Ever since the earliest commercial transactions conducted by mankind, we have been striving to bring in more trust and transparency into the system. This is what led to the creation of the concept of money, to the practice of money being issued as a legal tender by Governments, to the financial services industry and the many innovations it brought with it.
With the rise of global trade, financial service providers, banks in particular, continue to seek to achieve the ultimate efficiency level of full interoperability which will allow them to facilitate swifter and more secure movement of money around the world with reduced dependency on intermediaries. A growing number of them are touting Blockchain as the technology that will finally enable them to achieve this in recent times. It is seen as a technology that will completely transform commercial activity by eliminating intermediaries, thereby enabling seamless flow of business processes across diverse systems.
Anyone involved with the financial services and the information technology services industries in any part of the world is bound to have come across the term Blockchain and it’s been a topic of interest among many tech companies, financial institutions and the government during the past few months in Sri Lanka. However, there seems to be a great deal of confusion about its implications which has led to the technology being viewed as an opportunity by some and a threat by others.
As a local bank that drives its business on a sustainable platform of innovation, we see several key benefits in Blockchains.
for Sri Lanka’s
I believe that payment mechanisms built on Blockchain infrastructure will be the ideal choice for banks to embark on their Blockchain journey. This will allow them to get hands on experience on the technology before they can explore more complex use cases. A private Blockchain among Sri Lankan banks would be a practical implementation to start Blockchain as a financial tool within the Sri Lankan financial industry.
In addition to a payment infrastructure, ideally to facilitate cross border transactions, the Sri Lankan financial institutes could start experimenting on smart contracts as well. However, it is important to note that smart contract implementation has existing conditions that any other software could have since a smart contract is a program code running on the Blockchain.
Developing an application with robust data security which can be easily integrated into exciting systems will be critical to encouraging participants to get on board. The banking industry will also need to work closely with the Government on developing a well-defined regulatory framework that governs all Blockchain implementations.
Benefits and challenges
The core attributes of Blockchain technology have caught the eye of the world. Being decentralised, it doesn’t have a single point of failure. Utilising cryptography to validate every transaction, it is highly secure. The write-once, spend-only attribute of the ledger ensures that transaction history is immutable (i.e. every transaction is recorded on the system and cannot be erased from it). This also adds to the transparency of the system. It brings in greater efficiency by facilitating faster and simpler exchange of information. Businesses see boundless potential in Blockchain technology and are exploring the ways in which it can be applied to different industries.
At the same time, we need to be cognisant of the challenges that come with the technology. Almost all current information security solutions are designed to protect centralised data while Blockchains are based on decentralised data architecture. Secondly, the entire Blockchain technology implementation depends on the associated key infrastructure.
Hence protecting keys is paramount to ensuring overall security of the Blockchain system. Thirdly, keys and assets are held together in all Blockchain applications. Any vulnerabilities in the system would leave the entire asset exposed. We also need to build the necessary infrastructure including connectivity and regulatory frameworks to help us reap the true benefits of this technology in Sri Lanka.
However, these aren’t insurmountable as the very invention of Blockchain technology was driven by the need for confidentiality, integrity and authentication for financial information.
How ‘Blockchain’ works?
Due to the novelty of the technology, different implementations might have slightly different variants for this explanation.
However, every Blockchain record goes with a unique key and is stamped by the trusted party who creates it. As an example; Amal has Rs. 1,000 and wants to send Rs. 300 to Bandu. Amal creates a record mentioning he sent Rs. 300 to Bandu. Then this record is entered into a distributed ledger saying now Amal has Rs. 700 and Bandu has Rs. 300. When Amal creates the record, he will use his signature (Encrypting using Private Key) in the record in order to validate the transaction. Other participants who have this ledger will confirm and approve this as a valid transaction by referring to their copy of the ledger. After approvals, Bandu’s account will increase by Rs. 300 and Amal’s account will reduce by Rs. 300.
These records are created by including information from the previous record(s) and a unique key forming a block and these blocks are inserted into a chain and will create a Blockchain. Since every record has a dependency coming from the previous record, alteration to a record will invalidate following records, hence it is virtually impossible to make unauthorised changes and will notify the other parties who are holding a copy of the ledger.
Disrupting the present
for a secure future
Blockchain technology can be used to change the way in which banks and other financial service providers offer certain services, boosting speed, efficiency, transparency and service quality.
Although Blockchains originate from crypto currency, there are several other uses of Blockchain technology which can benefit the financial industry. One important example of this is the implementation of a payment infrastructure. The technology will be able to facilitate speedier transactions with better cost efficiency. Another key usage is smart contracts. We can see several attempts of smart contract implementations in the other parts of the world, although whether reality meets with expectations is a question yet to be answered. Another use of Blockchain is in identity management where the technology will improve protection of vital data.
(Ajith Salgado is Chief Information Officer of Sampath Bank, Director SITS, past president of CSSL and former member of the Board of Governors of Arthur C. Clark Centre)