With the growth of crypto acceptance around the world, many countries have acknowledged the true potential of blockchain technology. RBI and Indian banks are adopting the technology as it improves transparency which will help in reducing fraud.
Money laundering is a major issue that banks are facing every day. In February 2022, CBI reported a shipbuilding company in a fraudulent loan case of 22,842 crores. The company is said to have diverted the loans in Singapore through subsidiaries between 2012 and 2017. Every day, lakhs are wiped off from the bank risking the investor’s money. The Reserve Bank of India along with other Indian banks like State Bank of India, ICICI, and HDFC is planning to deploy a “proof-of-concept” blockchain technology that will help in trade financing.
In recent times, India has faced major money laundering cases including Nirav Modi’s suspicious move with LOC or the case of Vijay Mallya. The government of India is still struggling to bring them back into the country. This situation triggered the emergence of blockchain-based trade finance projects to promote a secure and safe banking setting by ensuring transparency that helps to trace money flow.
Why Are Central Banks Determined To Adopt Blockchain Technology?
Blockchain technology is a decentralized ledger technology that involves cryptography, and consensus and assures secure transactions in comparison to conventional banking services. The shared ledger will help the banks to reduce fraud and increase transparency. It will provide visibility of transactions through the supply chain between the members of a network.
Any transaction that takes place in the blockchain platform is instantly recorded and cannot be tampered. This means that any data or information in the blockchain network cannot be deleted as the information is stored as encrypted blocks.
To change any information in the blockchain network, a team or individual will need to have control of the entire system, which requires a 51% majority consensus. Moreover, the participants in the network are allowed to view transaction record history which can help to identify any frauds or double purchases.
Different from conventional banking services, which require lots of agents and manual labor, blockchain technology can automate various processes like loan issuance, remittance, etc making life easy. Blockchain can revolutionize the banking sector, and thus central banks are eager to adopt the technology and make the banking experience efficient, transparent, and budget-friendly.
How Will Blockchain Technology Help the Trade Financing Process?
After conducting diligent research, the central bank has aimed to demonstrate the real-world use cases of blockchain technology. The technology will bring hope to banks to enhance trade finance lending procedures by reaching new markets around the world. This will help to execute quicker and easier friendly transactions that are in the best interest of both foreign consumers and businesses.
The proof-of-concept blockchain project will help to secure transaction data formed as blocks and stored in chains with all members’ access. This will prevent document tampering like LOC (Letter of Credit) by granting digital forms. Therefore, fraud will be curtailed. Belgium-based SettleMint, Corda, and IBM are procuring technical aid to mold the project.
Blockchain and cryptocurrencies are gaining prominence worldwide. While opposing cryptocurrencies, RBI has acknowledged the potential of blockchain. In the latest plan of RBI for its own CBDC, the same technology will be used in their trade financing project.
Blockchain technology has huge potential and has been adopted by various industries including, the insurance industry, healthcare, real estate, education, and more. Although India is not quite keen on crypto, RBI has acknowledged blockchain’s potential in avoiding fraud and providing a secure user experience. RBI’s move towards blockchain-based trade financing is a significant step toward revolutionizing the banking industry in future years.