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SMACing the Bank: How to Use Social Media, Mobility, Analytics and Cloud Technologies to Transform the Business Processes of Banks and the Banking Experience by Balaji Raghunathan and Rajashekara Maiya; ISBN 9781498711937
Supply Chain Risk Management: Applying Secure Acquisition Principles to Ensure a Trusted Technology Product by Ken Sigler, Dan Shoemaker, and Anne Kohnke; ISBN 9781138197336
Software Engineering with UML by Bhuvan Unhelkar; ISBN 9781138297432
Big Data and Computational Intelligence in Networking by Yulei Wu, Fei Hu, Geyong Min, and Albert Y. Zomaya; ISBN 9781498784863
Mobile SmartLife via Sensing, Localization, and Cloud Ecosystems by Kaikai Liu and Xiaolin Li; ISBN 9781498732345
Empirical Research for Software Security: Foundations and Experience by Lotfi ben Othmane, Martin Gilje Jaatun, and Edgar Weippl; ISBN 9781498776417
Big Data Analytics with Applications in Insider Threat Detection by Bhavani Thuraisingham, Pallabi Parveen, Mohammad Mehedy Masud, and Latifur Khan; ISBN 9781498705479

Introduction to Blockchain and Its Applications in FinTech

Parag Y. Arjunwadkar

In 2008, when financial trust was at its lowest with financial crisis on the horizon, Satoshi Nakamoto evolved a concept of chaining of transaction blocks in a distributed manner in 2008. The same was implemented in creating the first digital currency, Bitcoin. Since then the concept has evolved into every possible use cases that can potentially be implemented using blockchain. Some of the blockchain concepts that have been implemented or being experimented include building a non-mutable ledger for government records, creating other digital currencies besides bitcoin and using it as a distributed ledger for cross border transaction.

Blockchain Explained

The way blockchain works is when an individual requests a transaction and the same is broadcasted to a network, the network nodes validate the transaction using pre-defined logic and rules. The verified transaction is then combined with other transactions to create a block. This block is then added to the existing chains of block, thus making it unique and non-modifiable. The transaction then is deemed as complete. The blockchain concept has been employed in building digital currencies because it is secure, cannot be duplicated and at the same is distributed globally without intervention from government agencies. Though there have been multiple debates of the same being regularized by central banks and governments, nonetheless is being adopted by some industry players as a valid currency. Some of the key aspects of blockchain are:

It Works as a Distributed Ledger: The transaction in a blockchain is shared across with multiple nodes and all the entities can edit the same single copy of the transaction. This feature of blockchain makes it to be used like a distributed ledger and is useful in all the multiparty transactions. In most of the multiparty transactions, a lot of time is spent because only one entity edits the record and while the entity is editing the record it locks the record for editing by any other party. Once the record is edited, the entity submits it for viewing and reviewing to all the parties and unlocks for editing. Any party thereafter has any issues or changes goes through the same processes. In financial transactions, this could take multiple iterations and days to arrive at a consensus between different parties involved. This also involves keeping multiple copies of database at individual nodes, versioning every transaction and encrypting every transaction. Thus, besides consuming time, the entire multiparty transaction also involves replicating the infrastructure and software at each of the nodes. This could also lead to infinite amount of interactions for a single document or system of records.

A solution to such scenarios was to introduce a third party like clearing house that would identify the protocols of information exchange and authorities with individual entities in the nodes, that could alter only a certain set of information in the document. Additionally, such intermediary agency also defined rules or workflows to ensure how document flow is governed across multiple entities. Therefore, multiple entities with replicated infrastructure, system of records and software evolved over time.

In contrast the distributed ledger is a concept which postulates that the database is shared, replicated and synchronized amongst the members of the network. The distributed ledger records a transaction by an entity in the network and then the same true copy is visible to all the participants for viewing and editing. The distributed ledger can also impose rules on the sections within that record, that is available for individual participants to edit and since all the entities within the network are updating the same record, therefore any changes made are available real-time to all the available entities.

All the participants in the distributed ledger agree on a mechanism or a logic to update and approve changes on the document through a consensus mechanism. Since the record is managed by all the entities involved, therefore distributed ledger eliminates the requirement of having a third party or an intermediary to set rules and workflow for consensus and authorization of the record in question. Also in a distributed ledger, every record has a timestamp and unique cryptographic signature, thus enabling audit trails and logging through the entire transaction history. In the financial world, multiple entities come together to execute a transaction often called as a contract.

Blockchain is a concept that closely relates to the distributed ledger concept as:

  • It records a transaction in a public or private networks
  • All the history relating to transaction is permanently recorded in a sequential chain of blocks
  • All the blocks are protected through cryptography and linked each other through a hash code using the cryptography
  • All the blocks are linked in a chain from the start of the transaction to the current state
  • Each individual entity can only view/ edit the blocks in the chain it is authorized to
  • Lastly, all the entities would be accessing the single true copy of the transaction all the time till it is posted.

Consensus: Members in a blockchain need to agree on validity of the transaction, before it is posted on the chain. Once a transaction is posted in a chain, it cannot be modified but can be appended only. It is necessary that all the participants executing the transaction or in the network need to agree to the transaction before the same is posted. The mechanism by which all of these entities agree to the validity of a transaction is called as consensus. There are multiple algorithms that make it possible for entities to agree on a transaction. Some of the common algorithms used for the same are the practical byzantine fault tolerance algorithm (PBFT), the proof-of-work algorithm (PoW), and the proof-of-stake algorithm (PoS). This mechanism ensures that the shared ledger have the exact same copies as any tampering to the same will have to occur across the board at the same time.

Cryptographic Hashes: It ensures that any changes to a transaction in a chain results into a different hash being computed than the original hash. The value gets changed even if there is minuscule change in the hash. If the origin and current hashes for the same transactions are different then the entities can confirm that the transaction has been tampered with. Hash functions is an encryption algorithm applied to input data in such a manner that the transformed output cannot be duplicated. The various algorithms that are applied in the blockchain world are SHA256 and RIPEMD.

Digital Signatures: All the transactions in a blockchain are stored digitally and therefore the identity of the transaction is available in digital format to all the entities within the system. A transaction in a blockchain is available to all the participants of the network, and consensus ensures the valid users have done valid changes to the same before it is posted into the chain. This system though encourages transparency amongst the members of a network, but it could also lead to exposure of information that is selective in nature. One of the solutions is to encrypt the transaction using cryptographic hashes and then provide public keys to decipher the same. The solution still does not address the privacy requirement associated with a transaction and one of the mechanisms transaction owners could employ is digitally signing the document and providing a private key to individual stakeholders in the network. This will ensure that the document is opened by the right entity and the right individual in the organizations, and is viewed/ edited and approved by only the responsible people authorized to do the same respectively. Thus, digital signatures ensure prevention of fraudulent entities altering the document before it is submitted to the chain.

Smart Contracts Could Be Executed in a Blockchain: Blockchain works as an online repository of all the transaction & takes care of the version management of transaction on its own. By the very nature of Blockchain, everything in it is executed in a digital mode. The way blockchain is proposed to work is that if the relevant parties in a network agree through a consensus then the transaction is considered as valid and is stored in a chain of transactions, but for their execution human intervention is needed. An example would be a contract that would have a penalty clause could be entered in blockchain database as a valid transaction, but will need human intervention time and again to get the same executed. In a smart contract, there would be conditions applied to the transaction and as soon as the conditions are met the next set of transactions would be automatically initiated. In our example, if an individual is not able to provide deliverables in time as per the contract condition, the blockchain would deduct the penalty automatically from owner’s account. In comparison to traditional financial transactions of similar nature would be handled through escrow account that individuals can withdraw from only if certain conditions are met, else the amount gets refunded to the owner. But all of this would be managed through multiple human intervention steps.

Besides the above-mentioned features there are multiple other features like auditability, exception handling etc. that are built in into a blockchain system inherently by the way it is developed. Additionally, there could be extended implementations that ensure different aspects of a unique, non-refutable transaction is maintained and delivered through block chain. Some of the companies delivering blockchain or distributed ledger solutions are

Fintechs Adopting Blockchain to Bring in Security and Transparency

R3CEV is a New York City firm that leads a consortium of more than 70 of world’s big financial institution in research and development of blockchain database usage in financial systems. The consortium’s joint efforts have created an open source distributed ledger platform called Corda that is more tuned towards the financial world as it handles complex transactions and restricts access to transaction data. R3 in 2017 declared that Corda is a distributed ledger and not a blockchain. Corda participants, can transact without the need for central authorities creating a world of frictionless commerce. Corda architecture was heavily influenced by the following use-cases:

  • A cash balance (e.g., The following bank and I agree that they owe me $1 million).
  • A security under custody (e.g., The following custody bank and I agree that I own 1000 shares of the following corporation).
  • A bilateral derivative agreement (e.g., Banks A and B agree that they are parties to the following Interest Rate Swap (IRS), which means they agree to exchange the following cashflows (netted) at predetermined scheduled times with an agreed payoff formula).

The core concepts in corda model are

  • State objects, representing an agreement between two or more parties, governed by machine-readable Contract Code. This code references, and is intended to implement, portions of human-readable Legal Prose.
  • Transactions, which transition state objects through a lifecycle
  • Transaction Protocols or Business Flow, enabling parties to coordinate actions without a central controller.

The combination of state objects (data), Contract Code (allowable operations), Transaction Protocols (business logic choreography), any necessary APIs, wallet plugins, and UI components can be thought of a Shared Ledger application, or Corda Distributed Application "CorDapp"). This is the core set of components a contract developer on the platform should expect to build.

Though Corda has been declared as a distributed ledger and not a blockchain platform, but it still has similarities to blockchain platforms like bitcoin and ethereum. Some of the similar properties are - Immutable states, multiple input and output, contract is a function and not a storage and code runs in a powerful virtual machine

Source code for Corda is available for download and a complete developer portal with documents, training, source code and support information is available on their website [42].

BitPesa is a company based out of Nairobi and has operations across multiple African countries and UK. Amongst many other functions they are transforming the remittance industry in Africa like never before. A large pool of people from sub-Saharan region and other African countries are living abroad and they typically use services of companies like Western Union etc. to make remittance back to their country. This is also true for business that wants to transact money from any country outside and the African / SSA countries. Besides using money transfer services, they would also transfer money using agents, who would take cash at one end and then send a message to a corresponding party at other end. The recipient would carry some kind of authority to receive the payments, and accordingly he would be paid in the local currency. The banks in these countries are scaling up their platforms to handle money transfer, but with the complexity of the platforms and the setup requirements along with the regulatory support to be built would take years and then the same has to be adopted by locals as well. BitPesa has tried to resolve this by using a bitcoin paradigm built on blockchain. The BitPesa platforms allows people to buy bitcoins in the local currency of transfer and then it transfers the bitcoins thus purchased to the country it has to be transferred. In African countries, it has tied up with bitcoin exchanges that would convert these bitcoins into relevant local currencies like the Kenyan shilling in Kenya. Since the entire bitcoin concept is built independently outside of any government or financial institutions, therefore it is free to send and receive bitcoins and the same can be done faster as well. It could take from minutes to maximum an hour to transfer your money using Bitcoin. Thus, by employing digital currency and BitPesa operating as a currency exchange aims to reduce the fees and time for money transfers as against their competitors who would do the classic remittance services. BitPesa also transfers money to wallets across Africa. It also enables B2B payments across Africa. For businesses, BitPesa says, "Using BitPesa, organizations can now take control of their payments to employees, distributors, or suppliers, as well as collect payments from African customers. This includes payment from popular mobile money services as well as delivery to an organization’s national or international bank account on the same day. We offer businesses the fastest and most cost-efficient way to make and receive payments in African currencies.:

BeForward, a Japanese company that exports used cars from Japan to Africa, required a solution for money transfer and specifically bulk transfers and with BitPesa solutions they can now make bulk payments in a much affordable and faster manner. BitPesa helps businesses make cross border payments across different countries & they offer a customized solution for treasury and FX needs of individual customers.

They have helped KJcargo, a logistic/shipping company, do payments from UK to Nigeria faster and with much fewer expenses. BitPesa has also tied up with BitBond a P2P lender connecting investors with small business owners, for their cross-border lending in African countries like Kenya, Nigeria, Uganda and Tanzania. BitPesa’s digital platform offers payment to and from the following key countries: Nigeria, Kenya, Uganda, Tanzania and Democratic republic of Congo. BitPesa has also enabled Eatout Kenya to send bulk payouts to their staff in Uganda [43].

Diamonds are said to be the most valued gemstones and different mythologies across the globe has attributed different level of importance to possessing or wearing a diamond. The Western world in particular, influenced by Italian belief that a diamond maintained concord between husband and wife, typically has a diamond as the stone to be set in wedding rings. The same is considered as sacrosanct and therefore people usually spend an enormous amount in buying the wedding ring. Besides the wedding ring Diamond has also been used by influential families to indicate status and privileges. Diamond being precious and being important beyond the financial aspect is preserved the most by owners, but if lost has the biggest financial and emotional impact for the owner. According to a 2012 study from association of bullion Insurers, around 65% of fraudulent claims go undetected at an expense of £2Bn.

Additionally, from a thief's perspective it is the easiest commodity to sell in the market, as there is no track record of the diamond maintained either by government or any of the private agencies. There is no unique identification number and the ownership record is only a bill. There is a very big possibility that the bill may either get damaged over time or the bill issuing entity may not exist anymore. Therefore, there was a need to make the entire process of buying and transacting diamond more secure, auditable and traceable over time. There are limitations to the extent, the entire security setup can help including personnel like police personnel and the infrastructure like CCTV etc. to prevent theft and fraud in the diamond industry.

Therefore, it is necessary to digitize the diamond, so that a single registry of the diamond can be maintained. The registry would help trace back all the valid and invalid transaction in the overall lifecycle of a diamond. Diamond are usually traded cross-border and across multiple parties. Therefore, the requirement for diamond registry was to have a single digitized version of the diamonds across multiple parties involved. And any transactions on the registry is done through a consensus of all the stakeholders, including government agencies.

Since some of these characteristics are in-built features provided by a block chain implementation, therefore EverLedger, a company based out of UK, built a system than helps digitizing the diamond and tracking all the transactions thereof using block chain technology. In turn ensuring the fraud and theft problems associated by diamond is tackled faster using traceable system of records.

There are over 1,000,000 diamonds digitized and uploaded on their platform, each diamond in the repository is identified uniquely using 40 data points related to each stone, along with the information about cut, color, carat, and clarity of diamond. Any diamond over 0.16 carats will also have a serial number inscribed on its girdle using the grading process. Though there is a possibility that thief might want to cut or reshape the diamond, but diamond values are because of the way a certain diamond is cut and presented in particular. Therefore, any further cutting would result in losses and in many case the appeal, attractiveness, dazzle etc. Consequently, we can say if a diamond is digitized, it is fairly more secure and the transactions are traceable resulting in low theft and fraud in the industry.

EverLedger is a business to business companies and have partnered with various entities in the diamond supply chain including the manufacturer, insurer, law enforcement agencies and 10 diamond certification houses around the world. Everledger builds this digitized repository on both public and private block chain to achieve a hybrid technical model. This allows best use of both the worlds, high security of public block chain combined with permissioned controls in private block chains. All diamond certificates are available on public block chain for verification and all sensitive information like police record, user information etc. is kept in the private block chain. Everledger in summary has built a digital ledger that tracks and protects valuable assets throughout their lifetime. Once a digital asset is created using specific characteristics of the physical assets then the overall governance is achieved through security rules which in turn uses fingerprints for authentication and then a rule based authorization for accessing and editing the relevant information. This way of digitizing physical assets has proven to be extremely useful for identifying the right ownership of the underlying assets and can be therefore used for multiple other asset type [44].

Every year millions of people are dying and are getting displaced because of natural disasters. There are children who are becoming orphaned. There are people in war ravaged countries that need help. Medical aid to the needy is also required. Thus, donations form a very key component of a progressive society. There is a large section of rich and middle-income people who understand the importance of donating and giving back to the society. In fact, a large number of them would volunteer to do social service. The problem with most of the donations is that it is not clear for what purpose and who will essentially benefit from the donation. Usually the companies accepting donations have a wider charter and they are reluctant to commit as to how an individual’s donation would help somebody on the other end.

  • Transparency of the Funds Collected: Most of the charities collect funds highlighting the underlying cause that they would serve. But the person donating never gets a statement of audit, highlighting how his fund was used for which event and on what day. Also, the segregation between how much all the intermediaries are making versus the end person in consideration is never declared and informed to person making donations.
  • Inefficiencies in Operations: It is much easier to collect funds, as it is usually done in a stable setup or country. But there are no reports provided to the user indicating if there has been efficient deployment of fund in the region or area for which the donations are collected. This is further complicated by the fact that it requires right management skills and governance to deploy and utilize funds in these difficult geographies. Therefore, often the donations are not deployed where it is needed the most by most of the charities.
  • Fraud: There has been many instances of frauds and money laundering being conducted by non-profit organizations, where-in they have swindled large amount of funds for self-interest, usually in collusion with the authorities. Such instances also take away the faith from government agencies monitoring the non-profit institutions.

All of the above have caused immense distrust amongst the donors and they would prefer a donation platform that is transparent, can be audited and gives them a freedom to choose the manner in which their funds are used.

helperbit is a natural disaster management platform that uses blockchain and GIS together to provide a fast and transparent P2P donation system. The system is used to connect the donors and those affected in direct contact with each other eliminating the middle man in the form of agencies collecting donations etc. It is one of the first platforms that exposes donation through a public ledger in block chain. The platform is available to all the users worldwide and therefore natural disasters happening worldwide would be made available by the network participants and the best information regarding the same would get updated, because of the consensus mechanism within the block chain. This in turn would ensure that the system would be transparent about the disaster, who is getting impacted by the disaster and in the end who is receiving the money. This view will be available to all the signed-in users of the helperbit. The user will have an option to donate to the event he is viewing using a pre-set and agreed algorithm or for any other event that would have a different algorithm.

The helperbit platform is also useful for charitable organizations as they can also show transparently how their funds are being used. The platform offers an opportunity to donors to send donations in less than an hour, all around the world. The platform does not charge donor anything if the payment mode is free. Thus, there are no commission or intermediary charges for the donor. Donors can also make payments using debit cards and the donation accepting individual or organization has the choice to accept bitcoin or the local currency. The platform provides multisignature wallet for all the users, a digital signature scheme that allows a group of users to sign a single document and being used as an additional security measure in bitcoin transactions. It drastically reduces the risk of theft and misuse of donations. All the members in the platform, can donate and receive the donations as well [45].

cashaa is a P2P Bitcoin exchange based out of UK and was formed in 2016. The basic principle behind cashaa is they want to create a transparent yet secure P2P exchange for bitcoin trading. cashaa is a bitcoin trading platform and works as a blind auction and escrow system to provide a private, real-time and competitive way to complete face-to-face bitcoin deals with cash. There are no trading fees at cashaa. Each deal between a buyer and a seller is private and cashaa will only disclose their mutual contact details when they enter into a deal and for that specific deal. Every deal is auction-based and the winner is the first who bids and matches the requests of the other party within the given auction time. cashaa keeps the bitcoin in the escrow wallet for the duration of the deal and releases to buyer if deal is successful, else releases to seller if the deal is not successful. The exchange is a complete online exchange and is very user friendly [46].

Hijro is an end-to-end open-account trade finance platform powered by distributed ledger technology by fintech company Fluent Financial Technologies. Hijro is a trade asset marketplace that helps connect lenders, bankers, and now even retailers to trade assets using a distributed ledger. Since it is using distributed ledger it can provide security and efficiency in origination, distribution, tracking, settlement, and reconciliation of trade assets. It facilitates a supply chain network with directly owners or other supply chains, to optimize working capital for businesses and streamline supply chain operations. It is also able to extend a corporation’s ERP and e-invoicing platform through its trade asset marketplace to provide supply chain finance and receivables finance solutions directly to the customers [47].

Slock.it, headquartered in Mittweida, Germany, is using block chain and IOT for developing one of the most innovative platform for Peer to Peer sharing. They are developing a peer to peer renting, sharing and selling platform on blockchain, and the objects within the network would be autonomous. The platform is called as Universal Sharing Network or USN an open source infrastructure on which blockchain application modules can be deployed. Once an object has been on-boarded to USN by manufacturer, owner or anybody having possession of the same. Then the same would be available to be rented or on pay-per use basis for all the other users on the blockchain. The access will be controlled and monitored by the blockchain network and the owner or manufacturer will be able to provide or revoke access to the user by unlocking or locking the object through the USN. Slock.it is using the smart contract and iOT technology to bring the implementation to reality. Through USN and objects mounted with iOT an owner would be able to control the access and usage time for the device using simple mobile devices.

The same could also be extended to a level where the devices are talking to each other automatically. Therefore, using USN and iOT a door to a particular facility rented only for an hour could open itself as soon as the user with access to the facility enters for the said duration. The user will open the app, find the object, will pay for it and would use the same. Therefore, now mobile phone becomes key to all the objects. There is no need to register or login for the service. Slock.it is building the next generation platform for the sharing economy. The USN is envisaged to form a financial market where machines can not only sell or rent themselves, but also pay for each other’s service. For example, a fridge could order its own repairs and pay for the same as well. Slock.it aims to address security, identity, coordination and privacy across millions of devices by making them autonomous. Slock.it gives connected objects an identity, the ability to receive payments, enter into complex agreements and transact without intermediary. The platform being developed is a full-stack platform and the architecture view is shown in Figure 1.

Architecture view of slock.it platform

Figure 1. Architecture view of slock.it platform.

They are also building an Ethereum computer, which will help to securely rent access to any space or compatible smart objects, without intermediaries. The Etherium computer will enable both customers and businesses to convert their assets into income. The framework is modular and event-based that can be extended to control any embedded devices using smart contract on ethereum blockchain [48].

Cambridge Blockchain is a blockchain based identity management solutions company. It specializes in designing blockchain software applications for large enterprises with a specific focus on identity management. As mentioned above a blockchain consists of node and any transaction comprises of chains of block that has been accepted by the participating node through a consensus mechanism. One of the most important element therefore in the blockchain is the identity of a node and once the node has been identified flawlessly the entire transaction becomes trustworthy. This also has become one of the key regulatory requirements for most of the financial institutions in the form of

  • The KYC and AML requirement mandates that financial firms should have all the relevant and necessary data of their customers
  • For most of the identity related fraud onus of liability is usually but upon the bank.

Therefore, Cambridge Blockchain creates an identity management and verification cryptograph based on AML and KYC requirement, based on country specific regulation. The same is stored virtually and a part of this information is released to counterparty at the time of transaction to suffice the counter party's requirement. The entire solution is built on distributed ledger, where an enterprise is a node and Cambridge blockchain provides a cryptographic code for each node based on KYC and AML requirements. The key aspects of Cambridge blockchain platforms are as follows

  • User control of personal identity services
  • Reusable multi-platform governance efficiency
  • Trust assurance for customer privacy
  • Enables regulatory compliance for financial institutions, corporate clients & identity partner

Cambridge-Blockchain has been working to develop a new privacy-protecting European Identity platform. The Platform will offer business and consumers a trusted environment to exchange and manage personal data online and compliant with regulations like European GDPR [49] [50].


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