Status Check on Blockchain Implementations in India VIJAYA KITTU MANDA Research Scholar, Department of Finance, GITAM Institute of Management GITAM University, Visakhapatnam, Andhra Pradesh, India Contact: +91 98495 19188; Email:
[email protected] DR. ARUNA POLISETTY Assistant Professor, Department of Finance, GITAM Institute of Management GITAM University, Visakhapatnam, Andhra Pradesh, India Contact: +91 99514 50046; Email:
[email protected]
Citing this Research Paper Vijaya Kittu, Manda., & Aruna, Polisetty. (July 27 & 28, 2018). “Status Check on Blockchain Implementations in India”. International Conference on Technological Innovations in Management Ecosystem. Visakhapatnam
Abstract India’s demonetisation of November 2016 has become a major trigger for the country to move towards digitization and become a cash-free country. Though in their nascent stages, newer and potentially disruptive innovations such as Cryptocurrencies and Blockchain have the potential to replace paper money with digital currency providing a de-centralized and secured environment. Blockchain features such as distributed computing, confidentiality, authenticity, non-repudiation, data integrity, and data availability can help a populous country like India to turn into a cash-free economy. Blockchain make tremendous impact on the financial sector, particularly in speeding up and simplifying cross-border payments, in share trading, by way of smart contracts, improving online identity management and in loyalty and rewards (Deloitte; 2018). This paper is an attempt to check out some of the blockchain implementations in India done so far in regard to embracing the technology, both within and outside the financials domain.
Keywords: blockchain, smart contracts, supply chain, cryptocurrency, financial solutions, finance sector, banking, economy Introduction Bitcoin and blockchain are closely related. When Bitcoin was released in 2009, it wrapped the blockchain technology and became the first implementation of the technology. Satoshi Nakamoto, the developer of bitcoin, used the words ‘block’ and ‘chain’ separately in his original paper. However, it is only from the past couple of years that the words are combined and used as a single word ‘blockchain’ - and perceived as a major technology. "Silicon Valley is coming. There are hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking". These are the words of Jamie Dimon, CEO of JP Morgan in the 2014 Annual Report. His obvious reference is about fintech start-ups and emerging financial industry disruptions such as the blockchain that will change the way the financial sector will work. Blockchain is going to change how people do business, the same way how Internet changed the way how people access information (Matt Lucas; 2017). India has a great reputation for its IT skills. It is the third largest economy in Asia and fifth largest globally. A highly-populated country with decent banking penetration, it has one of the strongest regulator in the banking and financial sector. Are Indian company in general, and banking and financial institutions in particular, ready to embrace blockchain and other such disruptive technologies? This paper attempts to do a status check on blockchain implementations in India.
ICICI Bank – Emirates NBD Back in October 2016, ICICI Bank and Emirates NBD announced a pilot launch of blockchain network for international remittances and trade finance. Both banks are first in their respective countries to explore blockchain network for financial services. Both banks are already running on the Finacle solutions suite and both of them began to use the EdgeVerve Blockchain Framework for Financial Services for UAE-India remittances. EdgeVerve is a subsidiary of Infosys. The remittances between the two countries forms the busiest corridors for both the banks. The key advantages of the framework are that it is distributed and permissioned, asset agnostic and extensible. The technology is put to test pilot for eight-week exercise and additional use cases are explored during the period. With manual Exchange of Letters between the banks eliminated, settlement time came down drastically and there by processing cost is cut. Both banks felt the use of smart contracts, secure digital exchange of documents and real-time monitoring of positions through integrated dashboards improve their efficiency.
Mahindra group and IBM Financial services industry is leading the way in absorption of blockchains in an enterprise setting. But this also mean that merchants of all types will also need to recognize the value of blockchains and start working with banks for the full potential savings to materialize. (Alin; 2017). The Mahindra group is one such early Indian adopter of blockchain. Back in 2016, Mahindra group and global IT solution provider IBM announced intention to build a cloud-based blockchain-backed supply chain finance application which has a potential to reinvent the supplier-to-manufacturer finance transaction system in the country. The two companies worked pretty much as a single team to move from paper to build and implement a practical test model in just three months. The system is ready for trial by January 2017. The proof-of-concept gave a promise that the approach can be used very well in invoice discounting, a process that helps supplies access to working capital finance by discounting and selling invoices. Being on blockchain, the parties will update their part of the process and get the overall activity moving. Needless to say, Infosys research paper - Blockchain Technology: From Hype to Reality - has put invoice financing among top five priority applications identified by banks and financial institutions. Since the first successful implementation, Mahindra group began exploring blockchain implementation in their other businesses financial services, auto, mobility and agri-tech and farm equipment, solar energy, defence and aerospace and so on. Mahindra Finance, a group company, is exploring the use of shared ledger concept for the small and mid-size enterprises loan business to begin with. The Mahindra auto division is exploring tracking parts and improving auto recalls. Globally speaking, the Mahindra group became the first large conglomerate in the non-banking sector to put the technology for full trials.
Bajaj Electricals – Yes Bank Bajaj Electricals, in February 2017, announced using blockchain in smart contracting in area of vendor / supplier financing. With support from Yes Bank, IBM and a fintech start-up, Cateina Technologies, Bajaj Electricals has cut down its payment processing time from four to five days to almost real time. Vendor financing module is picked up first in the entire supply chain because it is easier to implement and will benefit the vendor and the bank. While the payment processing time of the vendor comes down, the bank (in this case Yes Bank), for example, can extend its reach to Bajaj Electricals suppliers and provide other financial services and build a longlasting engagement with them. When suppliers provide material to Bajaj Electricals, they have to get a delivery confirmation from the company, raise physical bill of exchange and submit invoice and transport documents to Yes Bank to get the payment released. This process eats up no less than 4 to 5 days and involved paper documentation and manual checks. When the company went live with Yes Bank’s blockchain-based vendor-financing (supplier financing) system, the first major advantage of this move is that the entire process became paperless and happens on a cloud platform in real time. A tripartite agreement between Bajaj Electricals, Yes Bank and the vendor is entered to allow a permission or closed-loop implementation of blockchain technology. System integration between Oracle and ERP modules of Bajaj Electricals with those of Yes Bank were smooth. Being closed loop, only pre-registered and authenticated parties can transact in the blockchain. Invoice is first raised in Oracle and then transferred to the blockchain. The traditional Application Programming Interface (API) approach that banks usually provide is discarded and not put to use because it again leads to offline process and manual implementation thereby delaying the processing time. Discounting and funds
getting disbursed to vendors will be done by Yes Bank. On due date, an automatic debit based on a mandate happens to Bajaj Electricals account held with the bank. The business logic, rules and software are built by fintech start-up Cateina that developed chain code on top of Hyperledger (an open source blockchains and tools for use in businesses by Linux Foundation). Hyperledger is supported by IBM and over 100 other members who are actively pushing blockchain technology for business use. The system is implemented on IBM Bluemix cloud and uses cognitive service of IBM Watson Conversation (Natural Language Classifier & Conversation Agent) and Hyperledger Fabric. Yes Bank is able to bridge this new system with its existing system with the help of API Banking implementation which comprises of IBM’s Enterprise Service Bus (IIB), API management and Datapower solutions. Cryptokey looked over the secure aspects of the implementation. Though the system is a huge success having fulfilled its goals of cutting down process time, it still suffered from one major disadvantage. Being a closed-loop blockchain, the participants are limited and suppliers are forced to maintain a relation with a single pre-selected bank (Yes Bank in this case). The technology can be put to better practice when it allows multiple banks to participate in the process under the observation of a nodal agency or by the Reserve Bank of India (RBI) itself. Yes Bank, on its part, however, is implementing blockchain in other financing areas including ‘Letter of Credit’ and Documentary Collections, Foreign Remittances and Partnering with Correspondent Banks for Trade Finance among others.
Bankchain Bankchain is a community of banks who came together to explore, build and implement blockchain technology for use in banking system with a primary goal of information sharing between banks so that fraud handling and documentation sharing becomes easy. Established in February 2017, the community now has 37 members including 22 Indian banks – Indian public sector banks (State Bank of India, Bank of Baroda etc.), several Indian private sector banks (ICICI Bank, HDFC Bank, KMB etc.), 5 International banks (Citi Bank, Dubai Islamic Bank etc.) and 10 technology providers and consulting companies (such as Microsoft, IBM, Intel, Skylark, KPMG etc.). Around 10 projects are currently in test implementation phase covering areas such as cross border remittances, KYC, document verification and storage, trade finance, NPAs etc. The Bankchain is being operated by Primechain Technologies, a blockchain start up. Data Security Council of India is the Cyber Security Advisor for the project. SBI is currently pilot testing smart contracts and KYC on blockchain. Once a full-scale implementation of Bankchain is done, this new system will transform the way banks will work. SBI is building an innovation centre at Navi Mumbai where it would like to explore emerging technologies such as Artificial Intelligence (AI), Machine Learning (ML), Robotic Process Automation (RPA), predictive analytics, etc. ICICI Bank is testing Stellar platform for fund transfers while Axis Bank and Kotak Mahindra Bank (KMB) are testing Ripple for cross-border fund transfer. KMB has brought down its Letter of Credit (LC) time from 20 to 30 days to few hours, thanks to the help from Deloitte. The bank, along with its partner bank JP Morgan Singapore, is using blockchain for a wide range of services - from issuing LC for outbound transactions to transferring trade documentation for inbound LCs to facilitating the transaction funds using Swift. Meanwhile, Infosys, in May 2018 has brought together seven lenders to one place to test trade finance transactions on blockchain network. Participating banks in the test are ICICI Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank, IndusInd Bank, RBL Bank and South Indian Bank. A consortium of Australian banks are invited to join in this test bed. A study undertaken on blockchains in finance sector showed that reduction in operating costs in the banking sector, would result in a reduction in the marginal cost of funds based lending rate. This would reduce the interest rate charged by the banks, encouraging the public to take more loans. This would result in an increase in investments in the country, thereby increasing the GDP.
Government of Andhra Pradesh The Land Records Department and the Transport Department of the Government of Andhra Pradesh have recently implemented a blockchain pilot. Started in October 2017, the pilot made Andhra Pradesh to be the first Indian state to use blockchain technology. The outcomes so far are encouraging and plans are on to use it across all departments going forward. The idea to use them for land records came from a genuine need of landowners – to prevent tampering. Property disputes form 66% of civil courts and a bulk of them are because of fraudulent or manipulated land record. The Governments themselves are still dependent on colonial era land records with little or no digitization. With blockchain, geo-mapping and such technologies, Andhra Pradesh
wishes to reduce the burdens involved in land registration and title transfer. A public ledger of land records with the collaboration of ChromaWay, a Swedish start-up is getting built allowing people to easily collatarise property. Distributed ledger protects Governments against ransomware attacks such as that of WannaCry that showed how vulnerable India is. Zebi Data is being used to blockchain-based solution for hosting land records that is being used in Amaravati, the Capital region of Andhra Pradesh. About one lakh land records with the CRDA (Capital Regional Development Authority) are now on blockchain. Similarly, the Transport Department is using it to streamline titles of vehicles. Apart from Blockchain, the Department is using digital payments, ICR (intelligent character recognition) for vehicle and eKYC documents verification, and usage of Microsoft bots for citizen and officer assistance across the recently revamped 83 citizen services, most of which are offered through Internet. After this implementation, a vehicle buyer no longer has to carry any documents. Aadhar Card, PAN Card and finger print is all that are required. The manufacturer database is connected to fetch vehicle data. E-payment gateways can be used to register a vehicle online and the buyer can take the vehicle home directly without the need to visit to the RTO. The vehicle registration process has now come down to two days. Similarly, transfer of vehicle title cannot be done online. RTA documents are now digitally signed and sent to the email box of the owner. Two more Departments, the Education Department and the Road Transport Department are heading towards blockchain transformation. In fact, Andhra Pradesh intends to use blockchain in all Departments by the end of 2019. Plans are also on to become a cash-free state and citizens are encouraged to use digital transactions wherever applicable.
IDRBT Whitepaper The Institute of Development and Research in Banking Technology (IDRBT) (established by Reserve Bank of India) released a whitepaper in January 2017 giving positive views on using blockchain in Indian banking and financial sectors. It released a proof-ofconcept that practically implemented the concept in a real-life scenario. The readily usable cases presented in the whitepaper showcased how blockchain can be used for information sharing and digital currency based applications. NPCI gave inputs on the payments component. SBI, PNB, HDFC, Citi Bank, Deutsche Bank gave inputs on business processes, and test scenarios and review. MonetaGo looked after the technical implementation of the platform. IDRBT suggested a roadmap for banks and financial institutions who wish to move to blockchain. The steps suggested are: 1. Intra-bank private blockchain for internal purposes. 2. Interbank implementation in areas of centralized KYC, cross-border payments, syndication of loans, trade finance and in capital markets 3. Central Bank to use technology to evolve towards cash-free society The proof-of-concept presented by IDRBT discussed about architecture, specifications, Hyperledger Fabric and Chaincode and Application servers to be used for Trade Finance. The Use Case discussed about blockchain flow for the issue of a Domestic Trade Finance Letter of Credit.
TRAI Telecom Regulatory Authority of India (TRAI) is in the process of implementing blockchain to keep irritating spam telephone calls and messages under control, perhaps the first of its kind usage in the telecom sector. The new distributed ledger system will phase out the currently in use Do-Not-Disturb (DND) system which is often crowd-sourced. The technology also allows co-regulation where Telecom Service Providers / Access Providers establish and arrange frameworks, which is legally backed by regulation. TRAI is encouraging telecom operators to use blockchain system of distributed ledger model for cryptographic security of data. This way, telemarketing messages are sent to only those who have subscribed for it and by authorized entities only. The non-repudiative and confidentiality features of blockchain put a check to unsolicited commercial calls and messages. Under the new system, companies or telemarketers who wish to communicate with an interested user will have to confirm their identity through a head registered in their name just before they wish to send a message or make a call. A digital record is maintained so that errant telemarketers are caught. Telecom subscribers currently have to wait for seven days for their consent or revocation in regard to receiving commercial messages and calls to get reflected in the database. Under the new system, subscribers will be able to make their consent changes in real time through a TRAI app or other such mechanism. Proposals towards this move are made in the Telecom Commercial Communications Customer Preference Regulations, 2018 that is put in public domain for comments and counter comments.
Apart from TRAI, telecom companies Airtel, Vodafone and Reliance Jio are in various trail phases on implementing blockchain technology in various segments of their business.
UIDAI’s Aadhar and blockchain The Aadhar project of UIDAI is undoubtedly a massive implementation of demographic and biometric technology ever done by any government agency so far. But is Aadhar ready for future challenges? What is the next big thing to be taken to make Aadhar future proof? One of the biggest criticism faced by UIDAI in the existing model is that it is a centralized database and can become an obvious honeypot for hackers. A mischievous Aadhar User Agency (AUA) can easily make a copy of the biometric and demographic information of an individual in the guise of providing a service. Even the recently introduced Virtual ID concept that allows identification for a temporary period of time is prone to the same disadvantage. Moving to a tamper-proof distributed database model such as the distributed ledger model offered by blockchain will help overcome the centralization disadvantage yet maintaining the privacy and security of information. Hackers getting into multiple servers and then decrypting information that is encrypted with latest cryptographic tools within a fixed time frame is almost impossible. An intention to compromise data is also difficult because 51% of the nodes should give consensus which is difficult considering the nodes are under the control of various Government agencies. A criticism to this idea is that moving all Aadhar data to blockchain would make it an expensive exercise. A counter to this is to use the Ethereum protocol in which a permissioned blockchain could be made, and each node/block will be authenticated by the network. The node or block could be a large agency, such as state governments for example, which depend on Aadhar data for various reasons.
Niti Aayog and GNFC One of the biggest advantage of blockchain is the use of Smart Contracts that pave way for quick and easy reconciliation of payments made with multiple parties with almost no human intervention. This is exactly what Niti Aayog and GNFC attempts to address when they came together to do joint research and showed their commitment by way of signing the Statement of Intent (SOI) in June 2018 to use the technology for fertilizer subsidy management. Fertilizer manufacturing units across the country disburse as much as Rs 70,000 crores in the form of subsidies for selling around 31 million MT of fertilisers below cost. The turnaround time for subsidy payment which takes anywhere from four weeks to a couple of months will now get cut to become almost real time payments. GNFC already has a reputation of being a strong supporter of cash-free company when it turned the Gujarat town Bharuch into a 100% cash-free township of India. The company has taken a three-step process of training and digital literacy campaigns in the first step, building and adapting payment infrastructure in the second and finally putting a task force for implementation, outreach and support. This successful cash-free township model has inspired NITI Aayog to implement the project in 81 integrated townships across 12 Indian states. The project won prestigious awards such as the Golden Globe Tigers Award for Excellence & Leadership in CSR in the category of E-Payment Leadership and the Golden Peacock Awards in the category of Innovative Product/Service.
Challenges Blockchain is increasingly penetrating and getting positive results from the pilot implementation so far. Financial institutions that tried to stay away from bitcoin and cryptocurrencies are now beginning to embrace it on Ethereum network, or even the Bitcoin network showing a drastic change in attitude. For now, there are only handful few first movers who want to take advantage of this promising technology by slowly moving from proof-of-concept stage to nascent stages of a full scale industrial use. More Corporates need to join in to test implement and reap the benefits of the technology. As more and more Governments, Regulators and Agencies transform their service offering to blockchain, it will help a highly populous country like India to be more productive saving time and efforts. Recent studies showed that businesses and regulators would be wise to diligently research and solve many of these issues immediately to encourage industry adoption. There is a lot to be learnt even from tiny counties like Estonia where all assets and identities are put on a blockchain network making it a ‘country as a service’.
Conclusion Blockchain is a potential business disruption technology that is still in nascent state. Indian companies, particularly financial institutions, are showing increasing interest to embrace the technology by building use cases and pilot testing. Existing live implementations are only handful and are confined mostly within the organization. Even when extended to inter-organizations, they are permission-based and closely-looped. Apart from the Businesses that are using blockchain technology, Governments, Regulators
and Agencies too require a large-scale attitude shift to use the technology. Large-scale industry grade applications of the technology are not yet available in India though positive moves are made towards it.
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