State Bank of India
(SBI) is all set to roll out two applications that adopt the revolutionary blockchain technology
for banking. The use of blockchain could considerably reduce the costs of certain transactions while raising the bar for security. The blockchain is an open electronic ledger system invented to provide a platform for bitcoin, a cryptocurrency
. It was conceptualised by bitcoin inventor, “Satoshi Nakamoto”, as a method for verifying, while guaranteeing anonymity, transactions involving a digital currency that was not issued by any central authority.
But blockchain has since proved to have far wider applications. The decision is part of SBI’s contribution to “Bankchain”, a multinational consortium of banks
that is exploring ways to leverage the blockchain. Several other Indian banks
are members of Bankchain and SBI’s move could initiate wider use of blockchains across multiple banking processes.
Whenever a bitcoin transaction is conducted, the blockchain allows anybody to verify three things: The specific bitcoin used actually exists; the coin is held by the entity that is trading; and it is not being used simultaneously in other transactions. When all blockchain users agree that these conditions are met, the transaction is verified and recorded — the blockchain has a record of all transactions made with every bitcoin. This verification is public, transparent and uses a peer-to-peer network. The identity of the transacting entities is concealed by using private-public key combinations. Everybody knows each other’s public keys and this enables everyone to verify that a coin exists. But transactions can only be conducted by using the private key, and that is only known to the owner. The blockchain can be adapted to all sorts of processes that require peer verification and transparent recording of transactions.
For example, wine merchants use it to track claimed vintages, and museums and auctioneers check for forgeries as a blockchain record makes it difficult to sell two copies of the same painting. Investment banks
and other financial institutions now use blockchains to probe internal fraud.
SBI’s roll-out of these two applications will leverage the factors of peer verification – in this case by Bankchain members – and “transparent-anonymity”. One of these applications is a new Know Your Customer (KYC) format while the other is the so-called “Smart Contract” format.
Smart contracts, sometimes called trust-less contracts, are especially interesting applications of blockchains. Say, two anonymous entities wish to make a conditional transaction: A will pay B if the exchange rate hits a certain level on a certain date. The transaction could be guaranteed by a bank and the conditions entered transparently on a smart contract. The peer network will then okay the payment if the conditions are met. This obviates the need to draw up complex legal documentation or to reveal principals. It also reduces transaction costs sharply and enables wider participation in the hitherto-closed currency and bond option markets. There are several other applications for such trust-less contracts. For example, a municipality may tender out a road repair, put the payment in escrow and ask citizens to verify if the work has been completed satisfactorily. The payment will be automatically transferred but only after a successful peer review. The municipality can no longer hold up payment; the contractor cannot fudge. SBI’s roll-out might only be the beginning of wider applications of this interesting technological idea across other business sectors.
via The promise of blockchain | Business Standard Editorials