersal is vital to finance.

It’s not the perfect solution, of course. There are concerns about the technology, the role of regulators, and operational barriers that hinder a mainstream integration of blockchain in the sector. For instance, blockchain’s lack of interoperability is a definite problem. Today, there are many blockchain platforms being tried out by different financial institutions, but none of these can communicate with the other .

Why does this matter? Consider this real-life example. Earlier this year, Yes Bank carried out a pilot project for Bajaj Electricals (a Yes Bank customer) on financing and invoice tracking on blockchain. The bank, with startup Cateina Technologies, and guidance from IBM, developed a three-node blockchain network for Bajaj Electricals .

“We had one node for us, the other for Bajaj as an anchor, and then for all the suppliers,” says Anup Purohit, chief information officer, Yes Bank. Purohit says the purchase order from Bajaj, the invoices raised, and the financing of Bajaj and the suppliers were all conducted on the blockchain .

The project was developed on Hyperledger Fabric—a permission-based platform developed by IBM on Linux Foundation’s open-source Hyperledger.

It’s all good, but what if Bajaj or any of its suppliers need financing from other banks? Can that be implemented on the network? If the other banks are not using the same blockchain platform, this can’t be done. That’s why interoperability matters.

BankChain itself uses multiple platforms for different projects. Primechain does not have its own platform, but implements BankChain projects on various open-source platforms depending on the requirements. Lack of communication between these various platforms is a definite drawback.

Rohas Nagpal, co-founder and chief blockchain officer of Prime - chain, says the answer to this problem could be application-level interoperability. For the non-techies, he explains: “I could send a WhatsApp from my iPhone to your Android, though iOS and Android aren’t interoperable.”

There are other technological hurdles. Consider, once again, the Yes Bank pilot project with Bajaj. The blockchain here was only for the payment and invoice generation. There was no physical tracking of goods—no assurance that the invoice registered reflects the exact supply of physical goods. A certain international supermarket chain is experimenting with tracking its meat supply on blockchain using QR codes. But then tampering with QR code isn’t that difficult. Yes, it is difficult to use blockchains to track physical goods (like my chocolate), though there are companies experimenting with this. A Denver-based startup is trying to use blockchain to track coffee beans from crop to cup.

Purohit admits the Bajaj project wasn’t a true implementation of blockchain and was more an experiment to showcase the capabilities to the bank’s clients.

Yes Bank is one of India’s early movers in getting non-financial services companies on blockchain. It’s important to get corporates on board, says Sachin Seth, partner, digital advisory and financial services, EY. “The thing is, banks do not deal with just banks. They deal with all types of companies: automobile companies, shipping companies, exporters, retailers,” he says. A banks-only consortium has its limitations, he says.

Nagpal says BankChain already has multiple banks on board, so corporate entities will benefit better if they join the consortium. He adds that the “platform-agnostic” nature of BankChain is an added benefit for companies. ICICI too had conducted a pilot transaction with Emirates NBD on a blockchain network implemented by EdgeVerve Systems, a wholly owned subsidiary of Infosys .

IBM is also trying to woo corporates. Apart from the Yes Bank project, IBM’s Hyperledger Fabric has also conducted projects for Mahindra Finance. In fact, IBM, since updating its Fabric platform from version 0.6 to 1.0, is actively looking to form a consortium of banks and other corporate entities in India. The company has identified supply-chain financing, invoice discounting, and insurance as the sectors to focus on, says Sriram Raghavan, director, IBM Research Labs, India.

Talking of the need to bring in many companies and sectors on to blockchain, Raghavan admits that the unorganised sector poses one of the biggest challenges to the implementation of blockchain. In a large-scale supply chain, goods may pass through the unorganised sector (loading, unloading, transportation). Many of the players concerned would not have access to a computer, never mind the ability to use blockchain.

Raghavan says IBM is going step-by-step on this, and adds that the supply chain solution does not necessarily have to reach the last mile. “For the smaller players they, perhaps, only need a portal. They don’t have the IT capability to own or operate a node [in a blockchain network]. Hence, mostly the network will be done by the bigger players, while the smaller ones will need a transactional capability,” he says .

One of the big questions at this point is probably along the lines of: Do we need a single blockchain platform or solution? Will that resolve the issue of interoperability and small and large players transacting on blockchain?

Microsoft, which has been wooing customers with its ‘blockchain as a service’ solution, recently introduced Coco Framework, an open-source system for enterprise solutions. Coco isn’t a platform; it’s more like a trusted layer that integrates with other platforms. As of now, Microsoft is integrating Coco with Ethereum, and plans to do the same with Quorum (developed by JP Morgan), Hyperledger Sawtooth, and Corda. The key platform missing: IBM’s Hyperledger Fabric.

Multiple blockchain platforms and solutions are not necessarily a dampener, says EY’s Seth. “Most of these networks are being formed for solving specific problems in the ecosystem. It need not be that everybody has to be on different networks. It depends on what area of use-case each bank is considering,” Seth says.

Seth sees a future in which banks and their clients are part of multiple blockchain networks. “In real life, there may not be a particular banking consortium,” he says. The blockchain network could be based on a particular use-case for banks and their clients. That is, say Ripple for international transfers, R3 or IBM’s for trade finance with European clients, one for the same in India, and so forth.

Since the cost of blockchain integration is currently not that high, Seth says, banks would not have much trouble handling this. “Also, note, banks are already using some system to do these businesses. With blockchain, they are replacing the legacy system with a more efficient one.” He says banks should decide on when and where to implement blockchain in a manner that “the cost of new technology is offset by the cost of redundant technologies”.

Besides the technological hurdles— many of which may be solved in time— there are pressing regulatory issues as well. Since blockchain is a shared ledger, by nature, it does not have a territory. Thus the jurisdiction of a regulator and application of law are areas of concern.

There is no central authority in blockchain to pinpoint the nationality, nor does the buck stop at a particular desk. Also, if blockchain does become as ubiquitous as its proponents say it will, the existing legal frame for legal framework will need to be modified to, say, consider a land document on blockchain as valid.

There is also a case of which regulator ‘sees’ what and for how long, in case there are multiple regulators of different countries on a blockchain.

Regardless of its numerous applications, blockchain is still largely seen as a financial services platform in India. BankChain, of course, is the big mover, although it isn’t the only one. One of the solutions Primechain is developing for BankChain has to do with loan syndication. A major infrastructure project, for instance, may require loans from multiple banks. The suppliers of the project developer, in turn, may need financial assistance as well. And all of this needs to happen in time. If all the participants are on a blockchain, each bank could access a shared documentation of the project; would know what part of total amount the other has provided to the project developer, and when; what is the size of the order to the suppliers and the financial assistance they would need. It’s transparent, and it’s secure.

Or consider the often annoying ‘know your customer’ or KYC norms. “Today, every organisation repeats the KYC procedures,” says Primechain’s Nagpal. “If I open accounts in two different banks, the KYC is done twice. For loan application and credit card, the same set of documents is being repeated.” Nagpal says blockchain would allow banks to access a shared KYC system. “Once you submit your KYC documents, it is stored in an encrypted form on the blockchain.” He says, in future, if a bank needs to verify records, it can access this shared KYC. To avoid misuse the system Primechain is developing would require an authentication—through an OTP—from the user for banks to get access to the documents. Primechain and SBI, recently, announced the inclusion of Intel as technology advisor for the KYC project.

Of course, the Aadhaar is intended, in some ways, to serve as the single-most important verification, so KYC may become redundant if Aadhaar is linked to all transactions. Nagpal says individual KYC is not his focus; he’s looking at KYC for companies, or societies or trusts .

Then there is Ripple, another adaptation of blockchain that is focussing on international money transfer. Ripple, touted as a replacement for the traditional SWIFT wire transfer, counts, among others, Standard Chartered, Unicredit, and UBS as its clients. Two of the recent clients of Ripple: Axis Bank and Yes Bank.

Purohit of Yes Bank says, once the process of integrating with Ripple is complete, the customers can transfer money from and to Europe, Australia, and West Asia in real time. He says, if using the existing SWIFT method, the same transaction could take up to two days to be credited in the account. “Here, depending upon whether [the final transaction is] on IMPS, RTGS, and depending upon the value of the transfer, we can credit the money to the end-user almost real time.”

Challenged by Ripple, SWIFT, too, is working on its own blockchain solution.

All this is great news for the financial services sector. But there’s a very real problem nobody really wants to acknowledge. Remember those chocolates that I won and shared? The office clerk in that case was the equivalent of the bank. But I managed to get around him by using blockchain. Will a time come when companies and other entities handle finance and credit among themselves on a blockchain without the need for a bank?

I ask Yes Bank’s Purohit where he sees this technology headed. “Blockchain is like a beast right now. And we are trying to find out what this beast can do,” he says.

( The article was originally published in the December 2017 issue of the magazine.)