Blockchain and Business prospects

August 28, 2019 | Posted by BPR Team << back to blog

According to the World Economic Forum anticipation, 10% of the global GDP will be stored on the Blockchain by 2025.

What is blockchain? Definitely, it is not spelled B I T C O I N. Blockchain is the technology behind the cryptocurrency, if one defines Blockchain as Bitcoin or cryptocurrency, it is like defining the Internet as the technology behind email. Blockchain was originally described in 1991 intended to timestamp digital documents so that it’s not possible to backdate them. But it was left unused till 2009 until Satoshi Nakamoto created a digital cryptocurrency, BITCOIN. Blockchain has the potential to change our lives in the next 20 years as the internet has changed in the last 20.

The basic definition of blockchain would be a ledger on the cloud. A Ledger is the heart of the blockchain. It is protected by the most advanced cryptography algorithms. A hack-proof system – whenever an entry is made, after getting authenticated it gets added to the large immutable chain. Authenticity, transparency, quality, no change of state, agile and cost saving, these are the main characteristics of blockchain.

Traceback is possible through blockchain- Walmart uses this concept for tracing any issues with products, they can check at which stage this issue has occurred. Blockchain changes the concept of trust, from a centralized trust to distributed trust. Multiple countries namely Japan, Canada, UAE, Estonia, Mauritius (they call themselves Ethereum island) want to transform their economies and transactions using Blockchain.

Blockchain in Banking

Each day, looking specifically into the banking and finance sector, hundreds and thousands of regular transactions of funds take place from one region to another region of the world. This makes the global financial system one of the most popular sectors that could be benefited through Blockchain. Highly dependent on manual networks, the banking & finance sector is prone to frauds and errors that could lead to an incapacitated money-management system.

Blockchain owns all the appealing characteristics- safe, secure, decentralized, transparent as well as relatively cheaper – that are needed by a reliable technology that involves money. It can provide a very high level of security and safety when it comes to exchanging data, information, and money. These characteristics make blockchain a promising, dependable and in-demand solution for the banking and finance industry.

Big banks like JP Morgan Chase have placed their credence in the future of Blockchain technology. It has a separate division, Quorum, specifically for research and implementation of Blockchain. Bank of America has filed a patent document. The document talks about the implementation of a commissioned blockchain for securing records as well as authenticating business and personal data. Coming to India, ICICI Bank executed India’s first banking transactions on the blockchain in partnership with Emirates NBD. It is the first bank in the country and among the first few globally.

Though there are several hurdles, it can be said that the Blockchain technology holds the potential to transform the financial sector by decreasing potential costs and labour savings. Observing the wide-reaching implications of the technology, companies are continuously researching to find out ways to apply blockchain in multiple sectors. Blockchain can help financial services providers in fraud reduction, Knowing customer, smart assets management, smart assets, trade finance and so on.

Blockchain for e-governance and economic growth

(i) E-governance and economic growth: Andhra Pradesh government is using blockchain for e-governance. There are several proposals from the government to use blockchain in land registry, transport department, cyber security and make e-governance more secure. In Vishakhapatnam, the government has started a fintech valley which would be home for start-ups and companies in the field of fintech and blockchain. So far FinTech Valley, Vizag has created 5,500 jobs and attracted $900 million in investment. The original aim is to create 500,000 jobs by 2020.

(ii) Blockchain is helping build Amaravati (New capital of Andhra Pradesh), the government went for land acquisition to build the capital and this entire process of documentation was a massive exercise and is based on blockchain. The blockchain utilized by the government agency in charge of shaping Amaravati is private, unlike it is in the case of Bitcoin. Blockchain has left no scope for corruption and documents tampering.

(iii) Economic growth: Telangana government is coming with a blockchain policy (a draft), which is aimed at attracting firms and start-ups into the state. Policy states that land will be allotted at subsidised rates to Blockchain companies. Telangana wants to be the Blockchain capital of the country. With the collaboration of Tech Mahindra, the state government has conceptualised the country’s first ‘Blockchain District’, which will be a physical area within Hyderabad, aimed at creating the ecosystem. It will have a huge incubator and a world-class facility for promoting research and innovation.

Blockchain in Agriculture

A country with 12 crore farmers, 16% contribution to the GDP, India has the second largest area of land under agriculture in the world. Apart from these numbers there is another number, 23, this is the number of farmers that commit suicide every single in India. No proper input-output ratio, small size lands, even if they own the land they are not recorded, which results in financial institutions rejecting loans to them and these farmers go to some other sources for credit. How can blockchain help here?

Blockchain can be used to make farmers a fractional owner of the equipment (tractor may be, a set of 5-6 small farmers can come together to buy and all the finances are under blockchain). We are seeing that the governments are digitizing the lands these days, which is a good initiative but digitizing won’t help in protecting from manipulating the records. And under digitization, we will know who it belongs to not to whom it belonged to.

Through Blockchain, manipulation can be eradicated and accurate details of the lands can be maintained (As seen in the case of Andhra Pradesh Government’s initiative in recording farmers land details in the blockchain). Many more such options are feasible in this sector.

Regulations

The technology has outpaced the regulation. What is possible is vastly greater than what is permitted in a lot of cases and a lot of cases what is possible is not considered by the regulators even yet. So certainly, for the blockchain space, one of the areas that had a lot of focus is digital currencies.

Regulators in the US and Europe are creating regulatory sandboxes- these are the places where people who want to use financial technologies for financial products can go to that regulator and say we would like to work within your system to prove to you that this is a technology that you should find acceptable.

The Reserve Bank of India (RBI) set up an inter-regulatory Working Group (WG) in July 2016 to look into and report on the comminuted aspects of FinTech (also usage of blockchain technology) and its implications so as to review the regulatory framework and respond to the dynamics of the rapidly evolving FinTech scenario.

There are drawbacks with this sandbox concept as well, like it takes time for the start-ups to launch the product in the market as it needs to be tested on the sandbox before releasing it. Emerging economies like Brazil are also looking into these options of regulating it and creating a sandbox for testing the systems.

Challenges in adopting Blockchain

Blockchain has its advantages in terms of adoption given its features (proposed) but there are some barriers as well. With the increasing need for interoperability among industries like banks, the technology needs to be compatible with different systems.

Privacy, in order for blockchain to take their place, it is important to ensure that the data stored on the blockchain technology is kept securely and would not hamper the identity of any individual. Encryption, the generated private key if lost, there’s no way to get it back. Security, Scalability and Legal regulations are other key factors that challenge the blockchain adaptability. Although blockchain is highly secure and if it is applied to the banking sector it comes up with many more security protocols as well, but the system has to be made more robust so that it wouldn’t give any scope for tampering or hampering the operations.

Energy Consumption, it is one of the key challenges in adopting the blockchain. As the network keeps growing with the addition of new blocks to the network, it also increases the consumption of energy in an enormous amount. High levels of energy consumption can lead to massive carbon footprints. So, before the issue becomes a large one, alternate clean energy systems should be developed.

Conclusion

Blockchain can be used in Education, health care, taxation and financial sectors (specially to keep a check on NPAs, frauds). It needs more skilled resources, which can lead to skill development in the country and also attract a lot of investments which can boost the economy and also can help in curbing corruption.

India has to start taking baby steps to achieve excellence in Blockchain technology. Although there are regulatory and other issues associated with it, history teaches us that usually, new technologies take a few decades to realize their full potential.

Thus, it is possible that blockchain would prove far-reaching in the years to come despite its limited success so far. What is certain is that businesses should be looking at this technology and understand it because its underlying ideas are powerful and likely to be influential. Blockchain is at its hyped cycle right now but it has the scope and power to change our lives in the next 20 years.

Authored by Venkata Vivek Vasireddy, PGPM 2020, Great Lakes Institute of Management, Chennai.

References –

Image(s) courtesy – Google Images

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