How RBI And Indian Banks Are Piloting Blockchain Trade Financing

How RBI And Indian Banks Are Piloting Blockchain Trade FinancingBlockchain technology is gaining popularity among Indian states and banks due to its potential to improve transparency.

The most prominent issue today’s banks are facing is money laundering frauds, which are wiping away thousands of crores of rupees, putting the taxpayer’s money at stake. Along with other banks such as HDFC, ICICI, and SBI, the Reserve Bank of India (RBI) is interested in developing a proof-of-concept blockchain project aimed at trade financing.

We’ve recently seen an increase in the number of fugitive borrowing scams. Be it Vijay Mallya’s case or Nirav Modi’s hiatus with Punjab National Bank through Letters of Credit (LOC), the Indian government is still trying to bring them back to India. As a result, controlling such frauds becomes even more critical for banks. For this reason, banks are exploring blockchain-based trade finance projects to facilitate a safe and secure banking environment by ensuring greater traceability of money flow. 

Why Are Central Banks Keen On Blockchain? 

When compared to traditional banking services, blockchain technology is based on the principles of decentralisation, cryptography, and consensus, which can ensure greater trust in transactions. Since it uses a shared digital ledger, it can significantly reduce fraud by increasing the visibility and transparency of transactions throughout a supply chain between members of a business network.  

Another characteristic of blockchain is that the transactions recorded on it are immutable, which means they cannot be deleted or changed because each block must be validated before being added to the blockchain. To tamper with the transaction records on a blockchain, an individual or group working together would have to control the majority of the system, which is extremely difficult. Participants can also view the history and transfer of assets, which can help easily identify fraudulent transactions, double purchases, and errors in approval. 

Unlike traditional services, which require a great deal of manual labour, blockchain can automate some of those manual processes, such as payments or loan issuance, making life easier for banks. Seeing its potential, central banks are keen on adopting blockchain to make banking services more transparent, efficient and cost-effective. 

How Are Central Banks Aiming To Use Blockchain?

After thorough testing, the central bank intends to incorporate blockchain technology into its core banking system and use it to demonstrate real-world use cases. By using blockchain, banks hope to improve the trade finance lending process by accessing new markets across countries. This will in turn enable faster and simpler peer-to-peer transactions, which are effective for both international businesses and consumers. 

The proof-of-concept blockchain project is going to harness the blockchain technology where ‘blocks’ of transaction data are stored in ‘chains’ with peer-to-peer access, which can prevent tampering with documents such as the letter of credit (LoC) by issuing digital versions. As a result, fraud will be greatly reduced. IBM, Corda, and Belgium-based SettleMint are providing technical assistance to shape the project. 

Cryptocurrencies and blockchain are two technologies that are gaining traction around the world. Despite its opposition to cryptocurrencies, the RBI is enthusiastic about the potential of blockchain technology. According to the latest proposal from the RBI for its central bank digital currency (CBDC), the same technology will be used there as well. 

Take Away 

Blockchain is being adopted in a variety of industries these days, and all industries rely on the banking industry to conduct transactions. As a result, the banking industry must be vigilant and keen in tracking transactions to ensure that there is no room for fraud. The RBI’s move toward blockchain-based trade financing is a significant step toward disrupting the banking industry in the coming years.