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Blockchain Technology can avoid Bank Frauds

Blockchain technology, used in cryptocurrency like bitcoins, has the potential to prevent Nirav Modi like bank frauds if adopted in the country’s banking and financial system.

“Nirav Modi cannot happen at all as under blockchain, simultaneously the message goes to all concerned. Who has opened LC (letter of credit) and messages are sent to every user of the blockchain. It is a very solid system as every transaction and its execution is recorded besides it cannot be reversed. So smart transactions (like that of Nirav Modi) could be under check in blockchain technology,” former RBI deputy governor, Usha Thorat, who was in-charge of currency in the central bank, said.

Diamond merchant Nirav Modi allegedly defrauded Punjab National Bank (PNB) of over Rs 11,300 crore. According to a report in United States Bankruptcy Court, Nirav Modi companies used funds raised from one bank to repay outstanding letters of undertakings (LoUs) from other banks in a vicious cycle that broke out only when the scam was exposed.

Finance minister Arun Jaitley informed Rajya Sabha during the monsoon session that Mumbai branch of PNB had issued a total of 1,213 LoUs fraudulently to Nirav Modi group of companies since 2011.

In India, the 2018 budget announced that cryptocurrency like bitcoins will not be a legal tender but use of blockchain technology would be encouraged in supply chain management and other areas.

RBI banned the use of cryptocurrency in India subsequently in April. As a result, several exchanges dealing in cryptocurrency, particular in Gujarat, were forced to shut down.

There were allegations that cryptocurrency was widely used, particularly by politicians of ruling and opposition parties for money laundering, especially post demonetisation.

Niti Aayog is also working on a blockchain initiative called India Chain as it has several applications in the digital economy. Telangana, Andhra Pradesh, Maharashtra, Goa and Uttar Pradesh are using blockchain technology for land records. Andhra Pradesh has already taken the lead. An expert group in RBI is also exploring the possibility of digital currency in the country.

Under blockchain technology, there are identified nodes. It has a certain protocol, which can be changed but not retrospectively. Apart from its use in finance, Blockchain can be used for remittances, cross-border transfers, stock markets, depositories and customs. It can also be used in healthcare, education and insurance, besides payment systems.

The Philippines is using for overseas remittances. Following US sanctions, the Venezuela government has launched cryptocurrency ‘petro’. It is backed by the country’s oil and mineral reserves, including gold and diamonds.

Venezuela ambassador to India Augusto Montiel at a lecture on blockchain and cryptocurrency by Usha Thorat said his country had to go for cryptocurrency as “we have been financially and commercially blocked. Because of sanctions, we cannot use the dollar. We cannot buy food or medicine. There is a humanitarian crisis. The country had to intervene. Now thousands of euros, dollars and yuan are waiting for November 1 to use petro cryptocurrency to buy oil.”

Thorat said the advantage of blockchain technology is that it eliminates all intermediaries in the securities market. It can be useful for Clearing Corporation of India for wholesale clearing of foreign exchange.

But Thorat warned cryptocurrency that uses blockchain technology has several pitfalls. That’s why many countries like India are wary of it. Cryptocurrency has security concerns and money laundering issues. It can also be used for terror funding, havala transactions, smuggling and other nefarious activities including tax evasion and avoidance.

Cryptocurrency transcends boundaries and hence there cannot be a single regulator. This meant that regulatory framework has to be redrawn, she said adding it is one of the major items in the agenda of G-20 summit in Argentina this November.

Former deputy chairman of erstwhile planning commission, Montek Singh Ahluwalia, who chaired the session in which Usha Thorat delivered the address on blockchain and cryptocurrency, wondered if income tax department and enforcement agencies buy some bitcoins to keep a tab on cryptocurrency users for money laundering.

Blockchain technology is transparent and all users will know about the transactions made in cryptocurrency.

Cryptocurrency is used at the moment by people who did not believe in any authority. It is a community governed by a protocol for transactions. It is very volatile. The only earning in cryptocurrency is just capital gain. Bitcoin started with a value of just $400 in 2009 and went up to $20,000 and now it had fallen to $6000. So gains and losses come from its value at a given point of time. There is also a view that cryptocurrency is a bubble.

Blockchain technology today is evolving and is like what internet was in the 1990s. It is developing rapidly though there are some issues. But it could be useful for digitisation. There are still some challenges hence some feel it is an over-hyped technology.


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