Gunji, in Uttarkhand – a northern state of India nestled among the Himalayan Mountains – is a place of spectacular beauty and equally treacherous terrain. Reaching this idyllic spot located at least 45 km away from a motorable road takes 4 days of challenging trek along the ferocious Kali River en route to Kailasa, 25-30 km from the Nepal border. Despite the gargantuan challenges in commuting to Gunji, the State Bank of India has a branch even in this remote corner of the country.
Such heroic efforts are a part of the concerted push by India towards financial inclusion. The poorest of the poor villagers in the country have long lived outside the formal financial system, often choosing to store the few hundred rupees of their savings in steel boxes, buried under the mud floor of their house.
Not having a bank account deprives them of all the advantages of our modern financial framework and a multitude of welfare schemes that have been floated for their benefit. Besides, villagers often fall prey to money lenders who charge exorbitant interest rates since they have nowhere else to go. Bringing these millions of people into the fold of our financial system is absolutely critical. This represents a tremendous opportunity for the global community and will be instrumental in shaping the next stage of human development. But opening a branch in each and every village is not a viable option (1). The branch in Gunji, admirable as it may be, is an extremely difficult undertaking and not a model that can be replicated across the vast landscape inhabited by humans globally, where settlements are often few and far between and isolated from each other. Even on purely financial terms, the lack of basic economies of scale necessary to make a branch commercially viable means that banks would have to incur heavy losses to maintain their presence. As a result, nearly a third of the world’s population is still forced to exist outside the formal financial system.(2)
Besides, a major problem that is often overlooked is that villagers – who are used to a very simple life and show an aversion to anything outside their comfort zone – approach banking with a sense of trepidation and distrust, as corroborated by a Stanford study in Kenya (3) . Even if they do have a branch in their neighbourhood, getting them to walk through the swanky glass doors and hand over their savings to a stranger is a tall order. This trust deficit is the single biggest challenge impeding financial inclusion and related development initiatives. Blockchain – a technological marvel that effectively decentralises the process of building trust in transactions can be the answer the world was waiting for.
What is Blockchain?
Keeping track of transactions in this increasingly complex and fast paced world has become a complex, time consuming and expensive endeavour. Blockchain, the technology that provides the foundation for bitcoins has the potential to fundamentally transform the way the transactions and contracts are managed in every sphere of government, business and institutional interaction.
Blockchains can be thought of as the technological equivalent of public ledgers that were used in the olden days to record every important transaction occurring in any domain. This evolved solution for our digital age is a distributed ledger that allows information to be captured and shared by a community that opts in to the Blockchain by collective consensus. Since the system requires all members to validate the information, fudging the information in Blockchains is very difficult (4). It also allows the entire transaction history to be accessed very easily, easing the increasingly onerous burden of record keeping for regulatory reporting.
Apart from ensuring transparency and integrity of information shared among partners, Blockchain can also help to reduce the cost of transaction and eradicate the delays in transaction confirmation processes by doing away with the third parties that are currently required to validate the transactions. Instead, the Blockchain enforces security through cryptographic intervention. All participants of the Blockchain run complex algorithms during the verification process, thus ensuring integrity of the entire chain (5). This ease of operation, collective nature of its functioning and the resultant reduced cost make it an ideal tool to power the drive for financial inclusion and become the base upon which the holistic development initiatives are built.
Putting the Blockchain to Use
Blockchain has a sweeping array of applications, given the novel and collaborative nature of this technology. The reduced transaction costs will also make the push for Financial Inclusion commercially viable. The following characteristics are key to the interoperability and commercial use of Blockchain –
Immutability: The data integrity in a Blockchain is very reliable because once the chain has been established with the backing of all parties in the system and verified cryptographically, the records are very hard to tamper with, removing the need for an intermediary third party(6).
Unambiguity: Since the Blockchain is essentially a distributed ledger, the clarity of information is absolute with the information freely available for everyone to access as needed. The transactions are also validated by multiple parties and hence there is no confusion and little room for error.
Security: Blockchains use complex algorithms and cryptographic verification in order to maintain the sanctity of transactions. The technical complexity of this process and the involvement of many players mean that the security of a Blockchain is very hard to break, even in the age of escalating cyber threats.
Disrupting Financial Transactions
The financial services companies play a crucial role the record-keeping of payments and remittances, the issuing and trading of securities and trading, and custody and of financial instruments. The secure and transparent environment that the Blockchain offers can be a boon to this industry. Developing countries lose over $1.2 trillion due to tax evasion, bribery and theft. These inefficiencies can be curtailed to a large extent using the secure distributed ledger of Blockchain. This technology also has huge implications for the global payments marketplace, with the potential to exponentially enhance the speed of transactions along with the added benefits of secure verification without dependence on an external third party.
Recognising the potential that this technology holds, venture capitalists have invested close to a billion dollars in over 100 Blockchain related startups over the past two years. As the platform that powers digital wallets, cryptocurrencies and payment systems all over the world, Blockchain is possibly the single most important technological development of the decade for the finance industry. Such keen interest and rapid development is likely to create a fertile, modular ecosystem, whereby adopting this technology becomes hassle free for the players looking to reap the benefits of Blockchain by transitioning from their legacy applications currently in place.
The most encouraging aspect of the Blockchain has been the willingness of companies to come together and develop the commercial application of this technology. The HyperLedger Project (7) by IBM, Cisco, Linux and Intel is creating a framework for rapid development and adoption through and open-source approach. Over 40 of the world’s leading banks have put their collective might behind the effort of creating applications relevant to the use of the financial services industry based on the Blockchain.
Caveats concerning immediate adoption of Blockchain
Though there has been much collaborative effort to hasten the development of Blockchain for the financial services industry, there are a few crucial roadblocks that we need to be overcome –
Cyber Vigilance: Since the technology is still nascent, enterprising cyber criminals may find a way to break its defenses. Thus, moving to Blockchain will need to be done in an integrated fashion along with a larger push towards great cyber vigilance.
Incentivizing Miners: The miners are a massively important part of the Blockchain ecosystem as the algorithms employed by them to solve cryptographic problems are the mainstay of Blockchain’s security. Incentivising miners will be increasingly difficult as the computing resources required for the increasingly complex cryptographic keep escalating.
Regulatory Regime: Since one of the key benefits of the Blockchain is that is removes the need for third party intermediation, its adoption will need a change of mindset from the existing regulators. Winning the buy in from the regulators and working with them to reimagine specific applications with respect to compliance and regulatory reporting is of utmost importance.
Days of Our Lives: 2030
If the Blockchain technology is nurtured and utilised to power the drive for Financial Inclusion, a day in our life in 2030 could be very different from what we know and see around us today. Information about every single interaction that we choose to share will be captured, stored, analysed and put to use to enhance our quality of live in meaningful ways. There is no aspect of our lives that is going to stay untouched by the Blockchain revolution.
Digital Payments and Corruption: Payment systems are likely to be completely digitised, increasing the tax base and helping the world’s governments access more liquidity for the global development agenda. With the Blockchain, tracking financial flows will be easy and unambiguous. Financial inclusion and digitisation of payments will also dramatically reduce the possibilities of bribes and propel the world economy with a momentum and an optimism never seen before. Having a clear account of all that has been bought and sold can also put an end to hoarding and black markets.
Personal Mobility and Insurance Claims: With the progress of Internet of things and autonomous mobility, the benefits of Blockchain can go beyond the world of finance. Linking your national identification card to a dedicated Blockchain can enable biometric authentication on the go and secure all your movements. Insurance claims, disputes and even rescue operations can be managed with ease since information is sharable securely with civic authorities as and when necessary.
Healthcare Transparency: Personal health records are very sensitive. Storing them on a personal, secure Blockchain allows people complete autonomy and control over who accesses this information and liberates them from the dependence on any particular hospital or clinic. Not only does this improve information security, it also reduces switching cost for the end consumer, thus keeping the medical agencies on their toes to deliver quality service to the best of their ability and prevents malpractice by keeping a note of all their actions and decision making processes.
Accountability in Education: Concerns about teachers’ absenteeism in the classroom will be a thing of the past. Biometric attendance keeps an irrefutable track of the teachers’ attendance and their payments are scaled down automatically in case of unnecessary absenteeism. Since all information is automatically tracked in a Blockchain, powered by biometric authentication and Internet of Things, the evidence is irrefutable. Digital payments, both at the customer and employee end, have the potential of tackling moral hazard and asymmetric information.
Entrepreneurial Approach to Renewable Energy: To further the drive for renewable energy, decentralised energy generation is going to be a hugely dominant approach to powering our cities and villages in the decades to come. Units of solar photo voltaic plants, for instance, can not only power the household, but generate enough surplus that can be sold for a profit. Linking all these units in a micro grid with information on generation and consumption stored over a Blockchain can be an ingenious solution to energy trade at the last mile. By helping people make money out of their renewable energy installation in a way that is transparent and in their control, adoption of renewable energy technologies will also get a major fillip.
Scaling these benefits to every town and every village through Financial Inclusion powered by the Blockchain has the potential to elevate the quality of life of billions of people around the world. We are at an inflection point in our development where sustainability, movement and access to information are critical. It is important to understand the underlying technology and unearth the possibilities in order to make the best use of this tremendous opportunity that lies ahead of us. The future is digital, and the pay-offs of making the right moves through the Blockchain can be enormous.
1) New Branches are Rarer, Smaller and More Expensive – https://thefinancialbrand.com/33522/bank-credit-union-branch-sizes-and-c...
2) World Bank’s Global Findex Data – http://datatopics.worldbank.org/financialinclusion/
3) Challenges in Banking the Rural Poor – https://web.stanford.edu/~pdupas/Challenges_DupasEtAl2011.pdf
4) IBM: What is Blockchain? – http://www.ibm.com/blockchain/what-is-blockchain.html
5) PWC: Blockchain and Smart Contract – http://www.pwc.com/us/en/technologyforecast/blockchain/importance.html
6) Deloitte: Blockchain benefits and challenges – https://www2.deloitte.com/nl/nl/pages/innovatie/artikelen/blockchain-tec...
7) Hyperledger Project – https://www.hyperledger.org/