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Some more compelling reasons for Sri Lankan

banks and firms to go for blockchain technology

Blockchain has brought in a revolution in the use of the internet

Using online bank payment portals

Monday, 30 October 2017

Imagine a situation like this. You make an online payment to your internet service
provider using your banks internet banking portal. You follow all the safety
measures imposed by the bank like the first step password entry to your account,
validating the transaction by using a second password and clicking all the relevant
fields on the dialogue box.
The payment is instantaneous and you get a transaction number from the bank.
You immediately get an SMS on your mobile phone that your account has been
debited by the said amount under the transaction number that had been issued
by the banks internet banking section.

You are happy because you did not have to go to a payment centre or a bank to
make the payment. It saved a lot of your time, inconvenience and hassle. Above
all, you could make your payment in the middle of the night when the rest of the
world is asleep.

A costly communication gap

But the following day, you find your internet router displaying a red icon
indicating that it does not work. You call the service providers help centre to find
that your internet is disconnected because you have not made the payments in
time. You make a protest and insist that you made a payment the previous day.
The agent at the call centre says that all what he could do is to register a
complaint and he reads out a complaint number for future reference. You take it
down and wait but your router still displays that red icon saying that it is not
authorised to help you to access data.

In the evening, you call the help centre and another agent answers. His answer is
the same and the payment has not been received. He politely advises that you
should resolve it with the bank. You now get agitated because you had no
internet for one day and it seems that you are to go without internet for another
day too. You call your banks online payments help desk but no one answers;
apparently, they all have closed the shop for the day.
A high-tech firm taking ages to reconcile accounts

You call the bank manager and she is still at the bank though it is late in the
evening. She promises to look into the matter and report back the following day.
Given the circumstances, there is no choice for you but to wait and live another
day without internet.

The following day, it is revealed that the bank has done the transfer correctly, but
it has gone into a different service account and therefore had remained as
unsettled. The service provider, though he says that he brings future to its
customers today, takes at least 24 hours to reconcile the accounts. For a large
high-tech company, it seems somewhat an odd practice.
Delays in completing transactions are costly

This was exactly what happened to this writer last week. The problem was solved
in three days. But in the modern world driven by advanced information and
communication technology or ICT, three days are like three years. Both the
banking industry and the telecommunication industry rely heavily on modern
technology. Hence, they should have facilities to process and complete
transactions instantaneously. If something goes wrong, it should be resolved
within three minutes and not within three days.
An issue involving governance of large corporations

This issue poses several questions about the governance structure in large
corporations, the gap between what they publicly promise and what they deliver,
the use of outdated technology and poor customer care, though he is the source
of their income and thus the guarantee for existence.
Banking transactions kept in secrecy from customers

There is a salient feature in modern day banking transactions. That is, they keep
the customer completely in the dark during the entire process. Once a customer
gives instructions to a bank, it opens its systems to fulfil his desire. Yet, all the
systems within the bank are kept closed to the customer. He would come to know
about its success or failure only after everything has happened.

This is better than the era of the physical mail now known as snail mail
during which all communications to customers about the success or failure were
sent with a time lag of about two weeks depending on the speed of the physical
mail in his country. But today, all communications should take place
instantaneously on a real-time basis. If customers have to wait two weeks at
worst or two days at best to know the outcome of his banking transactions, the
likelihood is that things can go wrong beyond the point of recoverability.

Imagine a bank customer using online banking services to pay someone and his
message is intercepted by a hacker who directs it to somewhere else. The
customer would know of it only when the other party complains about the non-
receipt of the payment.
Satoshi Nakamotos solution

To resolve this issue, in 2008, an anonymous computer nerd or a group of nerds


working under the pseudonym Satoshi Nakamoto came up with a proposal for a
peer to peer digital payment system bypassing the banking system.

The paper titled A peer to peer electronic cash system (available at:
https://bitcoin.org/bitcoin.pdf) provided the blueprint of producing a digital
currency now known as Bitcoin and its operational mechanism called the
blockchain. The blockchain is a public ledger that can be used by many to update
and view transactions a feature which qualifies it to be called a distributed
ledger.
Blocks of transactions organised as chains to build a blockchain

Transactions are grouped into blocks and timestamped so that the verification of
the payment becomes easy, double payment prevented through timestamping,
peers are organised as networks avoiding third party intervention, and facilities
are provided to combine or split payments.
An electronic coin, according to Nakamoto, is a chain of digital signatures. Each
owner possesses two keys, a public key that can be seen by others and a private
key known only to him, generated by the computer system. Coins are transferred
by the present owner to another by signing a hash an authentication that it is a
genuine transfer from the previous owner and the public key of the next owner,
while simultaneously authorising the transfer by signing his private key.

Bitcoins are stores in a digital wallet and the use of the public key and private key
will enable the new owner to open his wallet and release the coins stored therein.
Thus, there is a chain of all the transfers made and they are all connected through
a node a point at which two digital signatures meet. The new owner can verify
the authenticity of the transfer by looking into the public keys of all the previous
transfers.
Involvement of many people in completing a transaction

Blockchain is a distributed network where all parties will participate in the process
simultaneously. There is no need for one person to complete his work for another
to begin. How a distributed ledger works has been explained by William
Mougayar by comparing it to a Google Doc and contrasting it from the traditional
Microsoft Word document.

The present way of group editing a document is to produce it first as Word


document, send it to each party as an attachment through email and get them to
open, edit and send back to originator of the document. Till it is sent back, no
party in the group can know what the other party is doing to the document and
how he is editing it. There is not only a time lag, but also a dark cloud of ignorance
separating them from each other. This is how banks at present complete
transactions with two customers.

Suppose customer A wants his bank to deduct a certain amount of money from
his account and pay to customer B. The bank after receiving the instructions
blocks both accounts to the parties concerned. It deducts money from A and pays
B and opens the system for the two customers after the whole transaction has
been accomplished. Until the bank opens the system, both customers are in the
dark and do not know what is happening to their transaction. Any inquiry from
the banker would be responded by a work in progress message.
Everyone knows everything

All transactions in blockchain are publicly announced and therefore, all those
operating in the chain are privy to that information. It thus takes away from
customers the veil of privacy which is provided to them by the traditional banking
system. This is a weakness of the blockchain.

To resolve the issue, Nakamoto suggests that the public key through which the
transaction is publicly announced should be kept anonymous. In that way, though
the public can see that someone is sending money to another, without knowing
the identity of the parties, they cannot point it to anyone. In the stock exchanges,
similar practice is followed. Accordingly, though the stock exchange releases the
data on the value and the quantity of a trade, it does not release the identity of
the transacters.

Nakamoto says that this anonymity could be strengthened by having a system


where transacters could have different blocks for different transactions.
Therefore, for each block, there would be separate public and private keys. Since
the public keys through which the announcements are made are different, it is
difficult to trace a transaction to any particular party or a group of parties.
The blockchain revolution

Blockchain has brought in a revolution in the use of the internet. Hence,


sometimes it is referred to as the Website 3.0 where there is connectivity with a
number of parties and forward and backward interaction with them. A number of
business applications have been developed by using the blockchain, according to
website BlockGeeks.

a) Introduction of smart contracts in which performance criteria are coded


through distributed ledgers so that delivery of obligations could be linked to the
satisfaction of designated requirements.

b) Blockchain can promote peer to peer transactions so that the intervention of a


third party could be eliminated, thereby establishing a true sharing economy.

c) It can also increase crowd funding by enlisting the support of many parties at a
relatively low cost and enhanced convenience.

d) Blockchain is fully transparent and publicly available so that it could improve


the governance of society and could be used in elections or public polls.

e) Supply chain auditing, a must for ensuring quality and timely delivery, could be
introduced through transparent distributed ledgers.

f) Safety of file storage can be assured by distributing the data to many points in a
network making it less remunerative for hackers to hack.

g) By digitising personal documents and information, distributed ledgers can help


better identity management.
Online transfer of value

Blockchain is a revolution in the application of internet today. While internet


transfers information, blockchain transfers value (see:
https://www.youtube.com/watch?v=Pl8OlkkwRpc). Hence, it is sometimes
referred to as internet of value. When someone sends an attachment like a
document or power point presentation via email, he sends only a copy. The
original is still retained by the sender. However, in the case of the blockchain, it is
the real things that are transferred.

For instance, if someone makes a digital currency payment, he uses the original
and not a copy to make the payment. When the originals are paid via the
blockchain, there is the possibility of hackers intercepting them in the cyberspace
and changing the direction of payment to someone else. The blockchain has
introduced safety measures to prevent such midway hacking. Those safety
measures have been successful in limiting the incidence of hacking virtually to a
zero level.
Promise of making a giant one day

So far, the use of Bitcoin or the associated blockchain has been a drop in the
ocean. As at end of September 2017, the total number of Bitcoins issued had
been only 16.6 million with a value of less than $ 100 billion as against a global
GDP of more than $ 80 trillion. But, as a regulatory, accounting and auditing
system, it demonstrates a compelling promise for the future.

The regulatory function performed by the blockchain is assured by its coding


system. The compliance is met through the network that rejects any unauthorised
instruction for payment. Even a restrictive monetary policy has been built into the
master of the blockchain, Bitcoin, by limiting its supply; the computer programme
that governs the issue of Bitcoins does not allow oversupply.
Excessive bureaucratic control of present payment system

The present financial system is a centralised operation and all centralised


operations are subject to risks on account of the excessive bureaucratic controls
they have introduced. However, the blockchain is a decentralised operation.
Hence, it commands superiority over financial institutions.

The flexibility which the blockchain enjoys and the speed at which it could process
and effect payments are some features demanded by customers. If banks do not
take any action to meet them, it is inevitable that banking customers would move
to systems that can satisfy their desires. In this sense, the blockchain will be a
killer App for banks.
Many following Bitcoin and the blockchain

Now there are proposals to use the blockchain technology to deliver government
services to citizens under an App called govchain.

With the threat of digital currencies posing to central banks, Bank of England and
the Bank of Sweden have announced that they are seriously considering the issue
of their own digital currencies in the future. The major banks like the Citibank and
the Bank of America are experimenting with their own digital currencies. The IMF
too, according to its Managing Director, Christine Lagarde, is considering the issue
of its own digicoin. All these systems will use the blockchain technology as the
operational platform.
Bank customers need not be in the dark

The advantage of the blockchain technology is its transparency. The payments are
effected by the parties involved by directly by logging into the system. The
mishaps where a payment has been made but the recipient denies its receipt
could be avoided through the public participation of parties involved in the
payment.

Hence, it behooves Sri Lankan banks and corporations to consider the adoption of
this revolutionary technology for their operations too.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka,
could be reached at waw1949@gmail.com.)
Posted by Thavam