By Shilpa Mankar Ahluwalia
Access to affordable financial services (savings, payments, credit, insurance, investments) is and will continue to be an area of concern for governments and regulators worldwide. The reserve bank of India
Digital financial inclusion aims at increasing access through mobile or web-based financial solutions and given the high penetration of mobile phones in India, it is probably one of the most effective ways to broaden the distribution of financial goods. It is well documented that more people in India have mobile phones than bank accounts.
How can blockchain-based solutions enable financial inclusion?
Blockchain can be a powerful tool to achieve the goal of digital financial inclusion. But first it is important to discuss what exactly a blockchain-based solution is. Blockchain technology or a distributed ledger technology is essentially a decentralized record of transactions. Any kind of transaction (such as those based on money or goods) or data (such as identity documents or cadastral data) can be recorded on a blockchain solution that is accurate, open and transparent by design.
In a traditional financial ecosystem, financial institutions act as intermediaries to verify and settle financial transactions. For example, a payment transaction usually requires a payer’s bank, a payee’s bank and a clearing house, which not only increases the cost but also the time for settlement. A blockchain-based payment transaction can be completed instantly, without the need for intermediaries (based on consensus of the participants in the network) and at very little or no cost to the participants.
Different blockchains Cross-border money transfer and remittance solutions have been developed worldwide to enable unbanked segments (such as migrant workers and immigrants) to send money abroad at a fraction of the cost that would otherwise have to be paid.
CBDC & Blockchain
Today, several blockchain solutions are tied to private cryptocurrencies. However, that doesn’t have to be the case. The RBI has announced a roadmap for the adoption of the eRupee (i.e. central bank digital currency or CBDC) which is well positioned to become the underlying currency for several blockchain based solutions in India. The RBI has indicated that it is considering blockchain as one of the technologies to support the e-Rupee. A key use case for the e-Rupee that has been consistently formulated is the ability to achieve wider penetration in remote areas and develop low-cost, instant cross-border payment solutions.
A key feature of a blockchain-based solution is the ability to embed smart contracts into the platform. A smart contract is a simple if/then program that runs when certain conditions are met. Smart contracts can be very useful in the distribution of government benefits. For example, suppose that individuals with an address associated with a potential PIN qualify for a particular insurance benefit or loan (caused by a flood in that area). The smart contract could verify the address (associated with an Aadhaar number) and automatically make a transfer to that person’s bank or mobile wallet.
Digital identity management
The inability to provide required identity documents and the costs associated with manual KYC checks have been a consistent roadblock for non-banking segments to access basic financial products. Blockchain-based identity solutions have the potential to solve this problem. Low-income individuals can be given a digital identity (stored on a blockchain) so that the record is transparent, immutable and easy to update. With such a digital identity, financial institutions can quickly onboard unbanked, low-income customers using a cost-effective KYC solution.
Next steps India is one of the few jurisdictions that will soon have a CDDC (the e-Rupee) not only for wholesale use but also for retail use. The e-Rupee has the potential to power the next generation of innovation in blockchain-based financial solutions, several of which could be aimed at broadening access and achieving financial inclusion goals. However, widespread adoption of blockchain solutions will require much more discussion so that people become aware of their benefits, a regulatory framework that supports a trusted blockchain-based infrastructure, and a coordinated approach between institutions to enable interoperability across multiple platforms.
The Author is Head, Fintech, Shardul Amarchand Mangaldas
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