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Contents
What is Blockchain? 5
Understanding the concept, technology and features 5
When is Blockchain the right solution? 9
Positioning for a future with Blockchain 9
Summary 30
References 33
Contacts 34
What is Blockchain?
Understanding the concept, technology and features
Operates Cryptographically
‘trustless’ sealed
5
6
Cryptographically sealed
Irreversible and Blocks created are cryptographically sealed in the chain. This
auditable
Consensus-based means that it become impossible to delete, edit or copy already
A transaction on Blockchain created blocks and put it on network, thereby creating true
can be executed only if all digital assets and ensuring a high level of robustness and trust.
the parties on the network Furthermore, the decentralized storage in a Blockchain is known to
unanimously approve it. be very failure-resistant. Even in the event of the failure of a large
However, consensus based number of network participants, the Blockchain remains available,
rules can be altered to suit eliminating the single point of failure. Data stored in a Blockchain is
various circumstances immutable.
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
Smart contracts are an important Figure 2 describes the various layers in Types of Blockchain
feature of the Blockchain technology a Blockchain stack
Apart from above mentioned The development and operation support
characteristics, smart contracts is one for a Blockchain is concentrated in the Public Blockchain Permissioned or closed-loop Private Blockchain
of the most important feature of the infrastructure layer of the technology stack. Public blockchain are open-source. Anyone Blockchain Write permissions are restricted to one
Blockchain technology. They are essentially A fundamental difference between legacy can be part of this type of Blockchain i.e. The difference in a permissioned organisation. Major applications include
computer codes stored in a Blockchain to processes and Blockchain technology is anyone can participate in the transaction blockchain compared to the public database management, auditing i.e. areas
process pre-defined business steps and in the way data is stored and processed. facilitated by the Blockchain, everyone blockchain is that the right to validate specific to a single entity where there is no
execute a commercial/ legally enforceable Blockchain has features of encryption and can see what blocks are getting added the transaction is provided to only few requirement to provide the right to read or
transaction without involvement of an verification inherent to its design, with and thereby anyone can participate in the pre-selected nodes. The right to read the validate to public.
intermediary. Smart contracts can be consensus on the network being a required consensus process i.e. the process of what blockchain may be public, or restricted to
executed in a cost efficient and secure condition for a transaction to be captured blocks get added to the chain and what the the participants.
manner, and in real time. Smart contracts in a block. current state is.
have a far reaching cross-industry
applications because they can automate
decision making especially when the
outcome of a decision is based on the
consensus reached between participating
members.
Application layer
Customer interaction, business Programming languages
logic, and user interface design
User interface Logic Application Python C++ Rust Solidity Java
integration
Services layer
Blockchain services to enable Multisignature Trackers Oracles Wallets Digital assets Connectors
operation of the application
and connection to other
technology
Event Application Distributed Smart Distributed Digital
managers server files stores contracts databases identity
Bitcoin
Network and protocol* Permissionless Proof of Gossip
(UTXO)
Network participation stake
requirement, base protocol, Ethereum
Permissioned Ethereum virtual Sidechains Proof of Byzantine fault
and method of consensus
machine work tolerant
Infrastucture layer
Blockchain as a service (BaaS)*
or in-house infrastructure to
operate the nodes
Compute Storage Network Virtualization Mining as
a service
*Many BaaS provides move up in the reference architenture to offer network and protocol and services layer solutions.
Note: The representation is not meant to be exhaustive (e.g. Ethereum and Bitcoin are not the only protocols and the represented consensus mechanism are also not
exhaustive).
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
When is Blockchain
the right solution?
Positioning for the future with Blockchain
Organizations around the world, including experimentation is necessary to validate a
banks and other financial institutions solution, it is important to first select the
are continuously experimenting with right use-cases to implement a Blockchain
multiple use-cases on Blockchain. While based solution.
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
Smart contracts allow business The hash/ pointers of the records written
validations and automated on the Blockchain are immutable and
reconciliation for straight through Blockchain irreversible, not allowing modifications
Fit
processing Assessment and eliminating risk of fraud
Framework
Assessing the economic impact of •• What will be savings in operating cost as •• Whether the firm should tie up with a
implementing a Blockchain based a result of implementing Blockchain? specialized Fintech firm to implement the
solution Blockchain solution or shall it develop it
•• What will be the intangible benefit to
A firm considering a Blockchain based in-house? What will be the cost incurred
each of the participants if Blockchain
solution, needs to perform a cost-benefit in either scenario?
based solution is implemented i.e.
analysis to evaluate the tangible and
customer satisfaction, convenience, •• What will be the cost of running a pilot, Major issues that banks face today? to be validated by various participants at For this, Blockchain potentially provides
intangible benefits vis-à-vis its existing
better relationship, etc.? who will be participants for pilots and The Indian banking industry today is various point in time causing the delay a solution for banks as it inherently
way of doing business. Some of these key
within how many days can it go live? faced with issues such as rising costs thereby resulting in almost lack of fraud- helps eliminate intermediaries, maintain
questions include: •• What will be the other tangible benefit
to each of the participants if Blockchain •• Whether the Blockchain model be open of operations, increasing susceptibility proof real time solution. immutable log of transactions and
Benefits evaluation: based solution is implemented e.g. to modification i.e. from consortium to to fraudulent attacks on centralized also facilitates real-time execution of
increase in revenue due to new Public? servers and challenges in ensureing What are banks looking for? transactions. This could potentially
•• Who are the participants and their role in transparency. All this, primarily because Banks are continuously exploring new reduce the TAT for banking transaction,
customers or higher customer retention?
the transaction/process? •• What should be the standardized most of the banking transactions – from ways to perform transactions quicker reducing costs of manual work, and
protocols governing the transaction/ opening customer accounts to making for an enhanced customer service, while leading to enhanced customer service
•• What is the time taken and cost incurred Cost evaluation:
process and what are the associated global payments – may require intensive ensuring cost efficiency in its operations and satisfaction. Like any other industry,
for the process currently?
•• What will be Blockchain model i.e. Private, costs of any such standardization? manual processing and documentation, and assuring transparency to customers choosing the right ‘use case’ is the key for
•• What will be the time taken and cost Public or Consortium? involve costly intermediaries and is time- and regulators. Banks to leverage full value of Blockchain.
incurred under Blockchain based consuming as these transactions need
•• Will the participants be willing to integrate
transaction/process?
on a common system?
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
Indian banks
Factors Assessment Framework Vendor Financing Fit
play a key role for helping Indian banks and financial institutions realize significant
benefits. Yes – applicant, beneficiary, issuing bank,
•• Are multiple participants involved? advising bank, etc. are involved in the
Case 1: Vendor financing invoices. Banks also provide structured
Realization of funds at various points in a financing services against confirmed Transparency •• Does increase in transparency into the transaction help the transaction. Higher transparency would
value chain is a critical concern for anyone purchase orders from their customers. participants increase trust in the system, and speed up
who is in the business of manufacturing the process
and selling of goods. Bank’s vendor We have examined this landscape using
financing program provides credit facilities our assessment framework and find a
such as Letter of credit, Bill discounting near-perfect candidate for adoption of a
and financing against purchase orders and Blockchain based solution.
•• Is the same information being stored in multiple locations? Yes – common information is stored across
Information Storage the participants such as Issuing bank,
•• Is data consistency an issue? Advising bank, Presenting Bank
Overall industry Number of Cost of funding a Yes – it is required throughout the lifecycle of
•• Does the process involve manual operations? the process. Manual processing is performed
Transaction value2 days it takes vendor financing Manual Processing
transaction2 •• Is the cost of Reconciliation high? at the Branch and CPC (Scrutinizer, Maker,
Checker)
$1bn 3-5 0.3%
Vendor financing participants •• Is there trust among participants? Yes – multiple participants are involved in
•• Do multiple participants have the right to modify transactions? the transactions and make changes/ issue
Trust instructions. Since these may be unknown
•• Is there a risk of fraudulent transactions? to each other, there is a lack of trust and
possibility of fraudulent activities
Clients Banks Vendors
Purchase materials Provide financing Supply materials
from vendors and to vendors based as requested by
•• Is the documentation paper-based?
instruct banks to on documentation clients and collect
make payment to provided by money from banks Yes – The application, PO, validations, bills,
•• Is there a large number of documents / reports required to
vendors vendors Documentation insurance, etc. are all paper-based. This is not
be generated?
due to regulatory reporting requirements
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
As is To be
2 Supply of goods
2 Supply of goods Clients Vendors
Clients Vendors
Takes few
3 Sends hours to
9 Auto-debits client 8 Payment
7 Auto- 3 Sends 6 Payment approved
account on due-date to vendor execute the
debits approved to vendor Takes 3-4 days Invoice via
transaction
clients Invoice (1-2 days) to execute the API
account (1 day) transaction
on due 4 Invoice uploaded 7 Payment
date request sent for
processing after
5 Transaction
validation
crypto key
Client’s generated Bank’s admin
node node
4 Sends 5 Authorize
payment payment Bank
Banks Bank’s Bank’s
request for Admin (1-2 days) payment
processing Department Department Certificate Bank’s payment
after authority node node
validation 6 Transaction certificate 8 Authorize and
(1-2 days) issued disburse payment DLT
Manual documentation Lack of mechanism to track status of Automated documentation Real time-tracking of transaction Currently, banks will have
Manual documentation is required invoice throughout the process Blockchain helps eliminate the manual With the transaction being up on
throughout the lifecycle of a Vendor finance Currently, all the participants (banks, client steps involved in the company’s bill Blockchain, all the relevant parties can view
to opt for a permissioned
process right from raising purchase orders and vendors) cannot simultaneously track discounting process and the entire and verify the processes. There is only one or closed loop Blockchain
to raising bill of exchange by vendors and transaction in real-time. The status of transaction becomes paperless. source of truth and transactions cannot be
submission of invoices and transport invoice is known to the participants only processed further unless all the relevant
with smart contracts
documents to banks. This increases through mails. Real time settlement of transaction parties agree and authenticate it. (which in this case would
overheads for banks and also makes the Clients can transfer invoices to the
process tedious for vendors. Potential of fraud Blockchain network using an external Fraud proof
be code-driven, tripartite
As invoice changes multiple hands technology such as Oracle and once it is Blockchain’s DLT and all the relevant parties agreement between
Time-consuming process throughout the lifecycle of a transaction, on Blockchain, smart contract rules can be can view and verify the processes. There is
Due to manual processing of the there are high possibilities for frauds in triggered, and then the bills are discounted only one source of truth and transactions
banks, clients and vendors.
transaction and lack of automation at any form of tampering of documents thereby and funds disbursed to the vendor within cannot be processed further unless all the If an open Blockchain is
point, it takes minimum 4-5 days for vendor causing delay in release of funds, funds few hours. An automatic debit to customer relevant parties agree and authenticate it.
to collect funds from the bank against being disbursed to wrong entity. Also, once account is triggered on the due date.
created, then ‘many-to-
the relevant document. This affects the such transaction happens, it is difficult to many’ relationships can
working capital situation of vendors as keep a track of such fraudulent entities/
the funds remain blocked as long as the practices.
be established between
processing takes place. banks/FIs and vendors.
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
Win- Win for all Case 2: Customer loyalty programs A variety of reward points schemes are
Loyalty/reward points are an integral part introduced by banks. There reward points
of the customer retention strategy across can be either merchant specific i.e. can be
industries, and especially for banks with a redeemed only with a specific vendor, or it
significant retail business. Loyalty/reward can provide loyalty points that can be availed
based incentives are offered by everyone across multiple vendors.
right from banks to e-wallets. Reward points
help in tokenizing a portion of the customer’s
spend and using it to increase stickiness.
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
Looking at it through the Blockchain Fit Assessment Framework Since a majority of the questions are answered in the affirmative, this is a right use
case for Blockchain.
Factors Assessment Framework Loyalty Program Fit
As is
Client 1 refused to avail loyalty points got wasted without any Accumulated reward points by client 2 get wasted
benefits may be because he didn’t know how to avail those points
or the points could not be redeemed at the concerned hotel
•• Does the process involve manual operations? Yes – it is required throughout the lifecycle
Manual Processing
•• Is the cost of Reconciliation high?
of the process and involves reconciliation Current pain points
among data across entities
Lack of interoperability in reward points the usefulness of reward points for in order to redeem against decent purchase
Various reward point programs offer consumers. As per an estimate, the current you need at least 500-600 points therefore in
merchant or category specific reward points. redemption rate is less than 80%. order to accumulate 500 points, you should
•• Is there trust among participants?
These specific reward points can’t be used shop for approx. 1-2 lacs.
Yes – multiple participants are involved
•• Do multiple participants have the right to modify transactions? in the transactions including merchants,
for any other category or any other merchant Complex programs
Trust outlet. This makes it less attractive for the As per a study, a significant portion of Lack of standardization
•• Is there a risk of fraudulent transactions? customers, vendors, etc. which are not well
consumers as there might be instances consumers are not aware of all the benefits Due to lack of product/quality
known to each other, causing a lack of trust
where the reward points might get expired associated with a reward linked card, process standardization, it becomes difficult to
and customer might not be able to to redeem the points, exclusive benefits ensure repeat usage of goods
avail the benefit. to members. Also, according to The 2016 by customers
•• Is the documentation paper-based? Yes – There is multiple documentation Bond Loyalty Report, 57% of respondents
required at each participant, with a lot Delayed gratification expressed interest in engaging with loyalty Information security
•• Is there a large number of documents / reports required to Consumers prefer instant gratification. programs via a mobile device. Loyalty programs accumulate large volumes
Documentation of validations for bills, items of purchase,
be generated? However, reward points does not get of Personally Identifiable Information (PII)
etc. This is not due to regulatory reporting
requirements credited instantly, which leads to 70% of System inefficiency thus they are prone to threats from data
the consumers abandoning the points Loyalty program management systems security. Identity theft is another area of
accumulated by them. inefficiencies cause poor data integrity. concern for program administrators
Degree of channel integration is also limited.
Limited redemption Real-time integration would help drive more Financial burden
•• Will the transactions benefit from being real-time Yes – currently it takes too long to redeem None of the reward points currently provide cross-channel integration. Administration of loyalty programs adds to
Time Sensitivity access across all the merchants. In fact, there the liability for company financials. Unused
or synchronous? points earned causing delayed gratification
are cases where reward points can be used Limited accumulation of reward points reward points are an unwanted liability
only to buy a selected range of goods at the The value of each reward point on an average
partnered merchant outlet. This decreases is 25-30 paisa on a purchase of INR 100 and
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
Case 3: Syndicated Loans entire process. The Lead Arranger carries Looking at it through the Blockchain Fit Assessment Framework
Corporations undertake multiple large out a KYC for the client, forms a syndicate
projects such as development of roads, of members which are willing to fund a
train systems, airports, factories, new percentage of the loan and diversify the Factors Assessment Framework Syndicated Loans Fit
business centers, etc., which requires risk, and also takes on underwriting
large-scale financing. Procuring these large of the loan. •• High fees for intermediary?
funds necessitate the institutions to come Yes – agents and intermediaries are
together to form syndicates and diversify The Global Syndicate loan volumes and Intermediary •• Latency due to processing through intermediary? appointed at high fees to manage and
the financial risk among its members. number of deals seem to have plateaued administer the process
•• Does the intermediary exist due to lack of trust?
between 2011 and 2015. Since the
The corporate clients seeking the loan APAC markets are growing, it provides
initiates contact with a Lead Arranger, opportunities for setting up of syndicate
which coordinates with syndicate loan back-office operations for global firms. Yes – syndicate members seek transparency
•• Are multiple participants involved?
members, manages and administers the customer’s rating, loan administering, etc.
Transparency •• Does increase in transparency into the transaction help the while customers seek transparency in
participants underwriting
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
Since a majority of the questions are answered in the affirmative, this is a right use To be
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
Challenges and
Implementation Roadmap
While the interest in the technology is all pervasive, there exists a number of
challenges for its widespread adoption
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
Figure 5
Create loyalty management Work with fintech startups to develop Collaborate with other players and
solutions from scratch tailored solutions develop a solution that has potential
to be industry-standard
Open ledger with Bitcoin blockchain where there is Closed ledger architecture where only verified nodes are
no restriction on the identity of nodes allowed to participate
Develop enterprise-grade distributed ledger Leverage existing distributed ledger platform protocols
framework based upon protocols, pollcies and and standards like those created by Ethereum
regulatory standards
Ease of Implementation
• Sandbox Testing
Key Activites
Consider both hard • Priority may be given to • Security, Scalability, • Stakeholders • Prioritize markets
and soft dollar cost extension of digital speed and to be Stakeholders where regulators
Key
This will involve answering a series of Due to lack of any precedence, banks will Deloitte Blockchain and CryptoCurrency Community (DBC3)
fundamental questions related to dynamics have to opt for a trial-and-error approach Internal group of 350+ practitioners in 26 countries, focused
of transaction and regulations underlying either through internal trials or partnering on educating, building eminence, supporting clients, engaging
the transaction. The questions related with a specialized technology firm. Strategic partnership technology companies and creating solutions
to dynamics of transaction such as cost Deloitte has partnered with various
FinTech players such as Blockchain
Cypher, Bloq, Stellar, Consensys,
Loyyal
Singularity University
An educational institute that brings together
top experts, such as Michael Rhodin, Peter
Diamandis and Marc Goodman, to inform
MIT MediaLab Digital Currency Initiative
financial services leaders how technology is
Working with Brian Forde, former senior White
impacting business
House advisor for mobile and data innovation,
and world-renowned faculty members from
Sloan School of Management and the MIT
media Lab to research Blockchain and its
possible implications on society
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
References
Deloitte’s experience
Deloitte is partnering and working on generation solutions for Banking Industry
various pilots/PoCs with organizations in leveraging the capabilities provided by the
India and globally and are investigating how technology platform
distributed ledgers can enable the next-
1
Deloitte US PoV: “Investment management
firms: getting started with Blockchain.pdf”
2
Industry estimates and Deloitte analysis
3
Economic times article: “http://
economictimes.indiatimes.com/industry/
banking/finance/banking/yes-bank-
upbeat-on-using-blockchain-to-add-more-
processes/articleshow/56314280.cms”
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Blockchain in banking | While the interest is huge, challenges remain for large scale adoption
Contacts
Monish Shah Suchintan Chatterjee
Partner Director
Deloitte Touche Tohmatsu India LLP Deloitte Touche Tohmatsu India LLP
monishshah@deloitte.com suchintanc@deloitte.com
34
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK
private company limited by guarantee (“DTTL”), its network of member firms,
and their related entities. DTTL and each of its member firms are legally
separate and independent entities. DTTL (also referred to as “Deloitte Global”)
does not provide services to clients. Please see www.deloitte.com/about for a
more detailed description of DTTL and its member firms.