This article is a deep dive into Reserve Bank of India’s [RBI] arm using blockchain technology to cater to the needs of banking institutions. The dissecting of its whitepaper, understanding how RBI is cool with blockchain, and centralized coins but not decentralized cryptocurrencies.
The Hindu Business Line, one of the leading publications in India that covers news related to businesses, government, and finance posted an article with the heading, “Tapping tech: RBI arm readying a model blockchain platform for banking needs”. In the article business line spoke to AS Ramasastri, the Director of IDRBT [The Institute for Development and Research in Banking Technology] which is an arm established and monitored by RBI itself.
Ramasastri states how the IDRBT team has been working on blockchain applications for government banking; it is expected to be developed next year. Additionally, the director even spoke about the scope of blockchain in FinTech and how the platform will integrate blockchain applications with interoperability and more.
In early 2019, RBI released a whitepaper written by IDRBT, titled ‘Applications of Blockchain Technology to banking and financial sector in India’. As news related to RBI entering the blockchain space is becoming one of the hottest examples of hypocrisy, covered by multiple leading crypto-blockchain publications, I believe it’s necessary to understand the whys and hows first. As to why RBI is integrating blockchain solutions into banking channels, and how it is planning to do so?
Why RBI is integrating blockchain solutions into banking channels. Diving into the white sea!
Blockchain has various use cases in the financial industry, but for RBI’s IDRBT blockchain will play a pivotal role in ‘Letter of Credit’. From a traditional method of processing LoCs to putting it out on a blockchain, the transition will help in fraud prevention, save costs on forex volatility, save costs of delayed settlements. Additionally, this will also provide resilience through redundancy, will reduce settlement timeline, and introduce immutability.
The very first chapter of the whitepaper is about Cryptographic components, it explains that:
“Blockchain Technology relies heavily on fundamental tools from Cryptology and Data Security, especially in terms of message authentication targeted towards tamper-evidence and tamper-resilience. In its most abstract form, a Blockchain may be described as a tamper-evident ledger shared within a network of entities, where the ledger holds a record of transactions between the entities.”
Every cryptocurrency whitepaper has a couple of Buzzwords, [Cryptology, Data Security, Tamper-evidence, Tamper-proof, Tamper-resilience, ledger etc.] does the above quote ring a bell?
Further, the whitepaper explains Cryptographic Hash Functions, Genesis Block, Merkle tree and everything that a Bitcoin Whitepaper has, including Bitcoin.
The whitepaper uses Bitcoin as the major example of making its audience understand about how a blockchain works, additionally it also mentions Ethereum and its smart contract applications.
For the cryptoverse, this is one of the biggest achievements. India’s central banking institution that controls the issuance and supply of the Indian rupee had banned banking channels, NBFCs and financial institutions from working with cryptocurrency exchanges and laid a prohibition of conversion from cryptocurrencies to INR and vice versa.
The same governing body now is planning to utilize the technology these crypto-assets are backed by to make their financial systems better. As the English say, imitation is the greatest form of flattery, I believe this news is a big compliment to every startup that thrives despite the ban and every company that works towards building scalable blockchain-based solutions.