(Article) Implications of ‘disruptions’ – ‘Blockchain’ technology

The initial concerns over the emergence of virtual currency schemes (digital currencies like Bitcoin) had been about larger issues related to the underlying design and incentive-structures of such privately- owned, internet-enabled alternative currency systems and their implications for the traditional monetary system. Even as opinions diverged on their merits, episodes of excessive volatility in their value and the failure of some virtual currency exchanges proved to  be  a  dampener  to  their  take-off.  On  the  other hand, their anonymous nature that goes against global money laundering rules rendered their very existence  questionable.  While  these  issues  along with challenges for consumer protection and taxation related aspects are being debated, the key technical concept of ‘blockchain’ which underpins such crypto- currency systems, is drawing more attention now. With its  potential   to  fight  counterfeiting,  the  ‘blockchain’ is likely to bring about a major transformation in the functioning of financial markets, collateral identification (land records for instance) and payments system.

The traditional (and presently used) system works on the basis of ‘trust’ and the ‘regulatory’ and ‘controlling’ power  of  ‘central’  entities  /  counter  parties.  As against this, the ‘blockchain’ technology is based on a shared, secured and public ledger system, which is not controlled by any single (‘central’) user and is maintained collectively by all the users / participants in the system based on a set of generally agreed and  strictly  applied  rules.  Thus,  the ‘blockchain’ technology facilitates transactions / collaborations among participants / entities which have no information about  or confidence in each other,  without necessarily having to resort to a neutral and trusted ‘central’ counterparty. While the notion of shared and technologically secured public ledgers raises the prospects of revolutionising financial systems, the full potential as also implications of its applications are still not known.

At the same time, regulators and authorities need to keep pace with developments as many of the world’s largest banks are said to be supporting a joint effort for setting up of ‘private blockchain’ and building an industry-wide platform for standardising the use of the technology, which has the potential to transform the functioning  of the back  offices of banks, increase the speed and  cost  efficiency  in payment systems and trade  finance.

Courtesy: Financial Stability Report, Issue No. 12, Reserve Bank India