Could the Nirav Modi-Punjab National Bank embezzlement have been prevented? It’s a question lots of people are asking. With blockchain it would never have happened, say proponents of the technology that backends cryptocurrencies like Bitcoin.

On February 14 this year, India woke to the news of its biggest banking scam: companies of billionaire jeweller Nirav Modi had allegedly siphoned off over Rs 11,000 crore from PNB, the country’s second-largest public sector bank. The alleged modus operandi was that, between 2011 and 2017, bent bank officials issued over 150 unauthorised letters of undertaking (LoUs). These LoUs guaranteed that PNB would pay back banks abroad from which Modi’s firms take short-term credit for paying suppliers and are usually given after verifying that there is adequate collateral.

According to investigators, the unauthorised LoUs meant that PNB had no collateral from Modi, so it ended up with a humungous liability  to the banks abroad. Modi’s lawyers claim he has nothing to do with the whole affair: it’s PNB that has to honour the commitment the LoUs bind it to. The LoUs were issued on SWIFT, a secure international messaging system used by banks. Bank officials cannot use it without following a strict authorisation protocol. Some relatively low-ranking bank officials have been booked for the breach but that doesn’t bring back the money.

Blockchain enthusiasts say that had the LoUs been blockchain-tagged, they would never have been executed without proper authorisation and maintenance of a collateral with PNB. “You can connect transactions where, based on certain amount of assets, you are allowed a certain amount of credit limit. That’s where blockchain technology can help,” says Jitan Chandanani, who heads the blockchain initiative at IBM. “We can connect the collateral with a particular transaction and see how much leverage it has against the party.”

Blockchain tagging could turn LoUs (or any transaction for that matter) into smart contracts –  with everything written into code – ­to be executed if the terms and conditions are met and to be blocked if they aren’t. Each step would be traceable. “If the PNB LoUs had been smart contracts in a blockchain, the scam would have been caught in no time. It could not have been hidden because it’s not a physical or hard copy,” says Prashant Shukla, national technology officer with Microsoft India. The contract would either not exe­cute, or it would be clear who has executed it and how it has been fulfilled.

Enter the super ledger

So how does it work? In simplest terms, a blockchain is nothing more than a digital ledger well protected by encryption. The technology came into public attention with the spurt of interest in cryptocurrencies like Bitcoin, Ethereum and Ripple. What blockchain technology does for cryptocurrencies is keep track of ownership and every change of ownership – time-stamped and authenticated at every step – so that a person X can be truly identified as the owner of a particular piece of cryptocurrency.

Unlike normal ledgers (electronic or physical), blockchains maintain records multiple times – millions of times, in fact. This is done by algorithms that copy a transaction into millions of nodes simultaneously. At every stage, encryption ensures that there is no possibility of error or foul play. The crucial part comes with authentication: unless a transaction record matches on a majority of nodes across the netscape, it will not be authenticated. There is no human intervention and the record is open source, which means that any user can seek authentication and have it accurately conveyed to him or her.

And since there is no centralised storage of data, it is that much safer against hacking or other damage. Let us assume the central database of a central bank is compromised or suffers because of fire, theft or power failure. Data integrity comes into question. Besides, since all data is located in one place (or a few), the loss could be immense.

“On blockchain, millions of devices store the same information on the distributed ledger. To hack into the blockchain, someone has to hack so many computers at the same time across the geography. It’s nearly impossible,” says Rahul Raj, co-founder and CEO of Koinex, a cryptocurrency firm.

On blockchain, the data is completely secure and totally accessible for verification – but not for modification. You cannot go to a previously recorded transaction and change it. Once a transaction is initiated, data points are collected and stored in a temporary memory pool. Transactions are then appended to the records in chronological order, and since there are millions of computers in a blockchain network, each one in sync with the other, they are recorded everywhere. A consensus algorithm verifies the validity of each transaction.

Beyond cryptocurrency

Microsoft and IBM are part of the BankChain project, in which 34 organisations, including leading public sector and private banks, exchanges and startups have come together to work on how blockchain technology can be used for a variety of uses.
Blockchain is currently being tested in a broad spectrum of areas not only by financial technology firms, banks and other financial institutions but also startups, internet and technology majors and even consultancies like the ‘Big Four’ (as the world’s four top accounting firms are known). The central and state governments – usually slow to respond to new technology – have woken up to the potential of blockchain technology. Maharashtra, Karnataka and Andhra Pradesh intend to conduct proof-of-concept studies for using blockchain technology to manage land records, healthcare and transport. Similarly, the centre’s policy think tank, NITI Aayog, intends to carry out studies for using blockchain technology in land records, supply chain management, public distribution system and electronic health records.

Worldwide, too, heavy investments are being made in blockchain technology. “Approximately $1 billion of venture capital investment over the last 24 months, and $500 million in 50 venture capital deals in 2016 alone,” according to an International Finance Corporation report. A McKinsey report of 2017 estimates that the global banking industry will invest $400 million in blockchain related projects by 2019. It says 70 percent of financial organisations are experimenting with the technology and expect to see an impact in five years. The report also estimates that blockchain will save $70 billion-85 billion through cost reduction.

Finance minister Arun Jaitley referred to blockchain in his 2018 budget speech too: he said blockchain technology would be harnessed “for ushering in the digital economy”.

Land records

The World Bank estimates that 1.3 percent of the GDP is lost due to unclear land titles. Frauds often take place because of falsification of records, and land-relatetd litigation is one of the biggest causes of pendency in Indian courts. According to a PricewaterhouseCoopers report, “There’s very little uniformity in the way centralised databases of land records are maintained... Due to the absence of a platform to maintain uniform records, there is a lot of autonomy amongst various stakeholders.” This leaves scope for manipulation.

Land registry and title transfer is a cumbersome process and people forge documents to claim the same piece of land. “All of that can be avoided if there is a tokenised form of land registry,” says Raj. “Every plot of land is represented by a token and every token has details of neighbours, area, geographical latitude and longitude positions. When a transaction happens the token is directly transferred from the owner and it is recorded on blockchain to the buyer. So everyone can verify that a land registry sale has just happened and the owner has now changed. No one can imitate or duplicate that token. No one can come with same document and claim that it is his plot of land.”

Using blockchain in land records is particularly relevant to India. “It’s a very inefficient market,” says Shukla. “You have no way of knowing or ascertaining past ownership. If blockchain is implemented in land records, we will successfully address the problem of benami properties. The transfer of property will happen smoothly. It could be done in just one day. It will uproot cheats who often sell the same property to many people.”

Smart KYC

Often false identity documents are used to claim benefits or services. It is easy to fake voter ID cards or other centrally managed identity documents. Although the government claims central databases are secure, it is a fact that the registries are still managed by officials enjoying discretionary power. Theoretically, there is risk of manipulation.

“Now imagine the entire system is on a blockchain. It can be seamless, publicly verifiable and is more trustworthy as there is no human discretion involved,” says Raj.

Capitalising on the blockchain features of immutability and transparent record keeping, Rubique, an online credit market place providing lending services to end users and SMEs, is offering smart KYC solutions that provide access to customer KYC data and also their prior lending information. “Most importantly, every time a bank or lending organisation wants to look at the KYC data, an approval is sought from the customer over SMS, ensuring user privacy,” says Suraj Agarwal, chief technology officer for Rubique.

Health records

IBM has collaborated with health insurance companies to build a blockchain solution for seamless sharing of health records. “For example, to get insurance, I have some tests conducted at company A. They reject me. I then go to company B, and they too reject me. Now the question is: Can’t company C obtain the results of the tests from A and B rather than put me through the same experience again?” asks Chandanani.

That’s where blockchain comes in. “Based on a unique identifier (say Aadhaar), they could access my data at companies A and B. As a customer I get an SMS seeking consent. Since companies A and B have spent, say Rs 1,000, to get the test done, company C can pay a small amount to buy that data from either,” he says. “We’ve discussed it with the Insurance Regulatory and Development Authority and the Insurance Information Bureau of India, and are negotiating production with them.”

Estonia, a pioneer in taking digital technology to the people, has all citizens’ health records on blockchain. Estonians can log into their records and see which medical professional or government official accessed their record. If found accessing without consent, government officials can be prosecuted. “In Estonia, the state is not the owner of the data, people are. I as a citizen using my digital identification can go and check the system to see who has been using or seeing my data. If I think, ‘Why has this person shown interest in my personal information?’, I can file a lawsuit,” a senior Estonian embassy official told Governance Now.

In the ad game

A good use of blockchain is in digital advertising. Brave Browser, an open source web browser set up by Mozilla cofounder Brendan Eich, incentivises publishers and users and eliminates intermediaries like Google and Facebook, which together get about 73 percent of digital advertising revenue. This happens at the cost of non-ad content providers. Users are profiled and tracked to send them targeted advertising.

“Marketing budgets continue to climb, yet publisher revenues are static or shrinking. This indicates serious market inefficiencies which can be repaired with a simplified and more efficient economic system based on new technologies,” says the Brave Browser team in a white paper.

What Brave Browser does is to provide a basic attention token (BAT) which can be exchanged monetarily. Brave Browser is just like Firefox and is built on blockchain. Here the advertisers will pay users to consume ads. Based on a user’s private encrypted information, ads will be showed to them based seeking their permission. They will be compensated with basic attention tokens.
“Since as a user, I agree to watch an ad and am being paid for it, advertisers’ investment is used far more beneficially,” says Raj.
According to the white paper, “In the ecosystem, advertisers will give publishers BATs based on the measured attention of users. Users will also receive BATs for participating. This transparent system keeps user data private while delivering fewer but more relevant ads. Publishers experience less fraud. And advertisers get better reporting and performance.”

The cons

Chief among the objections raised by blockchain sceptics is that there is no proof yet that it is hacker-proof. Enthusiasts say it is the best security option yet, and that any lock, for that matter, is potentially pickable.

The more plausible argument against blockchain, however, is about available computing power. Blockchain is trustworthy because it makes millions of copies of a transaction for verification. Consider the amount of data this generates – and the computing power that would be required to make validations. As more and more operations begin to rely on blockchain technology, computing power will have to keep pace. Sceptics wonder if that will happen.

Another argument relates to the anonymity of the decentralised system: actually, what happens is that everyone knows everything regarding a particular block though it might be difficult to identify the physical person associated with it. So what are the checks and balances to prevent the person associated with a particular transaction from being identified? When blockchain tech is used for the kind of applications a government would require, each node is clearly defined. Access, and identification of the person whose data it is, can be restricted. Any breach can be traced through the node and the official or authority allowed access from that point can be questioned or asked to explain.

And there are some who question the whole enterprise. “Blockchain comes in when there is no centralised authority. Land records have to be maintained by government. This is quite ridiculous, frankly. It means that the government has failed,” says a senior partner at a Big Four consultancy. “I don’t know why NITI Aayog has taken up blockchain technology for land records. Taxpayers’ money is being spent on stupid things. Let’s say I am trading stamps, or art, where I don’t know if it is genuine or not. There is no central authority. That’s a good use case for blockchain.”

For now, though, there’s a momentum gathering around blockchain technology and the way governments and corporates are betting on it, large scale experimentation, if not complete adoption, is on the horizon.

pratap@governancenow.com

(The article appears in the April 15, 2018, issue)