UNIT 4

BLOCKCHAIN TECHNOLOGY IN FINTECH

Blockchain technology is one of the most significant technologies to emerge from the fintech
revolution. Blockchain, which is frequently connected with the digital currency Bitcoin, is a
distributed database that enables safe, transparent, and tamper-proof transactions.

Traditional database technologies present several challenges for recording financial

transactions. For instance, consider the sale of a property. Once the money is exchanged,
ownership of the property is transferred to the buyer. Individually, both the buyer and the
seller can record the monetary transactions, but neither source can be trusted. The seller can
easily claim they have not received the money even though they have, and the buyer can
equally argue that they have paid the money even if they haven’t.

To avoid potential legal issues, a trusted third party has to supervise and validate transactions.
The presence of this central authority not only complicates the transaction but also creates a
single point of vulnerability. If the central database was compromised, both parties could
suffer.

BCT ITS POTENTIAL, AND APPLICATION

Blockchain technology has numerous potential applications. Here are a few examples of how
blockchain is currently being used or could be utilized in the future:

1. Finance and banking

One of the most visible applications of blockchain is in banking and finance. Blockchain
technology has the ability to accelerate transactions, cut costs, and improve security. Banks,
for example, might utilize blockchain to process payments more quickly and securely.

2. Management of the supply chain

Supply chain management is another area where blockchain might have a significant impact.
Blockchain technology could aid in tracking the movement of goods and materials across the
supply chain, from manufacture to distribution. This would improve openness and efficiency
while perhaps lowering costs.

3. Medical care
Blockchain technology might be utilized in healthcare to securely store and distribute patient
medical records, for example. The usage of blockchain technology could help to secure
patient privacy and data security while also potentially improving the efficiency of healthcare
institutions.

4. Elections
Another potential use for blockchain is in voting. The adoption of blockchain technology has
the potential to improve the security and transparency of voting systems. This could help to
decrease voter fraud and ensure election integrity.

5. Property
Blockchain technology could also be employed in the real estate market, such as to aid in the
purchase, sale, and rental of property. The adoption of blockchain technology has the
potential to streamline the process and lower the expenses involved with real estate
transactions.
BCT in Banking

1. Clearance & settlement

Bank transfer usually takes some days to settle transactions. So it's a

challenge for the bank to handle moving currency. The bank transfer needs
to go through custodial services and the reconciliation process. E.g., if a
person wants to transfer from one bank to another, the transfer process will
occur through swift. The money is processed through intermediaries, which
involve additional costs and time.

There are specific steps that help the banking sector during the clearance
and settlement process.
• When clients request a payment, the transaction is presented in the
form of a block.
• Then block is sent to the network known as nodes.
• Nodes validate payment and use status through proper proof
• Once payment is verified, it is combined with another amount to generate a new data block
for the ledger.
• A new block payment is added to the existing blockchain, and the process is completed.
Cross-border payments are cost-effective as compared to conventional banking systems.
Moreover, with blockchain for cross-border payments, third parties' verification gets
eliminated, speeding up the processing time.

2) 2.Lending & borrowing

Lending and borrowing are the primary services that banks offer. The stakeholders involved
are:
Lender: The banks or financial institutions which give money.
Borrower: The borrower who takes money from banks or financialinstitutions.
Guarantor: The guarantor is the promising entity to repay the loan if clients fail.

Blockchain helps in the following way:

Step 1: A lender generates his profile which contains Personal details like name, address and
other details Details of various bank accounts Type of investment a lender would like to
invest. Rate of interest to be associated with different types of borrowers who are involved.

The profile details are provided based on these details; the lenders and borrowers can find
each other at the market for their transactions.

Step 2: The lender looks forward to a loan request After submitting details, the lender waits
for a loan request. Once the request is received, the lender schedules an interview with the
borrower to discuss the loan and relevant information further.

Step 3: Borrower generates a profile detail A borrower creates a profile comprised of personal
details like name, address and collateral information. The collaterals could be specified in legal
documents, crypto coins etc.

Step 4: Borrower requests for the loan amount Once the account is opened, a borrower can
send a loan request to multiple lenders for intelligent contracts that help the borrower reach
the appropriate lender who meets the requirements of investments.

Step 5: The lender starts the discussion with the borrower about the loan
When the loan request is received, a lender begins the conversation with
the borrower and try to get through –

 The reason to apply for the loan.

 Monthly source of income.
 Repayment rate of instalment and interest.
 Number of times the borrower applied for the said loans.
These details help the lender approve or dismiss the borrower's loan application.

Step 6: Smart Contract, which decides the rate of interest Once the request is accepted, the
intelligent contracts check the CIBIL score to determine the borrower's rate. Borrowers fall
into high risk, medium risk, and low-risk categories based on repayment rates. When using
the P2P (peer to peer) lending blockchain platform, the interest rate remains constant, one
of the most significant advantages of the blockchain.

3.Trade finance

Trade finance is concerned with financial activities related to international trade and
commerce. All these activities still rely on paperwork such as a letter of credit, bill of invoice
etc. However, the whole process is online and consumes lots of time.
Trading based on blockchain solved the paper process with minor time consumption
and minimum regulations. It is how the blockchain is going to transform trade finance.

When the buyer purchases goods from the seller, the sale agreement is shared with
the import bank with smart contracts on the blockchain network.
The import bank reviews the purchase agreement credit terms & conditions and then
submits the obligation to pay to the export bank.
The export bank reviews the obligation payment and verifies it first.Once approved, the
intelligent contracts trigger the blockchain to include the terms and conditions and lock in
some obligations.Once the obligations are received, the seller signs digitally.

The blockchain-equivalent letter of credit in a smart contract to proceed with the shipping.

The goods are later monitored by third parties and customs agents in exporting countries.
All the goods are approved by signing digitally on blockchain smart contracts.

The goods are transported by one country to another country.On receiving the goods, the
buyer acknowledges the receipt.The payment is then processed from buyer to seller through
smartcontracts with the help of blockchain.

Benefits of BCT in banking

Blockchain technology brings many benefits to asset transaction management. We list a few
of them in the following subsections:

Advanced security

Blockchain systems provide the high level of security and trust that modern digital
transactions require. There is always a fear that someone will manipulate underlying software
to generate fake money for themselves. But blockchain uses the three principles of
cryptography, decentralization, and consensus to create a highly secure underlying software
system that is nearly impossible to tamper with. There is no single point of failure, and a
single user cannot change the transaction records.

Improved efficiency

Business-to-business transactions can take a lot of time and create operational bottlenecks,
especially when compliance and third-party regulatory bodies are involved. Transparency and
smart contracts in blockchain make such business transactions faster and more efficient.

Faster auditing

Enterprises must be able to securely generate, exchange, archive, and reconstruct e-

transactions in an auditable manner. Blockchain records are chronologically immutable,
which means that all records are always ordered by time. This data transparency makes audit
processing much faster

BCT in Indian Banking Sector

Blockchain Technology (BCT) also known as Distributed Ledger Technology (DLT)

is a revolutionary technology for record keeping. Picturise a spreadsheet that is duplicated
thousands of times across a network of computers. Then imagine that the network is designed
to regularly update the spreadsheet. The information will be constantly reconciled into the
database which is stored in multiple locations and updated instantly. The records will be
public and verifiable and will have no central location so it will be harder to hack as the
information exists simultaneously in millions of places.
This is a commonly used analogy that renders a basic understanding of the working
of a blockchain and also why the blockchain ledger is secure, transparent and immutable. As
such blockchain helps in making data immutable in any industry but blockchain owes its rise
to fame to cryptocurrencies. Being a distributed storage without a middleman, blockchain
eliminated the need to deal with a bank to verify the transfer of money as well as the
requirement to let it take a cut of a transaction and thus, became a favourite of
cryptocurrencies and a perceived threat to banks and regulatory authorities especially in India.
In time however, blockchain’s use cases have succeeded in making it an integral part
of the Indian finance system, starting with the pioneering effort of ICICI Bank in 2017 to use
custom made blockchain platform to execute payment transactions in international trade
finance in the private sphere and in the public sphere with the release of a national strategy on
blockchain resulting in blockchain based application pilots by the state banks and the RBI.

BCT in supply chain management

1.Future studies need to examine the real-life implementation of blockchain across various
business sectors to understand which dimensions of the technology are difficult to implement
from an organizational perspective. Additionally, studies should comprehensively identify the
critical success factors to assess productive implementation of the technology.

2.While many existing studies have focused on the features of the technology and their
implications on business operations to achieve productivity, sustainability, and resilience, it is
pivotal to comprehensively examine which business operations, functions, activities, and
sectors will reap the most benefits. The uptake of technology to support specific scenarios and
use-cases requires clarity and further investigation.
3.Research should also turn its attention to applications of blockchain technology such as
smart contracts within the OSCM domain to examine the relevance of existing operations
research optimization models and the need to either integrate or evolve these models in that
context. For example, how can tools enabled by blockchain facilitate multistakeholder
relationships in international business ecosystems?

4.The role of blockchain technology to achieve supply chain resilience and the factors that
will drive these warrants further exploration. In this context, studies should consider what
strategies organizations within the supply chain should employ to achieve resilience through
the adoption of blockchain applications, and conversely, how blockchain can inhibit supply
chain resilience.

5.Supply chain diligence is an emerging topic, and the impact of blockchain tools and
platforms to achieve due diligence (i.e., with the aim of preventing or ending certain human
rights or environmental violations) needs to be examined. Such studies should provide
evidence of how this technology can help companies comply with policies and regulations
and make all the information auditable and accountable.

6.Research is also gaining momentum on the impact of blockchain technology to achieve

sustainable development goals. More studies should examine this theme to critically
understand how the technology can facilitate addressing specific SDGs and at what cost. For
example, instead of just examining sustainability performance, studies that provide clear
evidence on implications towards selected SDGs will help in developing cases where, how,
and why the technology can be adopted.

7.A question that has arisen in recent years is why BCT implementation is failing and why
organizations are sceptical to adopt it. This theme needs to be critically explored to better
understand the role of different stakeholders and strategies to enable organizations to adopt
the technology. This underscores the need to go beyond examining drivers and barriers but
conduct in-depth analysis of failed implementations.

8.Blockchain analytics is also an emerging theme that will leverage Industry 4.0 technologies
such as Internet of Things, cloud computing, business analytics, and AI. The utility, relevance,
and application of blockchain analytics are an uncharted territory for organizations. Therefore,
studies should understand the interplay between the integration of these technologies and
unearth a framework that will facilitate data-driven agile decision-making using the data
recorded in blockchains.