Blockchain: Thwarting the Possibility of Frauds

Why do frauds crop up in a system? Sounds hackneyed? Maybe, but the provenance of fraud is pretty premeditated and intrinsic in any society. Innately frauds are a symptomatic manifestation of diluted accountability, inefficient compliance system and condescendingly low-slung trust levels in any institution, be it public or private. The recent unfolding of banking frauds only corroborates the fact that the lack of transparency, trust and traceability in banking operations has led to such deafening denigration of integrity. As media reports suggest, a few low-profile authorities in PNB have managed to manipulate the system by resorting to alternate means for allowing free flow of credits to a client who is also a big-time defaulter in debt repayment. And all these happened without the knowledge of the key stakeholders. Though sounds gross and sordid a closed system has always been the epicentre of genesis of frauds.

Now picture this. If the credit disbursement system would have been distributed or decentralized, trust-worthy, transparent and compliance-ready, these frauds perhaps won’t have happened during the life time of a bank. Beyond an idealistic consideration of non-occurrence of frauds, we must converge to an argument that let fraudsters play their dirty tricks in a system, but the system should be robust and dynamic enough to transpire the truth to all the stakeholders associated with the system. Then these frauds could be nipped in the bud without snowballing into massive swindles. In the light of modus operandi of frauds in any system, blockchain technology based solutions could be the de facto measures.

How can blockchain solutions really avert these frauds? Well, before getting down to brass tacks of fraud management, let’s first understand what blockchain technology is. Technically, a blockchain is a decentralized, distributed, digital public ledger that stores records of transactions across many computers so that no record can be transmuted retroactively without the amendment of all subsequent blocks and the complicity of the network. For a layman, a blockchain is a public distributed ledger. It’s a value-exchange protocol authenticated by mass collaboration over a peer-to-peer network of computers and distributed timestamping servers. The central point of blockchain is that it can’t be conned by few authorities having access to the system. Being a distribute ledger, blockchain thrives on the mechanism of consensus, which requires all stakeholders (here globally distributed computers or nodes) to be in collusion. Furthermore, the anonymity of computers throws the toughest task to hackers or bad actors to mutate the veracity of data.

Juxtaposed to a centralized system, which is managed by a select few, a blockchain is distributed and carries the consensus of anonymity. Each block in a blockchain, which registers valid transactions, includes a cryptographic hash of the previous block linking the two in the blockchain. Thus, the current block is linked to the previous block and this iteration is all the way connected to the genesis of original block. In a sense, blockchain is a tautology which always converges to the truth. Even separate blocks maybe produced concurrently, the inherent algorithm of blockchain ensures the highest-scoring version supersedes the others making the originality of data inviolable. The orphan blocks are automatically weeded out from the mainstream ensuring the sanctity of information is kept intact.

While discussing fraud prevention we must not forget the role of blockchain in immutability of information. A piece of information validated by collective consensus of stakeholders can’t be altered. This feature of blockchain prevents counterfeiting of documents. In financial domain where the complexity of transactions is surreptitiously high with multi-stakeholder approval processes, blockchain can enviably reduce the probability of fraud to almost insignificant level.

(This article was originally published by me on LinkedIn Pulse)