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Institute for Development and Research in
Banking Technology
Explore, Enable, Excel Established by Reserve Bank of India

Chapter 1: Introduction to Blockchain Technology 03

Cryptographic Components 03

Blockchain Protocol 05

Classification of Blockchain Ledgers 07

Chapter 2: Advantages of Blockchain Technology in Banking and Finance 10

Cost Savings 11

Efficiency 11

Transparency 12

Chapter 3: Applications of Blockchain Technology 13

Digital Currency 13

BCT Applications Without Native Currency 14

Monitoring of Consortium Accounts 18

KYC 18

Chapter 4: Security, Privacy & Scalability Aspects of Blockchain Systems 19

Security Aspects of a Blockchain Deployment 19

Privacy Aspects of a Blockchain Deployment 22

Scalability Aspects of a Blockchain Deployment 23

Chapter 5: A Prospective Roadmap for the Adoption of BCT to Banking and Finance in India 26

Annexure : Blockchain Application to Trade Finance - PoC 27

Use Cases 29

PoC Validation and Experience 32

© An IDRBT Publication, January 2017. All Rights Reserved.

T ECHNOLOGY and banking have a long close association. Both have been benefitting immensely
by this association. Innovations, which are by definition leveraging technology in unusual ways,
have great potential to be disturbing the standard ways in which systems are operated. However, in
that process we do gain, nevertheless it is not uncommon that these innovations do inflict pain on the
society. Therefore, a careful analysis of the pros and cons, a thoughtful ring-fencing of risks, closer
study on pilot basis before scaling up, fine-tuning based on feedback, etc., are required before we
adopt such innovations.
During recent years, banking industry across the globe is closely observing the developments in one
such disruptive innovation viz., the blockchain technology (BCT). BCT provides tamper-evident
recording of the linked transaction history in a distributed network, and has the potential to disrupt
the financial business applications. Sound theoretical underpinnings of BCT such as fault-tolerant
distributed computing and consensus have been studied for the past two decades. The nature of BCT
addresses risks and inefficiencies in multi-party systems, and that is where its benefits will be most
widely received. Applications of BCT for encoding economic signals have been in vogue for the past
decade and the claims that it may be useful for digitizing currency are being studied.
Smart-contracts are an advanced application of BCT that can encode complex business workflows for
enforcing their conformance, and enhances efficiency through event triggered mechanisms. Several
BCT platforms provide the necessary features to encode smart-contracts in a simple and efficient
IDRBT has taken the initiative of exploring the applicability of BCT to the Indian Banking and Financial
Industry by conducting a workshop involving all the stakeholders such as the academicians, bankers,
regulators and technology partners. In the process, the participants of the workshop came together
to bring out this White Paper detailing the technology, concerns, global experiences and possible
areas of adoption in the financial sector in India. The Institute has also attempted a Proof-of-Concept
(PoC) on the applicability of BCT to a trade finance application with active participation of NPCI,
banks and solution provider, the details of which are presented in the White Paper.
I congratulate IDRBT for the timely initiative and trust that the White Paper provides the necessary
impetus towards accelerating the adoption of this innovative technology. All members of the Working
Group deserve compliments for their inputs and efforts.

R. Gandhi
Date: January 05, 2017 Deputy Governor, Reserve Bank of India
Place: Hyderabad Chairman, IDRBT

Infosys. ISI. Accordingly. Citi Bank. State Bank of India. the Institute has been interacting individually with academicians. during the inauguration of the International Conference on Distributed Computing and Networking (ICDCN) today. Drawing from the strength of analysis presented in the first four chapters and the global experiences. the Institute organized a brainstorming workshop on Blockchain technology. The IDRBT coordinating team put together the inputs along with their study results into five chapters. IDRBT . Shri R Gandhi. All the participants of the workshop showed interest and keenness to work jointly to prepare a White Paper on Implementation of BCT in the areas of banking and finance in India. banks and technology partners working in the area. especially in the area of banking and finance.PREFACE I T is almost two years since a small team of researchers at IDRBT has been studying the structure. banks and the technology partner. Deputy Governor. the third chapter presents the potential areas of its application. TCS. released by Dr. Punjab National Bank. I am personally happy to get the White Paper. security features. Ramasastri Place: Hyderabad Director. the Institute formed a Working Group with experts from RBI. Reserve Bank of India. All the members of the Working Group have given inputs from their expertise and experience. Bank of Baroda. HDFC Bank. The results of the PoC have been quite encouraging. Former Governor. S. IBM Research. organizations. In order to gain first-hand experience of the implementation. Duvvuri Subbarao. A. privacy. giving comfort and confidence in the implementability of BCT. ICICI Bank. CCIL. with a foreword from our Chairman. protocols and ledger classifications of blockchains. both in currency and non-currency areas. In the process. Deutsche Bank. 2017 Dr. The fourth chapter critically examines the crucial features required in banking and financial sectors – security. the Institute organized a Proof-of- Concept (PoC) of BCT for a typical trade finance application with active participation of NPCI. NPCI. traceability and scalability. IBA. In order to bring all of them together. Date: January 05. the Working Group proposes a prospective roadmap for adoption of BCT in Indian banking and finance in the fifth chapter. The first chapter introduces the cryptographic components. While the second chapter provides the advantages of BCT. Deloitte and MonetaGo as members. Reserve Bank of India. process flows and use cases of Blockchain Technology (BCT). Axis Bank. It is a rewarding moment to the Institute and the Working Group to present the White Paper to all stakeholders in the country for further course of action.

especially in the data (through the regular pointer) as well as the terms of message authentication targeted towards tamper evidence of the same (through the hash tamper-evidence and tamper-resilience. pseudo collision resistance. holding some amount of data. and hence is capable of cryptographic hash functions. and precisely what a blockchain data structure looks like. that is. Minor input difference leads to major output difference 03 Applications of Blockchain Technology to Banking and Financial Sector in India . In order to Blockchain: Tamper-evident Linked-List justify the authenticity of a message through its tag. structure with the hash value of the data fragment it points to. a seemingly unassuming data structure. In Hash Pointer this White Paper. In other words. In its most value). and thus. creating tamper evident structures. probabilistically ensured that if a message is and this is the only one that does not have to contain a hash pointer. This produces an inbuilt data integrity Cryptographic Components mechanism. have recently taken the worlds of Finance and Technology inadvertently exposed to errors. and a suite of related protocols. with the regular pointers one-wayness. messages to fixed size hash values or tags. a cryptographic hash function tries to ensure pseudo Let us consider a linked-list. storing the hash pointer to abstract form. and a hash produce the same hash value or tag. the tag generated by a cryptographic because of the disruptive innovations it promises. that is. Blockchain exploits based linked data structure. the practical Each block in the blockchain acts as a node in the list infeasibility of generating two input messages that (or chain). An example of Cryptographic Hash Function such a tamper . Enable. The hash pointer is flexible enough to transactions between the entities. Figure 1. This allows us to utilize hash functions for application of the Blockchain technology to date. for minor differences in the the modern crypto-currency Bitcoin.evident data structure is the A generic hash function maps arbitrary size inputs or Blockchain. To achieve replace the regular pointer in any acyclic pointer- tamper-evidence in the ledger. and more so input message. hash function is supposed to exhibit major (random) While Bitcoin has been the most talked about difference. In fact. the tampering by storm through its groundbreaking application in will be evident. the practical infeasibility of linking the nodes replaced by hash pointers – this is generating the input message given the tag. we explore Blockchain similarly – as A pivotal construct in blockchain technology is the an abstract data structure and development platform hash pointer – a combination of a regular pointer to solve generic problems in FinTech. properties of cryptographic hash functions. new applications such as Smart Contracts have tried to exploit more abstract nature of the platform. a Blockchain may be described as a any piece of data acts as a commitment towards the tamper-evident ledger shared within a network of location as well as the integrity of the specific data entities. it is The first block in the chain is called the genesis block. Due to these two pointer pointing to the previous block on the chain. Excel Chapter 1 Introduction to Blockchain Technology B LOCKCHAIN. where the ledger holds a record of fragment. Explore. producing a variety of data structures with inbuilt data integrity and tamper evidence. its hash value will not match with the original tag. or has been intentionally tampered with. as storing the hash pointer Blockchain Technology relies heavily on fundamental simultaneously guarantees the location evidence of tools from Cryptology and Data Security.

Explore. all the subsequent blocks in the blockchain. automatically have a completely decentralized especially the copy of the last block. and of the blockchain as a commitment value. for consistency of records. in a hierarchical fashion. and nodes contain the cumulative hash pointers to the hence. which in turn appends the newly created block to the existing chain. In a Merkle tree. One may extend the chain quite easily. whereas appending is blockchain incurs an inadvertent error or is tampered O(1). simultaneously. If the blockchain in parallel. the leaf require changing an internal hash pointer. This specific property of blockchain decentralized network to ensure tamper-evidence of proves to be instrumental in constructing a tamper- the blockchain. in order to validate the complete involving other members of the network. without tampered block. Excel It is important to note that if any block in the chain are O(n) processes. if there are n hash) acts as a constant size commitment for the blocks in the blockchain. However. However. That would to obtain a Merkle Tree. the adversary is forced to fix becomes impossible as changing O(n) blocks in the the hash pointer in all of the blocks following the chain by a single entity in the network. if someone holds the last block feasible. that the commitment. replacing the regular pointers by hash pointers. Thus. is not blockchain. This action of appending a block does not tamper-evident data structure in the form of this require involvement of all entities in the network. insertion and deletion tampering is intentional. we have a the chain. with. a constant time process. respective subtrees. Similar to the blockchain. Blockchain visualized as a linked-list of blocks connected by hash pointers 04 Applications of Blockchain Technology to Banking and Financial Sector in India . that is. the block containing the hash pointer of the erroneous block will not match anymore. similar to the case of blockchains. appending a new block to the existing last block of anywhere within the blockchain. one may construct a binary one may not insert a new block in between two tree. evident decentralized ledger of records over a network. a network of entities tracks the appended block is broadcast in the network so that last block of the blockchain. which nodes contain the data blocks. insertion and deletion in the whole tree. existing blocks in the chain as easily. which acts as the platform to store the commitment and hence a commitment. we every entity may update their copy of the blockchain. Thus. it will be potentially every entity in the network is capable of easy to prove any such attempt at tampering. any In case a decentralized network stores the inadvertent error may be traced in a blockchain. and the intermediate leads to changing all subsequent hash pointers. Note that appending to the chain is fine. It is blockchain. The Exactly the same holds for deletion of a block from hash pointer to the root node of the Merkle Tree (top within the blockchain. Figure 2. In case. by creating a new block containing the hash pointer to the last Merkle Tree: Tamper-evident Binary Tree existing block in the chain. Enable. Technically. which allows a constant size sufficient.

another practical Merkle Tree with O(log n) operations. as specified in the protocol. in the form of the sibling hash and when required by the respective protocol. become O(k). the structure (Source: Wikipedia) of the blockchain network may be peer-to-peer (flat) or hierarchical. which may basic data structures defined in the previous section. to make the protocol fully Figure 3. instead of the the shortest path from the leaf node to the root. Consequently. Such roles and actions may depend upon a pre- specified access control mechanism. proof of membership etc. If any inadvertent error or malicious tampering value) format. This data structure is commitment in a distributed fashion. decentralized tamper-evident storage for data. Thus. while the the hash pointer to the root node may be stored as a commitment remains O(1). rather than of blockchain technology is the wide range and a list. we need to data blocks. In case of a Patricia Tree or a Merkle Trie. Similar proofs may be provided to Transactions verify that a collection of data blocks is a certain A mutual contract struck between any set of entities subset of another. the collection of data blocks is stored in a (key. it will be evident to everyone holding the Patricia Tree. where n is the authenticated data structure is the Patricia Tree or total number of nodes (data blocks) in the tree. establishes a consensus over a decentralized network of members involved in the respective protocol. any such In addition to the blockchain (linked-list based on contract is called a 'transaction'. or a set of permissions. as node in a Merkle Tree. Owing to the historical origin of blockchain technology from Bitcoin. operations like insertion. Merkle Trees allow an O(log n) flexibility of protocols that can be realized using the proof-of-membership for any leaf node. be used for consistency or audit proofs in the set of To understand the blockchain protocols.. one needs to produce only an follows: Network The blockchain protocol. the Merkle Tree will act as a Ethereum. In addition. as and when applicable. Excel However. hash pointer to the root node. in its most generality. which is a modified form of the Trie appending a data block requires an alteration of only data structure based on hash pointers. and thus. where the maximum length of the key causes the data in any of the nodes of the tree to values controls the depth of the tree. contrary to the case of the blockchains. in a change. The members participating in the protocol may have various roles and actions in managing the authenticated data structure. However. To prove the membership of any leaf define some essential functional components. as the Merkle Trie. Enable. In case of a network. appending. regular pointers. It is interesting to note that appending to the tree is Blockchain Protocol exactly the same as inserting a node. this The driving force behind the recent fame and success non-linear structure acts as a generic set. in its most 05 Applications of Blockchain Technology to Banking and Financial Sector in India . in the blockchain network is generally termed as a Patricia Tree: Tamper-evident Trie transaction. Explore. with every used in the modern smart contract platform – entity. it is hash pointers) and the Merkle Tree (binary tree possible to both insert and append a node from the based on hash pointers). pointers along the shortest path from the leaf node to the root of the tree. Merkle Tree as a binary tree connected by hash pointers flexible. and in such a case. as O(log n) size proof.

Each such set of transactions. the mining process. which results in either acceptance or rejection of the specific transaction. without going through an property to the blockchain. the task of creating a block and ensure tamper-evidence of the set of transactions appending it to the ledger should also be natively using a constant size commitment (hash pointer to decentralized. verified earlier as inputs. Enable. and these blocks are stored in general. In fact. This warrants for a c o n s e n s u s s c h e m e i n t h e p ro t o c o l . and the block containing this tree is recorded in A collection of transactions in a blockchain network is the blockchain ledger. It is to be noted that in a generally stored in the form of a Merkle Tree. The transactions are the Depending on the application. These connections have These generic blockchain transactions are also called been depicted by the dotted lines in Figure 4. which have been implemented in the form of an executable script. it is imperative to ensure that evident linked-list. Blockchain architecture as a ledger of transactions 06 Applications of Blockchain Technology to Banking and Financial Sector in India .Explore. the ledger is universally accepted across the network Verification at any given point of time. One may in fact view a entirely permissioned. as shown in figure 4. to distributed network. transactions in the blockchain. that is. T h i s Blockchain is inherently meant to be a decentralized decentralized consensus mechanism ensures a ledger of transactions. or it may be built on top of transactions. if any member independent arbitrator. and provides the most network requires verification or validation by the important tamper-detection and tamper-resilience network itself. the other members have the In practical blockchain schemes. Consensus The transactions are grouped together in a Merkle Ledger Tree. and the other structures in the protocol are transactions admit to public verification. Smart Contracts. each transaction or consistent version of the blockchain ledger amongst contract between two (or more) members in the all members of the network. known as mining segment of a block. blockchain platform as a tamper-evident distributed ledger of transactions. t h e verification routine also connects the Figure 4. this verification scheme is often implemented as a part of the transaction in the form of an executable script. Thus. chronologically (as per their time-stamps) in a Irrespective of the exact mining process that updates blockchain ledger. The blockchain technology is flexible the root of the tree). In certain practical applications of b l o c k c h a i n t e c h n o l o g y. This is achieved by introduces an inconsistency in the ledger through incorporating a verification scheme in the protocol. in the form of a tamper- the blockchain ledger. the verification fundamental atomic components of a blockchain scheme may be designed in such a way that the protocol. current transaction to previously existing party contract encoded as a Boolean logic. enough to accommodate a suitable form of recorded as a Merkle Tree. a transaction can be a complex multi. is included in the data decentralized appending process. Excel generality.

and all blockchains. and rectify the ledger by forking the chain. the Depending on the nature of the application and the mining process relies on some proof-of-work structure of the network. the process of blockchain architecture by taking the pioneering generation and verification of transactions is publicly blockchain application –Bitcoin –as an example. (definition by Barclays). the miners and auditors are trusted parties validate the outcome instantaneously and entities. so that anyone in the network may perform member. where the code. In case of private ensure tamper-resilience. and restricted to only a fraction of carefully. while a blockchain is said to be permissioned if the transactions can be Smart contracts are pieces of software. 07 Applications of Blockchain Technology to Banking and Financial Sector in India . In addition. the smart contracts auto-execute. the mining may be a delegation scheme. sequence of actions resulting from the contract's majority consensus is followed in general. designed to be much simpler in such cases. that uses consensus protocols to agree upon the In permissionless blockchain protocols. Excel Figure 5. structure to determine who in the network can view Smart contracts are executed by a computer network the blockchain ledger. Based on the choice of the functional components described above. Eventual consistency due to the consensus scheme in a blockchain network power to negate the block appended by that available. the members on the network. Quite often. this Smart Contracts results in a simpler consensus mechanism. like Bitcoin. Enable. In case of public architectures. A blockchain is said to be enforcement of rights and obligations or tamper. Note that the mining and blockchain architectures. However. Explore. In fact. the permissioned blockchains financial transaction entries to automatically might include specifically designed access control implementing terms of multi-party agreements. instead of a Classification of Blockchain Ledgers competitive scheme. and hence the consensus scheme may be without need for a third-party intermediary. verified by anyone in the network. the mining process is also open to anyone in the network. that extend made or verified by predetermined authorized blockchains' utility from simply keeping a record of entities. Automatable by Another popular nomenclature in this line classifies computer. although some parts may require human the blockchain architecture as permissioned and input and control. Enforceable by either legal permissionless. which may or may not require a competitive mining at all. most often. these actions. which may be monopolized by supremacy schemes may be constructed for the blockchain to in financial or computing power. specific consensus concepts. and hence should be chosen access controlled. “A smart contract is an agreement whose execution is both automatable and enforceable. permissionless if the transactions can be made or proof execution”. In case of permissioned protocol. mine blocks and verify blocks. blockchain architectures may be Permissionless Blockchain classified broadly into two categories – public and Let us illustrate the generic structure of a permissionless private. the processes involving the consensus schemes constitute the backbone for any generation and verification of transactions may be blockchain protocol. In fact. in a permissioned setting. With a shared database running a blockchain longest chain sustains.

where each miner may choose which script containing the signature with the private block in the chain to append to. which states that – “This transaction can be redeemed (spent) by anyone who possesses the public key which hashes to address of the recipient. resources at their disposal. Every transaction contains an output script. and eventually the key of the user who is spending the coins. This Blockchain Architecture 08 Applications of Blockchain Technology to Banking and Financial Sector in India . The miners have to mining process. etc. and an output script described below. input consensus. Enable. blockexplore. the block was created. address Consensus: Bitcoin follows a standard majority information about the previous output. i m p l e m e n t e d i n a Tu r i n g incomplete stack based scripting language. A new block Mining: Bitcoin follows a competitive mining is added approximately every 10 minutes through a scheme. The first block in the ledger is this is done in Bitcoin using multisig. and can allow payments to be block chain. To further regulate the flow of Bitcoins. validate the transaction on an average. and the longest chain sustains. to append a new block to inputs and outputs: the blockchain ledger. number of inputs and outputs. The mining competition based on the ¬ Input to a Bitcoin transaction is another hash-puzzle is also known as a proof-of-work transaction. and subsequent blocks form a are even more flexible. a nonce transactions. outperform other forks. based on a hash-puzzle. value of the output.info. time of the transaction. It is widely believed that as valueofthetransaction long as honest parties control majority of the ¬ Each output contains the transaction index. There are two types of scripts – input scripts and output scripts. Bitcoin as a specific instance of the Permissionless corresponding public key. Ethereum is another widely used crypto-currency Verification: Verification of Bitcoin transactions is facilitating the users of the platform to extend the p e r f o r m e d t h ro u g h s c r i p t s . the Merkle root of the a new transaction with the output script of the input transactions that are included in the block. Excel Block: A Bitcoin block contains the hash of itself.com. using the computing Transaction: A Bitcoin transaction contains a header. the verification routine combines the new input script of hash of the previous block. and executes the combination. It might that is used by a miner to solve the Bitcoin be necessary in certain cases to obtain the approval computational hash-puzzle. hash of miners. the market. blockchain.Explore. Some redeemed after a certain time interval (defined by a examples of such ledgers are available at time lock). Each input contains sequence strategy for consensus. and also possesses the signature from the owner of that public key”. The verification of a transaction is essentially verification of the digital signature against the Figure 6. Bitcoin employs a smart incentive mechanism to ensure honesty of the ¬ The header contains the transaction ID. as well as to regulate the influx of Bitcoins in the transaction. and a version number the hash-puzzle in designed in such a way that new that tells the verifier which set of rules to use to Bitcoin blocks are created (mined) every 10 minutes. compete with one another. number of the input transaction. and the time at which of multiple parties in order to process a transaction. Bitcoin scripts the genesis block. publicly maintained in a ledger. computing power. the longest chain will grow and address of the recipient.

¬ Identifying the structure of every form of transaction that needs to be performed in the network. the complex processes involving the ¬ Identifying the members participating in the ownership/purchase of this digital entity can be system and the role of each transparently handled through blockchain. the mining process may actually be Ethereum gives an incentive of 5 Ether (Coins in delegated to authorized members of the network. and to verify a block ¬ Designing an appropriate consensus algorithm and an incentive scheme to ensure the honesty of the members in the network. Ethereum is designed for implementation of complex in practical cases. if required. In fact. similarly. Each of the above design choices may be adopted based on the target application. may be delegated to authorized members. Consequently. Ethereum Virtual Machine allows a workflow resilience. applications. Like Bitcoin. Major design considerations intensive). Ethereum). authorized system to proof-of-stake in the next version of members perform the mining. Any physical asset such as a car while implementing a permissioned ledger are as manufactured in a company can be represented as follows: digital entity in the blockchain. the consensus and component of the blockchain architecture. Explore. may be custom designed for a resources spent for the longer workflows (resource- permissioned platform. In a permissioned blockchain. view etc. Unlike require a consensus scheme to ensure tamper- Bitcoin. Enable.) to the members in the network. each and every functional involving loops. quite often the ledger does not workflows on the top of distributed ledger. verify. To facilitate this. and in certain Ethereum Consensus algorithm. Ethereum currently uses proof-of-work algorithm called ETHash which is designed to disallow the mining to be done by pools Permissioned Blockchain based on Application Specific Integrated Chips (ASIC). 09 Applications of Blockchain Technology to Banking and Financial Sector in India . and the corresponding verification algorithms ¬ Designing access control structure to associate the actions (initiate. This technique allows the GPUs to be used for The main difference in the structure of a mining and currently the latency in block creation is permissioned blockchain as compared to that of a 12 seconds as opposed to 10 minutes of Bitcoin. Once represented in the blockchain. permissionless blockchain arises from the mining There are proposals to move from this proof-of-work process. so as to control who can mine a block and which transactions can be included ¬ Designing access control structure for each member in the network to define rights of viewing the content of the blocks. Excel basic transaction flow with much richer control flow called smart contract. Verification of transactions and blocks. as mining algorithms account for the amount of discussed earlier. for each type of transaction ¬ Designing access control structure for each miner in the network.

Typically. Blockchain Technology Blockchain holds the potential for all participants in a business network to share a system of records which will provide consensus. In order Financial services industry is currently the leader in to conclude/settle a transaction. which business network. d i g i t a l b a n k i n g a n d fi n a n c i a l t ra n s a c t i o n the key transactions in the processes are to underpin technologies. Excel Chapter 2 Advantages of Blockchain Technology in Banking and Finance B LOCKCHAIN is undoubtedly one of the most talked about technologies in the financial services industry today. Enable. The shift from a may lead to new business models and the existing centralized technical infrastructure to distributed. asset ownership and asset or value transfer. business networks are still Figure 7: (Source: “Blockchain for Banks: An Implementation Guide) 10 Applications of Blockchain Technology to Banking and Financial Sector in India . foundations for new business models in payments.'s Hype Cycle for Emerging Technologies. processes could move away from a hub and spoke ecosystem-enabling platforms is laying the model with intermediaries. A number of exchanged between the banks/financial institutions. immutability (BCT)/Distributed Ledgers lead the trend of Gartner and finality around the transfer of assets within the Inc. in the banking industry/financial services.Explore. progression to an industrial solution which will yield Despite the efforts to reduce the complexities and several important benefits in the context of transfer increase the interconnectedness of participants' of assets within business networks. initiatives that are already underway are driving its sometimes including 'trusted' intermediaries. The reason blockchain can be allow organizations to connect with new business potentially disruptive is that the distributed ledgers and payment ecosystems. data messages are experimenting with the technology. provenance. transaction records.

Enable. the consensus A trade finance solution with letter of credit. BCT enables the network to eliminate reconciliation. checker-approver process helps the banks and FIs to efficiency. The advantages brought by check/approval processes. BCT also brings in a high level of processes are sometimes inefficient. organizations resulting in reduced cost of processing Since the transactions are processed in near real. it saves on reconciliation cost In BCT. As a result. e. Thus.g. While the maker- BCT can be broadly classified into cost savings. it delays in decision making and can lead Cost Savings to longer processing time. as and when the approvals are documentary frauds. the players need not suffer through the participating nodes. streamlining conventional banking processes are linear and and simplifying the traditional siloed design of the hierarchical. In the case of an untoward event where BCT can be readily applied to banking is in the affecting the ecosystem (like war. cyber-attacks). gain control and puts the emphasis on ownership of decisions. the participating banks and financial minimal human intervention and it can address the institutions can enjoy reduced pressure on the market needs that could not be satisfied before. as the copy of the ledger vulnerable. Use Resilience through redundancy: Being a distributed of BCT can reduce duplicative recordkeeping. and redundancy in the network. ecosystem. even if some nodes of the network are unavailable. earthquakes. during transactions. akin to the assembly line of the financial industry infrastructure with a shared fabric manufacturing industry. costs and lower customer Fraud Prevention: As BCT is built on the concept of satisfaction. Excel typically exchanging data or messages between transaction can be approved by the remaining nodes them to conclude transactions. treasury management to keep their settlement Faster settlements: Blockchain can also help to accounts well-funded. the payments and settlements happen in real. BCT enables speed of processing and helps banks to Since. BCT can radically alter the way such sharing information across parties and consensus transactions are processed by banks and FIs today. the information is updated in the ledgers Save costs on forex volatility: BCT used in cross of all the nodes. Smart Contracts are business terms that are Save costs over delayed settlements: In case of a embedded in the transaction database and gets distributed payment network. minimize error rates and be operated by all permissioned nodes in the facilitate faster payment/asset settlement. BCT has the potential to address certain limitations of Reduced time for processing: Most of the the current processes by modernizing. shall effectively become the participating nodes in One of the most frequently suggested example the BCT network. BCT can help in border payments can help the consumers and banks improving the speed of processing transactions by to take advantage of the forex marketplace to get the reduction in decision making time across the best deal transparently from the market players. the transaction is relayed to all the approving between banks and prevents losses because of nodes simultaneously. and transparency. Trade Finance area. provided. architecture by design. the in the network. In turn. is available with all the nodes in the network. create and execute complex business rules that have time. Explore. BCT ensures the automatically executed when certain business transaction settlement information is also processed conditions are met. and enhanced transparency of decisions to all time. instantly. vagaries of currency volatility. expensive. maker-checker/cross of common information.. All the important members of the faster settlement means less risk in the financial payment ecosystem – banks. floods. Smart Contract feature in the simultaneously along with the payment messages. address KYC and identity management challenges as a lot of the data to prove identity is already in digital Efficiency form and BCT could enable instant verification. financial institutions system and lower capital requirements. bill of algorithms built as a part of the BCT network ensure a lading and multi-signature solutions based on BCT 11 Applications of Blockchain Technology to Banking and Financial Sector in India .

may help improve the services through continuous Provenance ensures the finality of the ownership of innovation. Enable. event-based fund permission-based ledger system that can move cash release to ensure speed and transparency. and trust. blockchain will not replace Immutable Transactions: Maintaining an immutable the payment systems or the messaging systems record of transaction events in a chronological order deployed by banks.Explore. messages and thus bringing about transparency and availability of audit trails brings in the necessary efficiency in the processes leading to reduction in control and trust to the participating members which overall settlement time and risk. augmenting existing business much desired attributes to banking and financial networks and providing increased discoverability transactions such as immutability and finality. Figure 8: (Source: “Blockchain for Banks: An Implementation Guide” Saving in decision making time: BCT helps in improving the rate of processing transactions by Provenance: In the area of payments. onboard other external parties ¬ Multi-signature contracts in the ecosystem for mutual benefits with a ¬ Smart-contract-enabled. BCT guarantees the blockchain. but these systems will connect to being a main pillar of its architecture. ¬ Banks issue letter of credit as a digital asset on experimenting with the distributed ledger approach the BCT to create efficiencies and a single version of digital truth. while the reducing decision making time. thus resulting in exchange of messages reasonably offer clarity on reduced cost of processing and enhanced each step in the payment process. and assets in real-time to settle market transactions. the asset and it saves efforts and processes to Transparency prevent double collateralization of the same asset. 12 Applications of Blockchain Technology to Banking and Financial Sector in India . Subsequently. As a ledgering technology. As BCT brings transparency to the system. banks are initially looking inward. Excel would include the following features: Although blockchain is imagined as an open system ¬ Carriers issue bill of lading on the BCT as a for transaction processing across the financial digital asset system. BCT could add to it transparency of decisions to all the participating by providing provenance and auditability for these nodes.

many central banks around the cannot be manipulated by any single person. or government. it may be prudent to look at the various use-cases of BCT taking shape across Very Low Transaction Cost: Currently. The value stored and of coins and the demand for them increases by each transferred needs to be denominated in a sovereign passing day. Excel Chapter 3 Applications of Blockchain Technology I N order to identify the potential application areas of BCT in Indian banking. blockchain the world and select cases that will be suitable and payments fees is very low. They have observed that unlike cryptocurrency is a form of digital currency designed traditional e-money. they derive value only currency. Enable. A Digital Currencies. thus enabling trust in While there are disadvantages of existing the underlying platform and guaranteeing that they cryptocurrencies. holders of digital currency may face cryptocurrencies have their own advantages and substantially greater costs and losses associated disadvantages. Electronic Money. without foregoing their privacy while currency schemes may discourage a range of overcoming identity theft. world have stepped up their efforts towards organization. Digital currency without native currency. sovereign currency. With transactions. It is possible to send developing digital versions of their fiat currency to and receive money anywhere in the world at any leverage the benefits of the underlying technology – given time. nor are they cryptography to secure the transactions and to backed by an authority. in many cases digital currencies are not denominated in or A Committee on Digital Currencies set up by Bank for even tied to a sovereign currency. Furthermore. currency to be considered e-money. while. BCT. digital currencies are not a to work as a medium of exchange using liability of an individual or institution. merchants are protected from potential difficult to satisfy in relation to digital currency losses that might occur from fraud. users can be implemented in India. do not providing facilities for digital currency use to their carry with them personal information. 13 Applications of Blockchain Technology to Banking and Financial Sector in India . for everyone to see thus allowing immediate verification of transactions. Litecoin. Ethereum and Dogecoin. and are customers. without a central authority. as a result. Control and Security: Users are in control of their The degree of anonymity provided by some digital transactions. is cautious about denominated in their own units of value. which is an early version of digital Disadvantages currency is formally defined as “value stored Risk and Volatility: Digital currencies are very volatile electronically in a device such as a chip card or a hard mainly due to the fact that there is a limited amount drive in a personal computer”. as AML/CFT requirements may be secure. Typical Accordingly. but rather are International Settlements (BIS). Also increased adoption and use of digital currencies could affect the conduct of Transparency: All finalized transactions are available monetary policy. The use-cases can be might include fees in order to process the broadly categorized into applications with and transactions on a priority basis. Explore. they have zero control the creation of additional units of the intrinsic value and. at a later point in time. or a certain amount of The examples of cryptocurrencies include Bitcoin. transactions. exchanges help merchant process transactions by converting them into fiat currency by charging lower Digital Currency fees than credit cards and PayPal. Due to the fact that financial system participants from direct use or from blockchain transactions cannot be reversed. Ripple. Protocols being open Central Bank Issued Digital Currencies source undergo wide scrutiny. from the belief that they might be exchanged for other goods or services. with price and liquidity risk than holders of sovereign Advantages currency.

and manufacturers. Bank of America. a firm that came through a Barclays development programme. are said to be involved in the effort. Swiss Federal Railways. Merrill Lynch. supported by IBM Research and IBM Global Business Services. HSBC and the Infocomm Development Authority of Singapore have claimed success in demonstrating the application of distributed ledgers to replace paper-based Letters of Credit in trade finance transactions. Switzerland transaction using BCT. Bank of England is also exploring the area of digital currency. The deal was executed via a blockchain platform set up by Wave. 14 Applications of Blockchain Technology to Banking and Financial Sector in India . called CAD-coin. focuses exclusively on pretty powerful – but to be really powerful the big Bitcoin-based digital securities.Explore. as well as the customs Cuber Wallet. The transaction guaranteed the government-owned railway company of Switzerland. Other major banks including Bank of Montreal. first accepted digital carried out what they say is the world's first trade currency in payment of city fees. butter from Irish agricultural food co-operative Ornua – formerly the Irish Dairy Board – to the Seychelles Trading Company.000 worth of cheese and sells bitcoins at its ticket machines. in a test. The application enables exporters. the big shippers. than four hours. The Dutch central bank is experimenting with a even if only a few participants were using a bitcoin-based virtual currency called “DNBCoin”. Scotiabank and TD Bank.000 Trade Finance: One of the most frequently suggested worth of cryptographically-protected certificates of examples of where blockchain can be applied is in deposits. Cuber (Cryptographic Universal the trade finance area. The trade deal can then be executed automatically through a series of digital smart contracts once certain conditions are satisfied. Enable.Money” – electronic payment service and digital currency of the same name. then that is subsidiary of LHV Pank. Royal Bank of Canada. cutting a process that added bitcoin as a means of paying small amounts. as well as banking consortium startup R3CEV. The parties involved in the transaction can visualize data in real-time on their devices and see the next actions to be performed. Zug. The application uses the open source Hyperledger as blockchain fabric. a the letters of credit – on the blockchain. Cuber's work corporates. export of almost $100. authorities. importers and their respective banks to share information on a private distributed ledger. If some banks decide to put Blockchain Entered Receivable) Technology. blockchain solution this would generate significant Russian government-controlled Sberbank of Russia advantages. In 2016. Excel The Central Bank of Canada has revealed recently that it is developing a digital version of the Canadian dollar based on BCT. owns “Yandex. BC T Applications without Native LHV Pank — the largest independent Estonian bank Currency — became the first bank in the world to experiment with programmable money when it issued €100. CIBC. comprises two strands: CUBER securities and the need to be on board. normally takes between seven and 10 days to less up to Sfr 200. a city Barclays and an Israel-based start-up company have government in Switzerland. As both letters of credit and bills of lading have very complex and intricate information flows.

The app uses core technology provided by Ripple. Enable. Excel Figure 9: Pre. Distributed ledgers present an opportunity to help powered by BCT.0 Paper: rebooting financial services”) Cross-border Payments: Ripple is using distributed ledger technologies to transform the cross-border payment business. to make international payments banks partially overcome such vulnerabilities in the easier and faster and has added a few banks to its future. Explore. Vietnam and Ecuador have highlighted the Santander Bank launched a new app to facilitate live vulnerabilities in cross-border transaction banking.and Post IoT trade finance highlighting advantages of the IoT (Source: “The Fintech 2. international payments (foreign remittances). FX Trading: Currently multiple records for currency 15 Applications of Blockchain Technology to Banking and Financial Sector in India . The recent cyberattacks in Bangladesh. network.

This introduces partners who conduct about three million additional delays in the transaction lifecycle. ledger technologies to the global financial markets. Cobalt DL uses also helps in Automatic DVP on a cash ledger and BCT. 16 Applications of Blockchain Technology to Banking and Financial Sector in India . Pre-Trade: A blockchain system that stores and employees use roughly six to seven software facilitates KYC data will help in reducing cost and applications to verify steps taken in the arrangement eliminating the number of KYC checks. seller. to enable a particular SBI and IBM is to test commercially viable platforms transaction and the corresponding ledger updates. providing over the life-cycle. to work Linq. a blockchain-based service. It will also as well as having to call banks. Furthermore. The goal of the collaboration between additional cost. worth $44 billion.and middle-office resources Post-Trade: Eliminates intermediaries as no central that are currently overwhelmed by the need for clearing is needed for real-time cash transactions. custodians and investment managers. eliminating multiple trade records for buyer. Trade: BCT ensures a Secure. IBM said the use of leading to reduced credit exposures. For correct accounting and to complete the business Bond Trading: IBM and SBI Securities. clearer and third parties from each for market authorities. Cobalt DL frees up back. brokers. blockchain startup (CCPs). it takes an average of 44 days to resolve such issues. immediate efficiency benefits. automatic reporting & more transparent supervision seller. standards. allocations and administration. for blockchain-based bond trading. a subsidiary of transaction. to issue pre-IPO together to design and deliver advanced distributed shares of companies. using IBM’s Hyperledger as a basis between them. like in derivatives. Loan Syndication: Financial services giant Mizuho BCT can revolutionize the Capital Market trading has announced a BCT trial to be focused on processes.000 disputes arise annually over issues such as BCT will benefit Capital Market Services at all stages the wrong number of computer parts in an order or of Trade and securities servicing. real-time transaction clearer and third parties and then continuously matching. avoided. financial institutions. FX market servicing processes are automated and duplication participants incur multiple unnecessary license fees. Normally. like exchanges. securities with 4. About increasing the time for final settlement. accounting. Enable. financing customers and borrowing or cash management.000 suppliers. use of assets on BCT as collateral. broker. There are several intermediaries involved syndicated loans.Explore. auto-execution of The technology is designed to integrate seamlessly smart contracts establishes the liabilities of parties with all trading sources and venues. Excel trade have to be created for buyer. This creates a delay and also for the trials. it reconciled across multiple systems. By presenting a shared view of a trade. 25. Sometimes. Currency Port and Microsoft Japan. deliveries that go awry. broker. central counterparties International-Dentsu (ISID). continuous reconciliation across multiple systems. BCT in Capital Markets: R3 is a financial innovation Pre-IPO shares allotment: NASDAQ announced that firm that leads a consortium partnership with over 50 it has issued its first investor shares on the platform of the world's leading financial institutions. establishing higher AML transaction. transactions per year. results in reduced margin/ collateral requirements. Fund subscriptions and redemptions are ticketing charges. analysis of which has Custody & Securities Servicing: Securities are shown to deliver a significant cost reduction when directly issued onto a blockchain to the parties. central securities depositories (CSDs). IT overheads and staff costs as a processed automatically making it simple for result of the complexity of existing structures. This is backed by eight major banks and financial faster and efficient post-trade processing. the compared with existing infrastructure. and associated partners. are looking to create new mechanisms respective ledgers based on the messages exchanged for trading bonds. including Information Services in a trade. intermediaries need to update their SBI Holdings. fungible institutions. help in Transparency and verification of holdings. intermediaries may need to complete a few additional Supply Chain Financing: The IBM business unit deals ledger transfers in the form of realignment. and immediate irrevocable settlement.

Enable. Explore. Figure 10: Blockchain in Capital Markets: The Prize and the Journey 17 Applications of Blockchain Technology to Banking and Financial Sector in India . has resulted in a 10-day resolution period. The same solution can be deployed by any big corporate and banks for supply chain finance. Excel Distributed Ledger Technology (DLT) records faster and more accurately than IBM's traditional resources.

Money Trail on Blockchain be useful to identify entities attempting to create fraudulent histories. banks can access the stored data to perform due diligence whenever customers request for a new service within the same banking relationship. SWIFT is now exploring the use of BCT for the same. which explains the popularity of central registries like the one managed by SWIFT. In the absence of a central entity. This will help in preventing “diversion of funds”. Excel Monitoring of Consortium Accounts IBA is suggesting an innovative usage of BCT – Monitoring of Financial Transactions of a borrower financed by a consortium of banks. The ledger would also enable encrypted updates to client details to be distributed to all banks in near real-time. or from another bank. Banks are struggling to manage and integrate all the data required for KYC compliance to obtain a consolidated view of the customer. A collaboration-based approach among financial institutions. The KYC ledger would provide a historical record of all documents shared and compliance activities undertaken for each client. Enable. can enable them to monitor money movement and perform the KYC desired analytics thereon to detect anomalies as per The increasing cost of regulatory compliance is the mutually agreed rules and patterns. It would Figure 11.Explore. this reference number. 18 Applications of Blockchain Technology to Banking and Financial Sector in India . SWIFT launched the SWIFT KYC Registry in December 2014. A blockchain-based registry would remove the duplication of effort in carrying out KYC checks. it is not operationally feasible to securely and reliably track the movement of money between accounts maintained across multiple financial institutions. which is a major concern of the banks today. The among every banker's top concerns. By using strengthen the monitoring mechanism. This will form the evidence to be provided to the regulators. The borrower moves funds from one bank to another and the end-usage is not known to the lenders. having to blockchain-based collaboration can also assist the comply with regulations such as Anti-Money participating banks/institutions to have better Laundering (AML) and Know Your Customer (KYC). and upload the generating leads therefrom for auditing and scrutiny. and more than 2000 banks have already enrolled with it. on the other hand. visibility of the use of loan money provided to corporates by tracking the movement of funds and Every bank and financial institution has to perform analyzing how the said money was spent/paid and the KYC process individually. validated information and documents to the central Use of BCT will make the information of movement of registry that stores digitized data tagged to a unique funds available to all consortium members and help identification number for each customer. The data within it could be analyzed to spot irregularities or foul play – directly targeting criminal activity.

One of the major advantages of BCT is integration of ¬ Ledger level security data processing. The design of platform will communication infrastructure security. Blockchain systems ¬ Transaction level security can be public (or permissionless) or permissioned in ¬ Associated surround system security nature. Quite often there may be a need for trade-offs security from malicious insiders. must be considered. business need to be carefully considered to balance these security through transparency and audit. existing financial technology. Being a fundamentally these issues. Security in general needs to be multi-level and one Security A spects of a B lockchain that encompasses all components and entry points in the system. consistency and security into an ¬ Network level security algorithmically enforced protocol. Let us take a look at the different levels Deployment at which security aspects need to be addressed in Financial institutions rely heavily on security detail. Due to legal and technical concerns. This section explores all three of Availability and Integrity). and concerns. One needs to ¬ Component configurations for scalability at all look beyond traditional endpoint protection and levels. anonymous by default and anybody with a valid By definition. confidentiality of components and entry points that are present in BCT transactions can also be addressed. a d o p t a h o l i s t i c a p p ro a c h t h a t i n c l u d e s authentication and authorization of entities Different applications of BCT may have differing accessing the blockchain. privacy and scalability that grail of Info Security – the CIA trinity (Confidentiality. we need to explore several aspects of all nodes are in essence agreeing to the state of its architecture. distributed system. This is now changing as financial firms are institutions that operate financial ledgers or recognizing commoditized operational functions registries may be inclined to utilize permissioned and leveraging Distributed Ledger Technology to blockchains as they form a more controlled and streamline those processes. This makes systems blockchain systems robust from an InfoSec ¬ Consensus mechanisms perspective. Privacy & Scalability Aspects of Blockchain Systems B LOCKCHAIN platforms are starting to be embraced by the financial industry in various aspects of their business operations and technology. while considering security in blockchain ¬ Network configuration systems. a distributed ledger platform version of the software can participate and create contradicts a financial institution's need for control transactions. Explore. privacy and scalability requirements nodes or server failure. a holistic view is essential. blockchain ensures high To understand these issues and concerns surrounding availability and integrity of the transaction data. BCT provides a secure and naturally from the following perspectives: decentralized framework for transaction processing. Blockchain platforms predictable environment than permissionless have the potential to solve various weaknesses in blockchains. Excel Chapter 4 Security. As the technology. By appropriate Acceptable level of security considering multiple use of cryptographic keys. of its data. procedures and technology to ensure the safety of Blockchain systems typically need to look at security their data. ¬ Encryption of data However. 19 Applications of Blockchain Technology to Banking and Financial Sector in India . Enable. compromised between security. but there are important Blockchains have the potential to address the holy concerns around security. transaction and architectural requirements. Participants in permissionless blockchain are ¬ Smart Contract security. such as: records based on a historical 'chain' of transactions – integrity of the data is maintained. basedon thebusiness contextandusecase.

it may other associated transaction information be best to avoid centralization of any process.e.. This includes ledger on-boarding processes. the effectiveness of DoS authorization must be safeguarded.. to change the payment amount. All transactions some key concepts in securing transactions: initiated from member nodes need to be signed so that only valid participants can create transactions in ¬ Relevant details of transactions must be the network. ¬ Tr a n s a c t i o n c r e a t i o n i d e n t i t y a n d For a permissioned network. Transaction accuracy and immutability is network must ensure that only legitimate entities are what drives the firm's books and records. This is to The network must be resistant to many different enforce the notion of 'unlinkability' of attack vectors. ¬ Transactions consist of moving an asset from components in addition to the blockchain software – one address to the other (a few use cases may these may include conventional “shadow” not involve assets).g. and other services. Internal ¬ Transactions should be unmodifiable i. both external and internal to the transactions network. the sender Blockchain is a distributed processing system and as information. the transaction model databases. It is must be such that parties having access to the recommended that communication between ledger are not able to trace activities or components of different nodes is made secure from a transactions done by other participants by networking standpoint. The ledger must have provisions to ¬ Associated transaction information such as withstand DoS attacks where an attacker can documents must also be encrypted so as to potentially spam the network with spurious allow only concerned nodes to interpret the transactions or acquire control of significant information percentage of the nodes or block creation/validation in a manner that they effectively control the network. The processes Transaction level security is critical for financial required to onboard entities onto the blockchain institutions. ¬ Transactions should be generally censorship ensure there is no single point of failure for any resistant i. observing transaction addresses. utilizing the multi- signature feature available in blockchain systems can be explored. Enable.e..Explore. it should eventually be added to the ledger ¬ For sensitive transactions. messaging. transaction spamming attacks (node delinquency) transaction information committed to the may be dealt with by quickly blacklisting the ledger should be probabilistically near delinquent node since the source of the attack is not impossible to modify – no one should be able distributed. institution 'A' should be able to perform whitelisting node IPs within the network) since all transactions using institution A's name/ID nodes and participants are known. Here are allocated the required credentials. i. the recipient information or any such to derive the true benefits of blockchain. members will be institutions who have real world legal credentials and are unlikely to disengage (as opposed to retail users who can Transaction Level Security withdraw from participation). Typically.e. Excel Ledger Level Security Membership to the blockchain needs to be restricted to participants who have been subject to required scrutiny.e. i. ledger protocol and validation rules. only attacks may be reduced by peer validation (e. if a transaction complies with the process. 20 Applications of Blockchain Technology to Banking and Financial Sector in India . encrypted using PKI concepts so that transaction details are not compromised to Network Level Security unintended parties Blockchain systems typically consist of multiple sub.

Explore. Excel Associated Surround System Security Blockchain systems might typically include associated systems such as shadow databases. then etc. referred to as Oracles. Additionally. then transactions different components to be grouped and may be queued by the remaining nodes and fed to deployed in different tiers. Many blockchain systems have a native token or blockchain contracts. 21 Applications of Blockchain Technology to Banking and Financial Sector in India . there is a need to implement 'highly available' systems. there is a possibility ledger. Security of these systems is also of paramount importance. the contract. Go. brought back online. These computer programs that act as agreements where tokens or digital currencies might be acting as a fuel the terms of the agreement can be pre-programmed for the functioning of the ledger either by burning with the ability to self-execute and self-enforce. key stores. Services that provide trusted data to smart of appropriate authentication and contracts. smart contracts may require data from ¬ Access to associated surround system external sources as inputs to their functions. One factor that needs to be ensured is ¬ Deployment of components of a node might that a corruption event at one of the nodes in the need to take into account appropriate network does not cascade across the entire network. – data is processed by multiple nodes and stored in etc. This design clearly has many advantages. once they are components makes for a more secure system. critical functions should never be (if applicable) served by a single node. may provide authorization mechanisms cryptographic proof that the data submitted has not ¬ Privileges/roles applicable to the blockchain been tampered with and came from a trusted source. placement with regards to corporate firewalls For resiliency. JavaScript. Python. the outside world. or otherwise creates a flawed program which can Malicious events that happen in the external world introduce vulnerabilities for the assets controlled by can impact the functioning of the ledger in this case. digital currency has value in the external world. introduces the possibility of receiving tampered or must be controlled through implementation false data. one needs to consider the impact of volatility of the value with regards to normal functioning of the As with any computer program. Contract Security Native tokens Smart contracts (also called self-executing contracts. There is an implicit some mechanism which prevents assurance that a transaction will always be processed proliferation of malware – viruses /worms. multiple places. contracts loaded onto the blockchain should conform to certain base It might be therefore prudent to have a ledger that is rules outlined by the network and should be asset agnostic and one which does not have any thoroughly audited for vulnerabilities or unfair bias native token or currency that has value of its own in before deployment. or digital contracts) are simply digital currency associated with the ledger. A crash or spike in the value of the native that the creator of the contract program intentionally token might impact business models drastically. etc. node must be linked to the surround systems Other Considerations as well with a view to prevent intentional or unintentional “privilege escalation” Handling Server Corruption/Outages ¬ As the use cases might involve sharing of Blockchain systems by their distributed design are documents. Segregation of the failed nodes for processing. Enable. In case this native token or languages such as C++. Java. Should all nodes performing ¬ An 'n' tier deployment model can be used for a critical function be unavailable. the token during transactions or as a form of Smart contracts are written using programming incentives to participants. To circumvent this. which components such as shadow databases etc.

but all their several transactions and use their combined transactions and who they transact with would be information to figure out who the parties may be. especially in cases where transaction is effectively random).Explore. However. However. so that anyone can verify if This is the simplest to understand – only the a particular transaction is valid (i. it may be possible to mine the data from members: not only their identities. and therefore. Applied naively. as well as any regulators and represent a double spend) or not. the anarchic world of This is. Every member of the blockchain others.. wherein linking transactions entirely encrypted. We can divide the privacy requirements into the The original. to be identification consisted of tracking a set of coins able to trust any future transactions where the through several transactions until something hit the content of this transaction are relevant. does not transacting parties. such as duly appointed auditors or a regulatory body. We have established. solved. direct identification of the details is concerned. It is assumed real world. auditors who are given access to the transaction. should be able to see specified details of a transaction. but that had its own uncertainties. That is. use for following categories: blockchain is in the Bitcoin cryptocurrency. this might seem like it violates the privacy of every user. this might the blockchain. Indirect for an entity that is not part of this transaction. is much more difficult. some information may leak. and still the most well-known.e. a situation where everyone knows events. say that every transaction is only known to the Auditor/regulatory access transacting entities. but that does not address requirements of auditability or regulatory While maintaining transaction privacy and compliance. perhaps by connecting this data with external Clearly. or their appointees. this combines with the inherent properties not knowing the identity behind any specific of a blockchain to create a total lack of privacy for the transactions. request-response mechanism of some kind. (i. the system also needs to make sure that requirements in most cases. laid bare. perhaps using a compromising everyone's privacy thoroughly. The problem. without losing the advantages of mean that they need to access everything.e. thus. However. A simplistic approach is to preventing such deductions from being made. The notion of unlinkability is about everything is untenable. both of which are important mandatory unlinkability. that participating nodes have a mechanism to each Bitcoin user can create any number of “bitcoin validate transactions considering availability of addresses” (which is a 256-bit number that is funds. Enable. some specific parties. but most verifiability that a blockchain provides. In some cases. Excel P r i v a c y A s p e c t s o f a B l o c kc h a i n Digging into the problem Deployment At this point it may be useful to delve a bit deeper into what exactly the privacy mechanism needs to deal Background with. indeed. is to determine the minimum are able to access specific data to the level they need amount of such dissemination that is required to run to perform their functions. One of Transactional Privacy the principles of Bitcoin is that all transactions will be visible to all participants. that arbitrary entities In the “permissioned” world. 22 Applications of Blockchain Technology to Banking and Financial Sector in India . On the face of it. the absolute minimum information Bitcoin does not require anyone to identify that is required as far as visibility into the transaction themselves. above. This means the system should be able to implement access with the required granularity. it makes it impossible parties in a transaction is impossible. however. depending on how that problem is must be “known” in some manner. identifying transactions that were made by the Unlinkability same person). Also. as well as supply keys to an authorized entity in order to process the audit function. and without of the time this will be ad hoc. there are no may not know the details of transactions between unknown players. despite therefore..

mitigations applied. Explore. with different design choices made at various network are aspects that can have a significant points. Bandwidth and storage are suitable for controlled membership 'permissioned' may be of particular concern in a blockchain type implementations. business context. documents) to all nodes (X) Blockchain platforms may face different choke points ¬ Time required for nodes to determine validity and constraints on scalability which are dependent of the previously added block (Y). Enable. retail applications may also be limited at the interface Depending on the use cases and the business level by consumer technology penetration. This is simultaneously. this presents a more distant limitation on retail scalability than the immediate hardware resources Effect of Consensus and Validation Mechanism required by blockchain platforms. Some methods are more suitable for variable requirements for processing power. To determine 'M' correctly. latency and operational costs to the process. Let us assume this is 'M'. one Scalability A spects of a B lockchain needs to take into account two aspects: Deployment ¬ T i m e f o r p ro p a g a t i o n o f b l o c k a n d The scalability of any potential commercialized supplementary data (auxiliary data like blockchain may be limited by multiple factors. Various methodologies exist for solving the Scalability will be affected by the architecture and Byzantine Generals' Problem that decentralized configuration of the blockchain platform due to systems face. rather than just the or “Proof-of-Stake” (PoS) algorithms. where possible. As transactions are happening. Effect of block size and block generation time Privacy in multi-chain environments on scalability The number of blockchain implementations continue In blockchain systems block size. it is clear that interoperability between systems where a high volume of concurrent different blockchains is a highly desirable feature. determines how many transactions can be confirmed considerations of privacy need to be handled. Current public permissionless network because of the replication and distribution blockchains often use either “Proof-of-Work” (PoW) of data between all participants. especially true if the two chains had different notions The block generation time is the window between of what should be private and what need not be. For However. 23 Applications of Blockchain Technology to Banking and Financial Sector in India . either intentionally or inadvertently. The PoW counterparties involved in a transaction. the values of the block size as well as the with over 30% of the Indian population having access block generation time 'M' need to be determined to to smartphones or internet connectivity in 2016. on the specific use cases addressed by the platform in question. the size of the block and when that gets solved in some manner. may itself be misused. or artifacts that can be accommodated in a block. Hardware limitations will be driven by It becomes clear that 'M' will need to be greater than software and administrative configurations. block generation to increase. even if the blockchain technology used impact on the scalability of the system. two successive blocks getting generated. This needs to be considered and. network public permissionless implementations and others bandwidth and data storage. There are several variants on the basic time window and propagation of blocks across the theme. however context. Excel Privacy against auditors The almost-unfettered access that auditors have. two different deployments may not be The size of block determines number of transactions able to talk to each other. Also. is identical. Certain X+Y. This can algorithm relies on a computationally expensive multiply the amount of data exchanged by each node process to achieve near immutability of recorded considerably compared with a traditional network transactions in a public environment but introduces model. and create systems with appropriate scalability for the a fast continuing growth of access to these services.

Verification and the case of digital currency or payments. File System Architecture Effect of Security/Privacy Mechanism Many applications require the exchange of large Blockchain platforms usually rely on public key transaction payloads. This can validation of keys is a comparatively efficient process create heavy bandwidth usage and data storage requiring only small amounts of processing power. Enable. and more efficient keep the size of the blockchain data to a manageable solutions may emerge with time to improve these size. the size the privacy of transactions can introduce a significant of the blockchain and the bandwidth required to source of latency. The storage of archived data should be limitations. Excel It is unlikely that any institutional application will rely on public networks and instead will rely on permissioned implementations which have the advantage of being able to sacrifice total decentralization in favour of a trusted network where only authorized and trusted participants may Not all financial blockchain applications require operate. Multiple variations validation of transactions for the purpose of of consensus algorithms exist and eliminate the maintaining accounting rules. and so should be considered carefully. This ensures that the data is tamper contents may be required by all nodes for the evident and can be stored and accessed efficiently purpose of validating the transaction. This problem may be Transactions in financial networks often require total addressed by storing part or all of a transaction privacy for the counterparties involved. Such a use case example may be a alleviate the scalability limitation from processor KYC-focused or messaging based blockchain. 24 Applications of Blockchain Technology to Banking and Financial Sector in India . These standard forms of encryption may be suitable to algorithms may be selectively implemented to ensure privacy. it is difficult to productionize network. however. a trusted administrator or designed in such a way as to maximize the security third party may be in charge of validation. The choice of file system type and configuration will generation of the proof is computationally expensive and also impact the capability of the platform to process so introduces additional latency in processing of data. This can negatively affect scalability of a high throughput system in favor of privacy and may Any blockchain platform which is expected to run for not totally stop information leakage.Explore. and including a hash decentralized nature of a blockchain validation pointer of the stored data in the blockchain process means that information about transaction transaction. nodes holding copies of the blockchain which is inefficient in terms of balancing storage space against integrity. As mentioned without unnecessary replication across the blockchain in the privacy section. such as documents or KYC cryptography for the implementation of security. homomorphic style encryption. Blockchains that do much more efficient solutions to the Byzantine not hold balance information may not require Generals' Problem can be used. share the data between all nodes may become a considerable limitation. intensive consensus mechanisms. proposed methods for ensuring transaction is stored on the blockchain itself. There is much a long period of time will likely require some form of development focus on Zero Knowledge Proofs across regular archiving of historical transaction data to the blockchain community. and integrity of the data. transactions. This greatly decreases the consumption of homomorphic encryption and while Zero Knowledge bandwidth and storage. but to store it with a this may introduce single points of failure and so replication factor much lower than the number of should be architected with resiliency in mind. However. The payload on a shared file system. Sharding techniques will be useful in this scenario. If all data relating to a latency. and increases scalability. In such permissioned implementations. requirements as the data is replicated on ledgers at and so does not introduce significant sources of every validating node. or a high volume of smaller payloads in permissions and ownership. Alternatively. Proofhasbeenusedinsomeblockchainimplementations. and therefore more requirement for heavy processing power. information.

Excel “Smart Contract” Implementation M a n y b l o c kc h a i n p l a t f o r m s a l l o w f o r t h e implementation of “smart contracts”. Enable. The capabilities and scalability of many proprietary and open source blockchain platforms that may be suitable for permissioned implementations remains to be extensively tested and independently verified. so it remains difficult to quantify the scalability of available platforms in their current state. in near real-time. Some of these architectures require more resources for execution than others. with varying advantages/ disadvantages and abilities. where beyond a certain point. Each platform may provide a different architecture for the execution of smart contract code. Deployments for Scalability Any blockchain implementation may have a combination of factors from each of the above mentioned sources that makes the scalability of the blockchain highly dependent on its specific architecture and application. The decentralized and distributed aspects of risk. There is often a compromise between security. Each call to run code in a smart contract usually involves the execution of the code on multiple validators and then consensus is reached on the output of each of those individual instances. This adds latency and additional messaging overhead which may limit scalability of the network depending on the usage of smart contracts. for specific use cases. functionality. adding additional storage and bandwidth resources will linearly increase the overall data capacity of a network. Today's cloud-based commoditization of computing resources may present an optimal solution for making the resources available to a blockchain scalable in both directions. It is possible to customize and configure blockchain platforms to improve scalability and balance other requirements as necessary. 25 Applications of Blockchain Technology to Banking and Financial Sector in India . However. The opposite is often true. Explore. privacy. The cost of these additional resources must be weighed against the requirement for scaling. Most are still in active development with constantly evolving abilities. and scalability which must be taken into blockchain technology mean that the throughput consideration when designing the appropriate and processing capability are not necessarily directly architecture of a platform. additional nodes may slow down the overall throughput of the network. to accommodate fluctuating demands on the network. correlated to the number of processors or size of the network.

and shortening settlement times. the advantages to be had by its among FIs to ensure that appropriate funds are adoption. a common information sharing platform for deriving Trade Finance: BCT usage for trade finance enables mutual benefits. 26 Applications of Blockchain Technology to Banking and Financial Sector in India . be carried out in the following order of increasing Central Bank application complexity – mainly because of the number of stakeholders involved in the transaction. development of real-time privacy concerns. security. etc. opportunities Further areas where BCT can be applied advantageously for cross-selling. among the stakeholders which makes this an Cross-Border Payments: BCT enables real-time appropriate time for initiating suitable efforts settlement while reducing liquidity and operational towards digitizing the Indian Rupee through BCT. Sweden. Smart contracts eliminate operational errors by capturing obligations the technology. BCT can provide based applications. Enable. BCT allows direct interaction between explored around the globe. resulting from the currently centralized systems. reduce duplicative efforts in customer onboarding. streamlining Intra-bank back office functions. and enables low value scalability concerns and potential countermeasures. The set of use cases of the first a global cost reduction opportunity within the category have ready applicability in BFSI Sector. automated. while protecting their security automation of LC creation. ASX (Australian Securities Exchange) has been Banks may setup a private blockchain for their working on a blockchain based test-bed to be a internal purposes. From a Secure codification of account details could enable technological perspective. Excel Chapter 5 A Prospective Roadmap for the Adoption of BCT to Banking and Finance in India H AVING had a good understanding of the various aspects around the blockchain technology including – the sound basis underlying costs. efficiency in transaction matured enough and there is sufficient awareness surveillance and simplifies audit procedures. KYC requirements can also be into information sharing based and digital currency automatically enforced in real-time. human resources in the technology. but also benefits by enabling efficient asset management. and distributed fashion.Explore. in BFSI sector would be supply chain finance. The information is maintained in a tools for enforcing AML and customs activities. mitigating the inherent delays associated cost savings. process execution and settlement sub-processes of These use cases help in bringing disparate entities on syndicated loans. and Netherlands have started client information shared between institutions helps exploring the use of BCT for digitizing their currency. Centralized KYC: Secure. many central banks around the globe including Canada. we feel that BCT has greater transparency. In a bid to evolve towards a cashless society. monitoring of consortium accounts. Capital Markets: BCT brings the following A suggested roadmap for the adoption of BCT to advantages in the clearing and settlement processes Indian banking is as follows: – reducing or eliminating trade errors. the variety of its applications that are being exchanged. privacy and sender and beneficiary banks. bill discounting. we recommend that the time is ripe for its adoption in Syndication of Loans: Underwriting activities can be India. transactions due to reduction in overall costs. Transparent and immutable data on BCT reduces fraudulent transactions. This not only helps them to train potential replacement for CHESS. leveraging financial details stored on the The use cases of blockchain can broadly be classified distributed ledger. Interbank servicing of securities and mandate management Proof-of-Concept implementation and testing may system. and many more are converging to the idea. distributed databases of England.

for the use cases (file encryption. The file storage is distributed with a regulated clearing authority for both use and replicated.PoC A Proof-of-Concept (PoC) was structured and customized to facilitate the feasibility analysis of blockchain technology for Indian banking and cases. storage. and is analogous to using HDFS. servers is to serve the interfaces to the users and the performance baseline. A scaled down version while the clearing authority has a clearing peer and a of a production network was simulated for the PoC to clearing server. event listening etc. Information' payments (EIP). and privacy of the blockchain blockchain. Figure A: PoC Architecture (Credits: MonetaGo) 27 Applications of Blockchain Technology to Banking and Financial Sector in India . Enable.). The purpose of the application enable the analysis of the work-flow. Explore. Architecture The file storage component is structured in a manner The architecture for the PoC required setting up a whereby large data files can be stored in a shared blockchain network that simulated 5 banks along environment securely. retrieval. authentication. Hyperledger Fabric is used as the underlying platform with the network having been configured finance sector with two use cases that highlight and deployed on a cloud environment. Banks are banking and consumer interaction: Domestic Trade represented on the platform with individual Finance with a sight letter of credit and 'Enhanced validating peers and associated application servers. and perform any required business logic implementation. Excel Annexure Blockchain Application to Trade Finance .

The application server service which executes chaincode. For EIPS. The validating peers that interacts with the Fabric peers to process the representing each of the banks run the Fabric peer workflow of a transaction. Any action retrieval is required.Explore. application logic must be managed by an application transaction type and ledger. blockchain network. decrypt it and present it to the user. as only the hash of the files is kept 'on service. The chaincode simply defines reaches consensus on the state changes through a the rules of a transaction. 28 Applications of Blockchain Technology to Banking and Financial Sector in India . The files are uploaded to the application network. Each validating peer and The application servers initiate new transactions. and for the sight LC the buyer's bank. The the chaincode. broadcasts and primarily provides the interface to the users of the receives any resulting state change to the ledger. Any external party attempting to query the transaction will have its call rejected. the chaincode can control access to the with communicating transactions to an external information stored in the ledger. contents. 32GB RAM dedicated servers ¬ Application Servers – 4 Xeon cores.Ubuntu 14. In the case of EIPS and the sight LC the network and submit transactions. with Fabric NodeSDK. resulting in a state change is called with a 'Query' Application servers must also deal with the function call. 16GB RAM dedicated server. standardized PBFT algorithm. server.6. React & Redux in a transaction. Any action that stored in the transaction to ensure it has not been simply returns information from the ledger without tampered with. When file state of the ledger is changed or queried. This mechanism makes it a 'permissioned' chain'. seller's bank and clearer may view the transaction Software contents. The chaincode allows for cryptographic key management for file encryption. In the case of the clearing organization at the appropriate times for EIPS and Sight LC chaincode. only parties that have real-world settlement of any monetary exchange in been named on the transaction may gain visibility the transaction. maintaining the privacy of the dedicated servers parties involved. authentication of the caller to verify if the caller is authorized to use a specific function. encrypted. preview Certificates issued by the certificate authority (member services) are used for authenticating a user ¬ Application Servers – Node JS. Excel Specifications Hardware ¬ Validating peers – 8 Xeon cores. Each use case has its own chaincode. Application Servers Hyperledger Fabric & Chaincode Hyperledger Fabric peers do not provide many tools Hyperledger Fabric 0. rehash it to compare with the original hash called with an 'Invoke' function call.04 is also encrypted to stop external parties from ¬ Validating peers – Hyperledger Fabric 0. Using this One or multiple clearing servers may be charged mechanism. Most tasks are platform to maintain the distributed ledger and run performed by the application servers.1 is used as the blockchain beyond those described above. and records state changes to the local ledger. The certificate they also handle the file data that is associated with a authority server runs the Fabric 'member services' transaction. Enable. The ledger data ¬ OS . the application server will fetch that results in a change of state to the ledger must be the file.6. 16GB RAM into the contents.4 Xeon cores. user of the validating peers (the banks) must register listen to new events and react to those events with the certificate authority server to gain access to appropriately. hashed and stored on a shared distributed file system. receiving bank and clearer may view the transaction ¬ Certificate Authority Server . The hash of the file is stored in The chaincode provides the methods by which the a field in the blockchain transaction.1 gaining access to the raw data stored on it. the remitting bank.

automatic settlement documentation after acceptance of the LC and and recording of full transaction history on a single shipping of the goods system. review and approval actions with the transaction running through multiple states. Simple user interfaces have been built for ¬ The clearer to process settlements at the demonstration and to allow manual execution of appropriate time in the transaction. UIs have been Access to the transaction details and the associated provided for: documents is restricted to the counterparties involved. Enable. ¬ The buyer's bank to review. Explore. Excel Use Cases Domestic Trade Finance Letter of Credit The sight letter of credit (LC) use case highlights the ¬ The seller's bank to review the LC ability of the blockchain platform to leverage chaincode to implement any complex workflow with a ¬ The seller to upload and attach shipping shared document repository. process the Below is a simplified workflow diagram of the LC use applicationandattachtheapprovedLCdocument case. A full and real-time transaction history is ¬ The buyer to initiate an LC application after a available to counterparties with all associated purchase has been agreed documents securely stored and encrypted. Figure B: Signed Letter of Credit Workflow (Credits: MonetaGo) 29 Applications of Blockchain Technology to Banking and Financial Sector in India .

Aer approval of the application.Explore. Excel Screenshots from Live Demonstration of Domestic Trade Finance PoC Figure C. Enable. Entering and uploading an LC application (Credits: MonetaGo) Figure D. the letter of credit is attached to the transaction (Credits: MonetaGo) 30 Applications of Blockchain Technology to Banking and Financial Sector in India .

Enable. referred to as information settlement). The hash and retail banking. invoices.e. Explore. settlements of multiple invoices in wholesale banking.). In both commercial stored on the blockchain transaction. automated reconciliations for net file data is stored outside of the blockchain ledger. linking key regulatory documents associated with an individual to his payment history) and many other useful cases where any kind of document may be associated with payment (pay slips. Excel Figure E. Completion of transaction. etc. (Credits: MonetaGo) Enhanced Information Payment encrypted and a hash is generated on the encrypted data. The file is Figure F: MonetaGo's Enhanced Information Payments 31 Applications of Blockchain Technology to Banking and Financial Sector in India .e. Full history of the transaction recorded with all associated documentation. KYC (i. providing rich data directly pointer allows for the transaction to stay “light” on associated with a payment can provide streamlined the blockchain and provides high throughput as the processes (i. The sender will upload the file along with the payment information. contracts. The enhanced data use case facilitates a file upload that will be performed during the payment transaction. The encrypted file is stored in a shared Supplementing data on a payment provides valuable distributed file system with the hash pointer being analytics for banking institutions.

the focus was only on validating the the Blockchain eco-system demonstrating the business workflow and the system's ease-of-use. the PoC provided a good demonstration of the use-cases and helped to broaden the understanding of the technology and its potential to other real-life applications. It demonstrated the possibility of increasing the possibility of information leakage integrating payment information with payment between participants. PoC Validation and Experience Features to be explored further The PoC provided a good overview of the workings of During the PoC. and test Deutsche Bank) scenarios. Also. PNB. Participant Role Coordinator. Hyperledger is developing initiation which has been a key requirement from the version 1.Explore. review Inputs on payments 2 NPCI component Banks (SBI. processes.0 to address the above shortcomings. IMPS providing the payment backbone. as fewer servers can be designated validation/flow components as part of the chain to each task whilst still maintaining sufficient security code. where a t ra n s a c t i o n i s p ro c e ss e d w i t h a ss o c i a t e d documentation. Summary Overall. Excel Enhanced Information Payments can be used as the foundation for many more complex use cases such as the domestic trade finance example. The interfaces were user-friendly and the and resiliency for the network. each server participating in the blockchain network performs all the required tasks of ¬ Automated flow triggered by the occurrence validating. following key aspects: Scalability and security aspects need to be studied in ¬ Complete transparency of various events detail. the process appears to provide a handle on the audit trail implementation of privacy features is incomplete. of specific events. consenting. and review Implementation of the 4 MonetaGo technical platform 32 Applications of Blockchain Technology to Banking and Financial Sector in India . corporate/retail users alike.6 was used for the PoC. Citi Bank. that can be latency and networking overhead is greatly reduced easily extended to incorporate additional in large networks. ¬ Immutability/Tamper-Evidence In this version. committing and ordering. By The PoC handled a simplified business workflow with separating those roles in the new architecture. Participants of PoC and their roles S No. triggered by various counter-parties Hyperledger Fabric version 0. of all the events. technical 1 IDRBT inputs. and is extensible to many more use cases. which introduces a barrier to scalability. Inputs on business 3 HDFC. Enable.

A. January 2017. IDRBT GROUP Members ¬ Shri Prasant K. Dilip Krishnaswamy Axis Bank IBM Research ¬ Shri Harshit Pagariya ¬ Shri Deepak Hoshing Bank of Baroda Infosys ¬ Shri Munish Bansal ¬ Shri Savvas Mavridis Citi Bank MonetaGo ¬ Shri N. S. Deloitte ¬ Shri K. DIRECTOR. Taylor Citi Bank MonetaGo ¬ Shri Sandeep Menon ¬ Shri Atul Khekade Citi Bank MonetaGo ¬ Shri Ram Kumar ¬ Shri K. Seth Reserve Bank of India ¬ Shri Supriya Bhattacharyi ¬ Shri Rakesh Kumar Reserve Bank of India Punjab National Bank ¬ Shri Jagadeesh Kumar ¬ Shri Charanjeet Singh Arora Reserve Bank of India Punjab National Bank ¬ Shri Dilip Asbe ¬ Shri Dhananjay Aravind Tambe National Payment Corporation of India State Bank of India ¬ Shri R. Srinivasan Deutsche Bank Tata Consultancy Services ¬ Shri Deepak K Mudalgikar ¬ Shri Sitaram Chamarty HDFC Bank Tata Consultancy Services ¬ Shri Maheshwara Yaddanapudi ¬ Dr. RAMASASTRI. BLOCKCHAIN WORKING Mentor DR.K. IDRBT Dr. Sivakumaran. Sushmita Ruj ICICI Bank ISI Kolkata ¬ Shri Abhijit Singh ¬ Dr. V. Nagesh Bhattu. Subramaniyam ¬ Shri B. IDRBT . S. All Rights Reserved. M. Ramachandran ¬ Shri Nitin Mahajan Indian Banks’ Association Deloitte ¬ Shri Ajay Lande ¬ Dr. IDRBT © An IDRBT Publication. Dr. N. Sourav Sen Gupta ICICI Bank ISI Kolkata Coordinators Dr. Narendra Kumar. Vishweshwaran ¬ Shri Sudin Baraokar National Payment Corporation of India State Bank of India ¬ Shri Praveen Mata ¬ Shri Shankar Lakshman The Clearing Corporation of India Ltd. V.

40 .500 057.40 .ac.idrbt.in E-mail : publisher@idrbt. 1. Masab Tank. Fax : +91 . Hyderabad . India. Excel Institute for Development and Research in Banking Technology (Established by Reserve Bank of India) Castle Hills.ac. EPABX : +91 .in .Published by: Explore.2329 4999. Road No.23535157 Web : www. Enable.