What do you understand by bitcoin and block chain? Examine the implications of these technologies for banking sector. (200 Words)
Bitcoin and blockchain are two internet technologies which are in their initial stages of development.
Bitcoins refers to peer to peer digitally verified currencies dependent on digital mining and digital transactions.
A blockchain is a composite word with each word having specific meaning. Block refers to any payment agreed to be paid between the two transacting parties. It is much like a promissory note issued by a central bank to the bearers. At the same time, it works like a hawala system which involves transactions by swapping different currencies at different countries to reach final recipient, needless to say, the whole system working on the basis of trust. Every mediator knows the payment amount or ‘block’ which is fixed. A blockchain, like a hawala system, allows financial services to be materialised without the need of a bank. This is possible by way of development of transactions systems by IT experts in the respective financial service providers to settle payments internally without routing it through banks.
The banking sector has all reasons to be alarmed by the growth of the above two concepts as both clearly intend to bypass the role of bank for settlement of transactions. Although it may be taken as positive on the fact that banks and therefore government’s burden will reduce, but it should also be kept in mind that these are recent technologies with no proven success.
Way forward
Looking at pros and cons of these digital currencies and present competence of our financial and banking institutions there is need for step wise and phased introduction on small level. After various review and time further process and decision may be taken.
Technical details of BlockChain
A blockchain is an internal network system based on data structure concept that needs three essentialities –
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Two entities agreeing for mutual transactions to be settled electronically e.g. financial service firms
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An internal computer network for such transactions
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Digital signatures at every point of transaction chain along with freezing of transactions at every stage to negate manipulations (addition/removal) in transaction data
The IT experts for the two agreeing financial service firms A and B develop such internal network system between them (including their subsidiaries as links of blockchain) with following twin objectives – avoiding third party in transaction e.g. central bank working as a mediator for transactions and reduce the time of transactions.
Application of BlockChain:
The adoption of blockchain by India’s banks could help avert frauds such as the one at Punjab National Bank as the disaggregated and transparent nature of the technology, which updates information across all users simultaneously, would have ensured that various officials would have instantly been alerted to the creation of the letters of undertaking (LoUs), according to bankers and blockchain specialists.