Can an alternate technology that aims to curb fraud gain credence?
Blockchain gained popularity about seven years ago, as the underlying platform powering Bitcoin, a popular virtual cryptocurrency. However, over the past year, several large corporations including many investment banks have begun to test and work with blockchain technology, exploring its potential to reduce costs and improve efficiency of transactions.
Blockchain overcomes the traditional challenges of having a ‘wall of security’ around data that can (in theory) be breached by those having access to it, such as administrators. Often such access can be misused by individuals to make changes to data that the larger organization is unaware of. In contrast, blockchain relies on approvals from the majority of users to make changes to existing data, reducing the possibility of backdoor transactions.
Like the internet, blockchain has the potential to disrupt multiple industries and make processes more democratic, secure, transparent, and efficient. Some of the merits of this technology from a fraud prevention perspective are as follows:
- Blockchain can be used to create a potentially tamper-proof, cryptographically secure online ledger that can be used to verify transactions securely and directly, on a peer-to-peer and decentralized basis, without the need for a middleman like a bank or financial institution.
- Due to the decentralized nature of its networks, blockchain does not have a central point of failure and is expected to be better able to withstand malicious attacks.
- Two parties can make an exchange without the oversight or intermediation of a third party, strongly reducing or even eliminating counterparty risk. Users can trust that transactions will be executed exactly as the protocol commands, removing the need for a trusted third party.
However, the biggest challenge to blockchain adoption remains the absence of a centralized authority or regulatory system. Unlike the prevailing financial systems, blockchain does not grant full access rights over the network to any one user, administration or governing body and is hence difficult to regulate. This also means that users may have fewer avenues to seek redressal to fraud, malpractice or noncompliance on these networks. The possibility of a ‘51% attack’, wherein a majority of Blockchain users could collude to wrest control of the blockchain, is a point of concern, although no such incidents have been reported so far. Also, security firms have argued that it is possible for individuals or groups to insert malware into blockchain transactions. Lastly, questions remain over the integration of Blockchain with other technologies used by an organization, its customers and business partners. For Blockchain to work at an organizational level there is a need for re-designing business and application workflows, as well as adoption by all users.
Authored by: Jayant Saran, Partner, Deloitte India