Putting Blockchain into Practice

What are We Trying to Solve?

Blockchain is a distributed immutable ledger that is encrypted. It is immutable for two reasons: time stamp and the encryption of preceding content. This looks simple enough. On face value, this does not solve much. Google sheets can be tweaked to become an immutable ledger with open access. We only need to find a way to introduce one-way encryption so that only the owner of the original node knows the verification.

It is surprising how hard it is to find all these in one system. Decentralization has been made possible in the past decade due to better internet penetration. Earlier, it would not be accessed in real time. Encryption has become very important in the past few decades and privacy is being equated with a fundamental right. People would not want someone to know their health records, their expenses, their purchases and so on. Some western jurisdictions have taken a very strong stance toward privacy and penalized corporates for their lapse.

Cambridge Analytica was a famous scandal highlighted in the light of the US Elections in 2016 where data from Facebook and other sources was used to target advertising in a way that it is said to have affected the outcome of the elections.

Opportunity flows from needs. Privacy is a need and cryptography is a solution. To recall, cryptography is one-way encryption. This means that all areas where privacy is required are places where blockchain has a natural application. Similarly, any place where ledgers are involved would have an application of blockchain. These cases might or might not require encryption. Immutability provides trust to any transaction. A buyer does not have to trust the seller (and with encryption, the buyer does not even need to know the seller). Transparency is needed wherever there is money involved and when the rest of the process is not in the hands of the initiator.

From this we deduce that health, finance, real-estate and governance can unlock value through implementation of blockchain.

Blockchain is at the back end in any process and no one gets (or needs) to see it. To understand this better, turn to WhatsApp. When you send a message to a new person you get a message saying that all messages are encrypted. This does not mean that the person at the other end cannot understand your message. It means that during transmission it is encrypted. Communication between the receiver and sender is not different, it is only the journey through the medium that is encrypted. Similarly, in the case of blockchain, the components and user interface are not affected by this. Just the log of all transactions is maintained on the blockchain and one can be assured of privacy.

Some Useful Distinctions

Difference between Blockchain and Cryptocurrency

One is to put things in an immutable way, the other is to have that as currency. Cryptocurrency, as we know it, is currency that is based on the blockchain.

These can be understood as concentric circles where cryptocurrency is a token based on blockchain.

Public Versus Private

A public blockchain is one in which anyone can participate in any capacity whereas in a private blockchain the owner of the blockchain defines who all can participate and in which capacity. This means private blockchains are ‘permissioned’ blockchains where only participants selected by the owner of the blockchain can verify the information.

Since public blockchains involve anonymity, most of the blockchain solutions that are being developed for internal use by corporates would be private blockchains. Solutions for governance would have a combination of both where some data is available to the public and some other data is accessible based on permissions.

Possible Applications

Finance

Since blockchain shot to fame with the bull run of bitcoin. the first application of blockchain is that of payments.

Know Your Customer

According to the Report of Steering Committee on Fintech' putting Know Your Customer (KYC) and Anti-Money Laundering (AML) systems on blockchain would reduce costs and effort by banks to comply with these requirements.

Similarly bill discounting could be made a lot easier. If a manufacturer has a work order, they could put it on the platform and a bank could verify the work order and discount the bill, providing finance to the manufacturer. In case of default the record of the buyer would reflect this and would be for all to verify. These records would also allow people to have a credit history, which is valuable for lending institutes.

Cross-Border Transfer

If you want to transfer money to a relative in another country, the payment is routed through multiple banks and intermediaries that receive, collate, net-off and transfer the money. This leads to a long time and consequently high cost in such a transfer. Application of blockchain in these cases would lead to intra-day and inter-bank liquidity. Use of digital tokens would further expedite the payment process but this assumes cryptocurrency (and not just blockchain). Some banks have worked with Ripple to explore inter-bank-cross-border transactions. Ripple is a cryptocurrency that reduces settlement times to less than a few minutes from a couple of days.

Securities Transactions

Stock market trading is famous for T+2 settlement and T+0 settlement. T+2 means it takes securities two days after the day of trade to reach the account of the buyer. Similar T+0 means the securities are transferred to the account of the buyer on the same date. T+0 is available mostly in cases where the buyer has a bank account with the intermediary. This way the monetary transaction and the reverse securities transaction are done by the same intermediary for the same person. This cuts down on the KYC time. Application of blockchain would radically decrease settlement time for securities.

International Trade

Payments in international trade are the most important because of lack of trust between traders. Banks through ‘Letters of Credit’ (LC) bridge this gap to an extent. The Punjab National Bank Scam2 involving Nirav Modi highlighted the lack of reliability of these LCs. Blockchain is a secure and fast way of ensuring that the issuing bank and the honoring bank would know about the intent and actions of relevant members.

Smart Contracts

A smart contract is a way by which conditions are fed to a machine and money is blocked therein. When the coded event occurs, payment is automatically transferred. This is similar to what PayPal was for e-commerce. Since all this is on a blockchain, there is little doubt about the payment. An external and independent source confirms the occurrence of the event. This source is called Oracle. A service that tracks flights is an Oracle in case of flight insurance. Similarly, the Met’ declares certain districts as flood affected or drought affected. In case of crop insurance this could be used to trigger compensatory payments by the government.

In case of sports betting, the payment risk is assumed by the broker. If someone were to use ESPN or another sports application as an Oracle, then all wagers could be coded as smart contracts and counter-party risk would be assayed.

The scope for blockchain implementation in this is huge. Contract-related litigation is a huge component of Ease of Doing Business in any jurisdiction. Contracts have two sides, performance and payment. If either or both of those can be secured then the other can be tamed. In case of smart contracts, the payment is blocked and the performance is evidenced by an Oracle. This would lead to fewer disputes causing more and better trade.

Litigation, non-execution, non-payment. If we guarantee one side then the other would be solved automatically.

Property

Property Records are the most precious possession of most citizens. Any error in these could lead to revocation of property rights, problems in insurance claims and at time of sale/hypothecation. There is only one ownership record for all properties, and that is with the government. The process of change in ownership of property through sale/purchase/mortgage and the process of change in records are each carried out in different offices and come under different departments in certain cases. While property sale/purchase is a revenue item, that of land ownership is a record item. This divorce further adds to incorrect and incomplete updating of records.

Any error or malfeasance on part of someone with access to ownership records can lead to a lot of monetary loss and frustration. It is not easily possible to trace these changes to correct these. Title suits can take years to get resolved and in the interim period the property is useless.

If the two processes could be linked in a secure and verifiable way, it would solve a lot of problems. While some states have tried to link land registry through digitization and making the records open, blockchain can add a layer of security for land owners.

Healthcare

Having and maintaining medical records is beneficial for patients. They help doctors diagnose things better and prescribe a smoother medical route. It would lead to fewer experiments (by knowing what the patient has already gone through). Tracking of blood pressure and heart rate in our phones can provide a snapshot of the patient’s wellbeing to a trained doctor. Family history would allow a doctor to target tests better and to monitor progress.

Accumulation of these benefits is prevented by privacy concerns associated with Electronic Medical Records. Health data is used by companies for designing solutions and to study the impact of interventions vis-a-vis a control group.

Data can be used for marketing new drugs to people which is at the boundary of ethically accepted practices. This data can also be used to malign someone or to prevent them from taking up public office. Because of all these use cases and concerns regarding medical data its cost on the black market is very high. Anecdotal evidence4 suggests that medical data is thousands of times costlier than credit card data. This reflects a clear gap in the market. If there were a secure way for people to share anonymized data in exchange for money or credit (that can be used on the platform, in the form of tokens) it could be a win-win situation.

De-identification of data is a key component. Blockchain would ensure anonymity and control. The patient can decide who can view what component of the report and whether the updated content would be accessible. Cryptocurrency can ensure that people who consent get paid for sharing it.

Insurance

Insurance is one industry that requires a lot of documentation and verification. This is done multiple times. Insurance companies go to great lengths to ensure that they are paying the right person with the right set of documents for a covered event that happened during the insured period. All this verification takes time and effort. Efforts duplicated at different levels to ensure there is no wrong-doing on the part of the insured, inspector, processing staff and others.

Car insurance typically involves the following steps: [1]

  • • Claim report
  • • Damage report
  • • Internal processing
  • • Bill submission by mechanic
  • • Verification
  • • Payment

For each claim, the company wants to assess

  • • Whether the same car was insured
  • • Whether the driver had a valid driver’s license
  • • Whether the documents of the car are in order
  • • Whether a police report, if needed, had been filed
  • • Whether this damage existed before the insurance period
  • • Whether this damage existed after the insurance period
  • • Whether an independent party has seen the claim5
  • • Whether the correct claim has been filed by the mechanic
  • • Whether the part that had to be repaired was replaced or repaired
  • • Whether the prices of the parts are as per notified prices
  • • Whether the bills are for the right car
  • • Whether the dates on the bills and those on the claim match

Assessing all these basic things requires matching and verifying documents. This is subject to human error and malicious intent in some cases, to counter which it happens at multiple levels. While these checks seem simple, they are not so. Also, the number of claims processed by an insurance company is too huge for it to be done efficiently. There are anecdotes that a public sector general insurance company took over three days to verify that the vehicle for which a claim was made was in fact covered by the company.

In case this data were available in a digitized format, verification could be coded and conducted effortlessly. On blockchain, this could be immutable and distributed, which would ensure transparency.

Supply Chain

When goods are moved from the producer to the user, or when high-value items are resold, one major concern is their genuineness. Organic fruits and vegetables command a premium. The resale value of a Rolex is very high. Wine from certain vineyards is valued more. How can the end-user be assured of the origin of these products? Blockchain is being considered as a major solution.

If at each stage of processing or change in ownership through agents and transporters, the data is fed on to a blockchain, the end-user can simply scan the product and verify the origins. This would require the producer to enter all relevant details of the product on the blockchain and affix a code or engrave a microcode on the product that can be scanned and the information would be made public. This makes blockchain a good application wherever counterfeit goods are a problem. This extends to pharmaceuticals as well as durables. Companies such as Walmart and Pfizer have conducted successful pilots with this technology.6

Governance

Government is the biggest spending entity in the country. Most of it is mired in processes. Tracking that money is a headache for most government departments themselves. The subsidies and grants disbursed by the Central Government pass through multiple hands before reaching the beneficiary. Blockchain can enable tracking of government funds and it is open to audit at all times by anyone who may wish to see it. Any claims made by beneficiaries can be quickly resolved by verifying them on the blockchain. Transparency and immutability would be very useful in ensuring that the money reaches the right people.

  • [1] Insurance cover • Event which in this case is an accident • Claim • Claim verification
 
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