Q. 115   Blockchain is an emerging technology particularly useful for financial ledgers. Explain how does it work and will it's implementation ensure zero defects in posting financial transactions?

 

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Blockchain is the new technology kid on the block

 

To understand what Blockchain is, let us understand its components

 

1. Encryption using cryptography: It is like lock and key. You lock the code using a particular combination. Anyone who knows the combination will be able to open the lock. This is how encryption works. In technical terms, it is called a key. There are two forms of keys - private and public. Private key is private while public key is the one which is available to all. In blockchain the public and private keys combine to form a Digital Signature. This provides strong control to the owner of the key

 

2. Distributed Network: Imagine two people doing a financial transaction using encryption. Only these two people will have the details of the transaction. In case of fraud or a dispute, there is no independent authority to decide who is right and who is wrong. In blockchain the details of the transactions are made visible to validators who are witness to the transaction. They approve and record the transaction using mathematical validations. The distributed network itself is the approving authority. Key details recorded in a block are the amount transacted, timestamp and the digital signature

 

3. Linking of the blocks: It is like building a chain. All the blocks in a chain are interconnected to each other using a cryptographic key. The linking of the blocks is done for safety requirements so that no one person can change the contents of the block. Even if a hacker wants to change the contents (in one block), he will have to make changes to all the following blocks, else the chain will break. The linking process is called mining, where unique cryptographic keys are identified to link the blocks. The unique cryptographic keys ensure that one block is not used again for another transaction thereby giving it a unique status

 

Using the above three components, blockchain offers the following advantages

 

1. High level of security

2. Open and distributed network

3. Decentralization

4. Low maintenance cost

5. Round the clock availability

 

Owing to the above benefits, blockchain is touted as the next BIG thing in banking and financial industry. Some of the common challenges which blockchain will address for banks are

 

1. Banks spend a lot of money in securing our transactions (but we still get to hear that some bank's databases were hacked)

2. Money transfer from one region to another is time consuming and involves a lot of middlemen (who charge a fees for their services). It is for this reason that money transfer is not free

3. Centralized server space for transaction data storage

4. Banking services are not available round the clock

5. Reconciliations to validate the numerous transactions taking place on a daily basis

 

All leading banks (Bank of America, Goldman Sachs, JP Morgan Chase to name a few) across the globe are aggressively looking at using blockchain technology for their services and are also investing in new tech startups working on blockchain technology