The Finance Ministry’s FinTech report, under the Department of Economic Affairs, did not provide any concrete recommendations for blockchain in India, though it laid out applications of blockchain in fintech, and in MSMEs and government. It recommended formation of an inter-ministerial group under MeitY to explore the use of blockchain, among other technology.
Current usage of Blockchain
As per the report, some major fintech applications where blockchain is generally being deployed as follows:
1. Cross-border payments: The report suggested that blockchain-based solutions related to issues with cross-border payments could encompass the following features:
- Exclusion of intermediaries and direct transaction between parties
- Intra-day liquidity need not be ensured with central banks as all stakeholders will hold a copy of balances and transactions of every participant.
- Encryption will nearly eliminate the possibility of modification of data and will maintain an immutable audit trail
- Private or permissioned blockchains, only limited to stakeholders, will address data protection and privacy concerns
- Consensus-based validation of transactions will allow for immediate updation of transaction trail
- Use of digital tokens resolve the issue of multiple currencies, improves liquidity and capital compliance costs, allows for micro-payments and expedites the payment process, which further eliminates liquidity risks
2. Settlement of securities: Blockchain would allow for distributed and decentralized records. Multiple intermediaries makes transactional and final settlements complex. In private blockchain, the system will store and facilitate KYC data across all nodes. History of payments and transactions maintained on the blockchain will enable transparent supervision for auditor and regulators.
3. Trade finance: Blockchain can increase visibility into asset status, leading to transaction transparency, security, and real-time merchant tracking.
4. Smart Contracts: Blockchain can enable automated compliance verification with contract terms, faster payments to sellers, and prevent disputes from ambiguities in the interpretation of the contract. Goods and services can be tracked in real-time using geo-tracking APIs. The report also noted that Blockchain-based smart contracts and P2P lending are being used by fintech companies to serve individuals excluded from accessing finance through traditional modes.
Other use cases:
- International: Financial firms in South-east Asia have developed the first proof-of-concept for a KYC blockchain, which has the potential to improve KYC and AML systems, increase standardisation of KYC information, and reduce the costs of completing and maintaining KYC information.
- National: Blockchain has been used for de-duplication in TReDS, which facilitates the financing of trade receivables of MSMEs from corporate and other buyers in India. Blockchain is helping solve problems of double discounting and transparency of invoices in trade finance through TReDS, thereby reducing the cost of credit.
Blockchain in the MSME sector
- The committee suggested that MSMEs can promote digital lending through blockchain. Also, it could solve problems such as that of paper-based documentation, fraud through forgery, and bifurcated information.
- Blockchain technology in supply chain management and financing could help reduce fraud, duplication and scattered information. “Digitally verified identities on a single blockchain network would provide the trust necessary for financing MSMEs”, suggested the report.
- Financial firms should invest in blockchain-based systems for reducing transaction costs, providing better information security and privacy, the report stated.
- Securing property records and stamping of documents through blockchain is also being considered in a bid towards efficiency and ease of doing business.
The report makes the following recommendations in the report:
- Inter-ministerial group for Fintech: Formation of an Inter-ministerial group on fintech at MeitY, for exploring applications of technology like open APIs, blockchain in the government processes, “particularly in accounting and asset management, welfare services, taxation, and handling citizen grievances”.
- Public sector blockchain-based trade finance: The Ministry of MSMEs should work with the Department of Financial Services (DFS) and RBI for testing and implementing blockchain solutions in trade finance for MSMEs.
- Capacity building: Implementation of capacity building program in fintech (blockchain, APIs, etc.) for senior government officials on its use cases, risks, costs and benefits through government training institutions, such as the National Institute of Financial Management (NIFM), Institute of Development and Research in Banking Technology (IDBRT), etc.