Scams and frauds: Why blockchain technology is need of the hour in Indian financial sector

Financial frauds and money laundering have become the latest buzzwords sabotaging the future of India’s financial sector.

First Rs 11,300 crore scam at Punjab National Bank (PNB) was exposed and very recently INX Media scam hit the news. India seems to becoming a hotbed for financial frauds, unfortunately. It might be worthwhile, and perhaps even imperative to think about how we can avoid such frauds in the future. Some fintech experts feel our best bet is blockchain. With this novel technology, the frauds could have been spotted sooner if not real-time, they say. But is this true?

PNB Case
Nirav Modi, a diamantaire, was reportedly able to swindle money from PNB’s accounts with the help of a Deputy General Manager – Gokulnath Shetty – from the foreign-exchange department. How did they do it? They did it by taking advantage of PNB’s disjointed systems. Shetty issued fake LoUs (Letters of Undertaking) from the bank to get Nirav Modi money without any collateral. This happened for seven years without anyone noticing. The bank’s internal systems were not transparent enough for other employees to pick up on Shetty’s fraudulent activities. Their opaqueness gave the DGM both – power and protection to carry out his and Modi’s will – to commit the crime. The payments were secured using the SWIFT global payment system, which allowed Shetty to instruct overseas banks to give money as loans that were, for all intents and purposes, only partially registered and authenticated, if not wrongly so.

Blockchain technology

What would change with blockchain? Blockchain is a digital public ledger system that is revolutionizing the way data and assets are exchanged. It uses a distributed verification system to authenticate transactions. It is decentralized, which means no single person or institution has full authority over the ledger to ever become the central point of failure. Nor can any person or institution highjack the system entirely because that would require plenty of computing power. Blockchain is robust and secure.

Representational image. Reuters.

Representational image. Reuters.

It relies on miners, who check and authenticate transactions using high-performing machines. All miners have a copy of the public ledger so that transactions are not duplicated. The widely shared public ledger avoids the pitfalls of multiple and dissonant systems. Blockchain is transparent as it allows users to track the flow of information and assets from one end to another.

In case of the finance industry, the technology is perfect due to its immutability. It does not allow for duplication or reversal of transactions. It does not allow creation of inconsistent records. The issue at PNB as Jesse Chenard (founder of MonetaGo) rightly pointed out was that information and payments were relayed using two systems that were to some extent mutually exclusive, despite being related. This makes it difficult to spot fraudulent activities at first sight or quickly. If PNB’s banking systems followed the principles of blockchain and used it, there is a high chance that the scam would have been uncovered and even prevented immediately.

Three reasons why Indian finance sector must adopt Blockchain

First, blockchain has no room for dubious processes like LoUs. They use “smart” contracts that are especially sensitive to wrong information. One can imagine, a smart contract immediately flagging the errors or fraudulent process as it has the capability to instantly check and scan the system– blockchain transactions can be real-time – with the core of the bank’s records.

Second, blockchain is a peer-to-peer network. All activities are recorded and available for all users to observe, and for some (miners) to authenticate. The transparent and distributed verification system would most certainly be the second line of defense against scamsters.

Third, blockchain can be enhanced using machine learning algorithms that detect fraud, or other features like digital signatures that ensure nonrepudiation. Blockchain would remain transparent and users wholly accountable, therefore, responsible for their actions. The three arguments put together make a compelling case to use blockchain for financial and banking purposes, even without scams.

Scam-Resistant technology

Blockchain technology is still in the development phase. Many have likened it to the internet of the 90s. Designed using seven highly ethical principles, it still spells potential for tech enthusiasts harboring hopes and dreams of a just, secure, and technocratic future. To these people, blockchain represents limitless possibilities. Of course, not all these hopes and dreams can turn real. Nonetheless, the technology has shown, thus far, in small ways, that it can maintain integrity in sensitive and important matters by upholding the right values. It has shown tremendous potential to re-model and improve social systems and institutions. And, it has shown that scams do not occur on blockchain technology.

(The writer is Co-Founder & President of AEON Learning. Views expressed are personal)


Updated Date: Mar 17, 2018 17:07 PM

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