As per the latest reports, State Bank of India along with ten other commercial banks, is taking the lead in building the country’s first financial blockchain framework. Reportedly, Axis Bank, Central Bank of India, DCB Bank, Deutsche Bank, HDFC Bank, ICICI Bank, IDBI, Kotak Mahindra Bank and Saraswat Bank are the other players in this consortium. This framework built upon the blockchain technology is being developed for SBI by global technology giants IBM, Microsoft and KPMG, among others.1
What is blockchain?
Blockchain is a decentralised transactional record management system where exchange of value is independently managed by participants of the network.
The technology behind blockchain relies on the undeniable proof of mathematics. Identity and authority to make transactions on the blockchain medium is ascertained by mathematical functions.
As of now the most popular use case of blockchain is bitcoin. Currently, the publicly available ledger of bitcoin records each bitcoin transaction with little or no cost, and stores them permanently on an immutable chain of records called the blockchain. It provides for a traceable history of all transactions till the very beginning. This offers an ironclad proof of ownership. As there is no single trusted authority to maintain the database it is not susceptible to hacking and accounting errors.
However, blockchain can be used to transact in any goods or services. Like diamond2 and gold instead of bitcoins.
You may read quickly about bitcoin and the underlying technology blockchain in this detailed article: What are bitcoins / cryptocurrency / blockchain – what is so different than fiat money?
What is Bankchain?
The blockchain’s new found use case in the clearing and settlement of financial transactions is being taken seriously from the past 18 months. According to the consulting firm Oliver Wyman, clearing and settlement alone costs the global financial industry a whopping USD 50 billion annually.3 The structural inefficiencies and the traditional delay associated with clearing houses make for an industry ripe for disruption.
Initially started out as a secretive consensus-based ledger system exclusively for financial institutions, Bankchain is a project of industry leading bitcoin exchange – ItBit.
itBit was started by CEO Chad Cascarilla in 2012 as an early stage growth fund directed at bitcoin/digital currency-related startups. itBit was possible as Chad was a highly experienced manager and co-founder of the hedge fund Cedar Hill Capital Partners.
ItBit invited almost 100 participants including major banks, brokers and stock exchanges of the USA to its “Bankchain Discovery Summit” at Washington, D.C. on 27th April, 2015. This summit was especially closed to the press.
In later stages ItBit formed a product named Bankchain, a custom technology to meet the specific needs of the financial world. Bankchain then joined hands with Euroclear to create the Euroclear Bankchain4 which was to be specifically used in international gold transaction.
Euroclear group is a consortium of Euroclear banks. It is rated AA+ by Fitch Ratings and AA by Standard & Poor’s. The consortium includes Euroclear Belgium, Euroclear Finland, Euroclear France, Euroclear Nederland, Euroclear Sweden and Euroclear UK & Ireland. The group settled an equivalent of EUR 675 trillion in securities transactions in 2015, representing 191 million domestic and cross-border transactions. By December 2015, the group held EUR 27.5 trillion in assets for clients.
On December 20, 2016 a good number of participants performed 600 mock London bullion trade transactions in a pilot project with Bankchain. It was ascertained that Bankchain helped lower trade risk and simplify post-trade process. The next pilot and live service is scheduled to happen in 2017.
The technology behind itBit’s Bankchain
Bankchain is built upon protocols derived from the blockchain technology but not purely the same thing. It is built on some proprietary algorithms developed by itBit to create a permissioned blockchain where members require special permissions to transact.
“It’s a private network. You know who everyone is. You can sign legal agreements among everyone involved that lay out the rules, and create a variety of ways to establish trust among the known participants. This allows you to reach a much speedier consensus not based on work, but on the fact [that] you are in the system.” – Chad Cascarilla
Unlike blockchain which relies on public creation of tokens (bitcoins) through a mix of cryptography and economics, Bankchain is not open to public and can be populated only by verified actors and tokens. Here the incentive is not in mining or maintaining the blockchain for rewards, it is the simple need of cost savings, which faster processing speeds and reduced red tape bring.
Bankchain does not rely on proof of work like the blockchain did. Unlike solving difficult math puzzles Bankchain relies on a variety of ways to establish trust. In a private network where the identities of the parties are established, trust can be easily created by consensus.
Also in place of the original token on blockchain, Euroclear Bankchain tokenizes physical gold. Digitised gold tokens are standardised to an unit of physical gold. These units are redeemable against gold coins amongst each other.
Instead of bitcoins, digital gold tokens are issued and these units can then be traded against. For e.g. instead of 100 BTC I may hold 100 DGT (digital gold tokens). I would be then able to buy 100 Gold coins worth of goods and services from the members of the same network who will honor the agreement. The ingress and egress of the DGTs is also based on a mutually agreed method.
This helps in dynamic reduction of time taken for international settlement of trade. As of now it takes about two working days for Bombay Stock Exchange to settle a transaction, on this technology it would be instantaneous.
However, this altered version of blockchain still uses the most of the original technology to create inviolable and immutable transaction records which take effect instantly! Participants get to control their own data without any central point of failure. Ultimately, the core difference is control, something critical to financial institutions with fiduciary concerns.
SBI Bankchain – meaning for India
RBI’s research wing Institute for Development and Research in Banking Technology released a White Paper on Blockchain Technology – IDRBT on 6th January, 2017.
It talks about the technology and the mathematics behind bitcoins and presents use cases of the blockchain technology after explaining various concepts in bitcoin terminology. And finally, in chapter five it concludes with favourably putting the application of blockchain to Indian Banking and Finance.
Fast enough on 26th January, Dy Managing Director and CIO of State Bank of India, Mrutyunjay Mahapatra confirmed that 15 of India’s largest bank is coming together to make an interbank blockchain platform.
This platform would serve heavily in subverting scams like the ones of Harshad Mehta where a few banks issued bogus Bank receipts not backed by any security. An unified credit record can be established which would help in reducing Credit Card fraud. Current mechanisms like NEFT, IMPS cost banks a lot of money spent in interoperability, with Bankchain such problems would be non-existent.
However, Bankchain is only the probable technology they may use, the usage of the word in context to SBI does not mean they have settled upon the use of the proprietary technology owned by itBit. As of now, they have only invited technology companies and other banks to come together and devise ingenious ways to solve the Indian market conditions using blockchain.
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