• Thu. Feb 22nd, 2024

Blockchain technology for digital financial inclusion

By Shilpa Mankar Ahluwalia

Increasing access

Access to affordable financial services (savings, payments, credit, insurance, investments) has been and continues to be a focus area for Governments and regulators globally. The Reserve Bank of India (RBI) has emphasized that a critical focal point for the digital payments push in India has been financial inclusion targeted not just at individuals but also small and medium enterprises, all of which are groups that lack access to basic financial products.

Digital financial inclusion aims at increasing access via mobile or internet based financial solutions and given the high mobile phone penetration in India, is probably one of the most effective ways to widen 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 become a financial inclusion enabler

Blockchain can be a powerful tool to achieve the objective 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 land records) can be recorded on a blockchain solution which, by its very design, is accurate, open and transparent.

In a traditional financial ecosystem, financial institutions act as intermediaries to verify and settle financial transactions. For example, a payment transaction will typically require a payor bank, payee bank, and a clearing house, which adds to not only costs but also time for settlement. A blockchain based payment transaction can be completed instantly, without the need for any intermediaries (based on consensus of the participants in the network) and at very little or no costs to the participants.

Several blockchain based cross-border money transfer and remittance solutions have been developed globally to enable unbanked segments (such as migrant workers and immigrants) to send money overseas at a fraction of the cost that would be payable otherwise.

CBDC & Blockchain

Today, several blockchain solutions are linked to private cryptocurrencies. However, that need not be the case. The RBI has announced a roadmap for the adoption of the eRupee (i.e., its’ 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 consistently been articulated is the ability to achieve wider penetration in remote areas and to develop low cost, instant cross-border payment solutions.

Smart contracts

A key feature of a blockchain based solution is the ability to build in 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. Just by way of an example, assume that individuals with addresses linked to a potential pin code are eligible for a certain insurance payout or loan (triggered by a flood in that area). The smart contract would be able to verify the address (linked to a Aadhaar number) and automatically make a transfer to such person’s bank or mobile wallet.

Digital Identity Management

The inability to provide required identity documents and costs associated with manual KYC checks has been a consistent roadblock for unbanked 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) such that the record is transparent, immutable and can be updated easily. Such a digital identity will allow financial institutions to onboard unbanked low-income customers quickly 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 can be targeted at widening access and achieving the goals of financial inclusion. Widescale adoption of blockchain solutions however will require much more discussion so that people are made aware of its benefits, a regulatory framework that supports a trusted blockchain based infrastructure and a coordinated approach among institutions to allow for interoperability across multiple platforms.

The author is head, Fintech, Shardul Amarchand Mangaldas

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