Back after a while. Have been published twice (yay) in Swarajya Mag; meanwhile others won’t even acknowledge me :(. This particular piece was unfortunate enough to be preceded article on same topic by a professor from Ohio University in Swarajya Mag. Please give your valuable feedback if possible for you. Thanks.
Blockchain technology and fighting corruption in India
In Oct 2016, ICICI Bank in partnership with Emirates NBD, a UAE based bank executed India’s first blockchain transaction in trade finance which enabled the transaction to be completed in minutes compared to usual 3 days.
Blockchain technology has been touted as next big thing not only in world of finance but in all transactions and storage. It is product and one of defining feature of Information Technology 2.0. First IT revolution was computerization of the existing systems and business process of business along with some innovation this led to gain in economic productivity and hence economic growth. IT 2.0 is about development of new technology and business process within sphere of digital technology leading to further increase in economic productivity. Among other examples of this would be of cab aggregators Uber and Ola which have used advent of GPS, smartphones, digital payments and faster mobile networks to disrupt cab business world-wide.
What is Blockchain?
Simply told Blockchain is digital chain where each block/link stores data. This block’s data is publicly stored in computers and is encrypted and can be accessed and modified by systems where this blockchain is stored. Each block stores data which can be money, contract or anything else once recorded, the data in blocks cannot be altered once change is made across system. For new transaction new block is created by anyone on network but it needs to be updated on every system where the blockchain is stored. For example if you use bitcoin and transfer it to someone else, this transfer needs to be updated in Bitcoin blockchain in entire network wherever it is used. The requirement of updation of blocks of blockchain on each (or majority) of systems on network makes it trustworthy and secure and takes care of double spending problem.
Blockchain replaces single ledger of each party which is sent for confirmation/acceptance to counterparty which takes time, with distributed ledger which can be shared on real time basis for authenticity. For example – suppose you want to transfer Rs. 1000 using blockchain to your friend, the block confirming this exchange would need to be updated on all systems where crypto-currency used by you is used and stored. This updating of systems with new information is verified and automatically updated. This open system allows verifying the transaction of money from originator to each user. Hence money you transferred to your friend will have data in preceding blocks of being transferred by your employer to you, customer of your employer transferring this amount to your employer and hence forth. This distributed registry is based on elegant algorithm developed by Satoshi Nakamoto (pseudonym) for crypto currency Bitcoin.
Corruption in India
India ranks lowly 76th on Transparency international corruption index. India’s rank has improved in recent years but still it has long way to go. Corruption according to World Bank economist Late Mahboob ul-Haq, is violence against poor.
Corruption’s ill gotten wealth is mostly hidden by anonymous cash, gold or ‘benami’ real estate transactions according to report by Central Board of Direct Taxes. Recent step by government of India in demonetisation is a step in fighting this corruption by forcing people to deposit their anonymous cash money back in banking channels. However alone this step does not deter money launderers and corrupt as they used multiple bank accounts opened on name of unsuspecting people.
How can Blockchain help in reducing corruption in India
Current technology links the money to account when it is deposited in banking channels and further transactions recorded if transferred using digital channels. This has been exploited by creation of fake accounts and depositing laundered money in these accounts by unscrupulous bankers. Another disadvantage is money launderer’s use web of shell companies to transfer money where the ownership of shell companies and the trail of money is lost in maze of electronic transactions.
Blockchain technology is completely digital medium where entire record of transactions from beginning is stored in blocks stored on distributed systems and is encrypted. Any ill gotten money in any one’s account can be quickly verified by the source of funds regardless of multiple shell companies or different jurisdictions used to cover the trail of money.
Gold is one of the biggest avenues of hiding unaccounted wealth and also serves as one the most preferred investment vehicle for Indians. This love for gold has made India one of the largest importer of Gold in world consuming nearly 800 tonnes of gold annually. An example of using gold as repository of unaccounted wealth, on fateful night of 8th November, night of demonetisation many jewellers in Mumbai and Delhi kept open their shops till midnight and sold gold at premium to people holding unaccounted money who were desperate for anonymity of gold.
Transactions in gold are opaque due to lack of registration in entire process. Government of India’s agency BIS currently offers voluntary registration that gold sold in India be marked with BIS mark certifying the purity of the gold. Along with this a unique code can be assigned to each piece of jewellery which can track the ownership of the gold by blockchain.
Question about divisibility of gold and small pieces which can break off can be dealt by limiting sale of such gold pieces to certain quantity per person/business and linked with their PAN/Aadhar number.
By making ownership of gold trackable while ensuring purity by mandatory BIS mark government can eliminate the unaccounted wealth hiding in gold anonymously.
A big avenue of investment of unaccounted wealth is real estate in India mostly being held ‘benami’ or under other people’s name. Other countries like Sweden and even poor Honduras considered or have considered moving real estate transactions blockchain for registering and transferring land titles.
Corruption in land registry is in terms of paying market rate and registering the land at circle rate as mandated by government. This leads to loss of revenue to government and also encourages cash economy even among people whose entire wealth may be accounted and taxed. Once a land title is registered in blockchain the titling becomes clear and immutable which would allow for more secure mortgages, contracts, and mineral rights. It would bypass the discretion of corrupt in land and property registration offices of Indian states.
Land is state subject and its administration varies from state to state, some states like Rajasthan, Karnataka have digitized the land titling. Push towards blockchain technology by them would be relatively easy. Other states can then learn from their experience in implementing this technology.
Feasibility of adoption of Blockchain in India
Blockchain technology requires computational resources to handle/store transaction and skilled workforce to work the system along with digital technology education among masses for adoption. Internet penetration remains low at 35% of Indian villages being covered by broadband internet. Experts opine that majority of Indians would go online through mobiles hence there is need to scale up blockchain technology in mobile domain for adoption in digital transactions.
India has large IT sector which is hit by maturing of outsourcing model. Push towards new technology like Blockchain will give Indian IT companies expertise in new emerging technology.
Blockchain are especially useful for remittances both domestic and foreign, and India receiving over $75 billion remittance annually reduction in transaction cost and time would benefit it economically and socially. Development of blockchain for trade finance, remittance and other financial products is contingent on entities like banks or financial service providers. As evidence shows BFSI sector is early adopter of technology hence BFSI’s move to Blockchain technology to offer new faster and more secure product is probable. Government or central banks of world can help by agreeing on framework which standardizes the blockchain technology. Setting up an organization like SWIFT which manages international wire transfers securely and reliably would help. Such an organization can setup multilaterally and needs agreement at international level.
Blockchain technology in gold and real estate transaction can only be introduced by Government intervention and policy decision.
IT has encouraged transparency, increased efficiency and created huge amount of wealth in last few decades. Blockchain technology takes advantage of huge computing resources developed in last decade along with faster internet speed to transform transactions in society. Government should utilize this new technology to both transform and reform the Indian society and economy.