Digital Rupee in India: What is blockchain technology and how does it work?

New Delhi, Feb 01: Finance Minister Nirmala Sitharaman has announced that Digital Rupee will be issued by the Reserve Bank of India in 2022-23, using blockchain technology.

Made popular by Bitcoin, blockchain technology has caught a lot of attention in the past fives years and is predicted to be the future of technology that would change the financial services infrastructure.

What is the Blockchain technology?

It is a Digital Ledger Technology (DLT) that is digitized and decentralized. It gives the users access to a public ledger consisting of all the transactions in a system of networks.

How Does Blockchain Technology Work?

If we were to take conventional banking as an example, the blockchain constitutes the bank's financial transactions throughout its history and a block would be an individual bank statement. When someone requests a transaction (involving contracts, records, currency, etc.), it transmits to a P2P network which consists of computers known as nodes.

Theses nodes validate the transaction and user's status using algorithms. Once is it verified the transaction it is added to the ledger, i.e., a new block adds to the blockchain in a way that is it unalterable, and the transaction is now complete. It is called a block chain as these blocks act like a chain where every block adds in chronological order.

The new block would contain a hash (link) of the previous block. So, the blockchain would have the records of the requester's transactions from the first transaction (first block) to the most recent one.
Advancements in India

The Securities and Exchange Board of India (SEBI) appointed an advisory committee called Committee on Financial and Regulatory Technologies (CFRT) to conduct research on the blockchain platform and its use in the Indian Stock exchange market.

Future

Once implemented the technology is believed to eliminate intermediaries in trade settlements reducing post-trade events to minutes instead of days. It is a case of supply chain optimisation. It also acts as an automated surveillance system that tracks, blocks and reports illegitimate attempts made.

This public tracking characteristic would bring transparency and improved trust in the regulatory system. Expenses related to record keeping, verifications and audits can also be reduced to a great extent.