Blockchain is a cryptographic technology that simply substitutes the physical world’s security requirements like locks, vaults and signatures in the digital world. Though it was initially introduced as a technology to underpin cryptocurrencies, it has the potential to change the face of business and finance in the coming decades. It is a decentralized technology where the computer networks verify, monitors and enforces the transactions without the presence of a trusted third party or a central institution. The technology consists of chains of blocks that stores information referring to a transaction and is connected which can be traced back to the pathway of a basic transaction. Due to the cryptographic nature of the technology, it becomes impossible to hack, delete or edit a transaction that is stored in blocks, as it requires the approval of all the networks collectively involved in the chain. The revolutionary nature of blockchain technology derives its authenticity from two key features used for the recording of the flow of assets: (i) Distributed Ledgers and (ii) Cryptography which will be dealt with in detail in the due course of the paper.
Blockchain technology finds a clear potential in the Banking sector due to the ‘decentralized trust’ factor. This feature eliminates the reliance on a centralized agency to facilitate transactions and rather work with a distributed ledger technology with participants across the network that authorises and verifies the transactions. The distribution of data across the ledgers rather than centralized storage eliminates the chances of corrupted transactions and enhances legitimacy. The technology also fits for core banking functions such as payment clearing and settlements. The distributed ledger technology would also provide a tool to surmount the pain points in cross border payment systems particularly high costs and indefinite delays as the network is frictionless and is equipped with global interoperability. The Indian banking sector has progressively detected the power of this technology and is in the process of explorations and adaptations.
The aim of this paper is manifold. First, shaped by the traditional banking methods, the paper attempts to highlight the benefits of blockchain technology by emphasizing on its application in the Indian banking sector. Second, given that there is no statutory basis for its application in India, the paper traces the regulatory framework for the technology in the banking sector and its contour in the Indian fiscal context. Third, the paper also explores the possibility of the emphasizing on introduction of an incumbent payment system based on a national digital currency by weighing the cost and benefits of transacting with virtual currencies. The paper also contemplates the application of an existing regulatory framework to virtual currencies. Fourth, the paper analyses the issue presented by blockchain technology. It looks into the application of more efficient modes of transactions, verifications and title transfers. It also explores more advanced aspects of the technology, an understanding of which is essential for its sensible adoption to the banking sector.