How can Blockchain eliminate fraud in financial transactions?

By May 3, 2018 No Comments
Blockchain Financial Transactions

There have been suggestions from experts that if Blockchain technology was used to manage transactions and accounts, frauds like Vijay Mallya and Nirav Modi could have been prevented or detected at an early stage and the money recovered partially, if not entirely. Recently, there has been an abundance of financial fraud that has surfaced in both public and private sector banks. When answering an RTI, the RBI says that state-run banks have reported close to 9,000 “loan fraud” cases amounting to over Rs. 60,000 Crores over the last five financial years up to March 31, 2017.

Cyber-attacks and data tampering problems have posed serious threats. Blockchain is a strongly recommended system to verify and tackle these maladies. As per Juniper Research, $290 million was invested into the development of the global blockchain industry in the first half of 2016. Financial organisations were the first ones to start protecting their electronic payments using blockchain.


What is Blockchain?

The entire cryptocurrency network is run on Blockchain Technology. The crux behind the technology is that there is no concept of a single server, and the digital information is duplicated thousands of times across a network of computers. Blockchain security methods use encryption technology. The basis of this technology is the public key and private key. The private key is like a password, which gives the owner access to their Bitcoin, or any digital assets. In case the private key is lost, there is no chance of retrieving the digital assets. In other words, all information or data stored in the Blockchain technology is encrypted into a random string of numbers, and can be converted into a readable format only by using the private key owned by the user. Therefore, any information or data stored on the Blockchain can be never viewed by any person other than the owner.

Most of the population that uses the internet thinks Blockchain is the same thing as Bitcoin. No doubt, it is the underlying technology behind the successful virtual currency, but it has much more potential to assist a variety of industries and verticals.

Owing to its ability to eliminate the need for a middleman, Blockchain shows promising potential for the financing sector. It brings back power to the hands of the individual trading partners and makes processes more transparent than ever.


How Blockchain Works

The Blockchain is a bookkeeping system that functions on connected computers recording every transaction. Every transaction made over the blockchain platform is visible and traceable, if need be. Blockchain is just like a ledger we use to maintain day to day transactions with the only difference that it needs no middlemen for registering the transaction details. You do not need the assistance of any centralised agency for transferring assets.

On average, a security transaction in the market space takes approximately three days to complete. However, with blockchain technology, it can be achieved in minutes if not seconds. The current payment processing services are complicated and slow moving, making it difficult to follow the flow of money. Blockchain allows tracking transactions until it reaches the end user.

Like banks, ATMs and credit cards in the past, Blockchain represents the next step in the ever evolving process of increasing the velocity with which money moves.


How does Blockchain help fight fraud?

The Blockchain has a complex functionality where digital records combine to form blocks, and such blocks make a chain cryptographically and chronologically connecting the network with each other through sophisticated mathematical algorithms. Each block has a unique set of records with a connection to the previous one. Any new block is added to the end of the blockchain only.

The process of encryption is known as hashing and is performed by ‘n’ number of computers across the network. Each block computes the same digital calculation and has its unique digital signature. Once a new block is registered, the participant gets notified of the same. The information on this block is unalterable. The participants can only add value to the existing old information.


Three Features of Blockchain that help prevent fraud

  • Distributed Network
  • Immutability
  • Blockchain can be permissible

The Association of Certified Fraud Examiners said in a study that “a typical organisation loses five percent of revenues to fraud each year.” These are three features that of blockchain that help prevent fraud:


Distributed Network

The blockchain is a distributed digital ledger that contains data which is shared between numbers of computers and reconciled periodically. There is no central authority and thus no one point of failure. The management and authorisation of the data spread across the entire network is transparent, so there is no one place to commit fraud. There are many methods used by criminals to instigate fraud. Some of the standard practices include deleting or altering data in the records, creating corrupt files, altering or creating digital/ electronic papers and more. As a result of the higher visibility and transparency, blockchain prevents any such kind of fraudulent activity.

The members of a business network or supply chain management over viewer can quickly check and verify the processes from scratch. Not only the current data, but the history of the asset transfer is also at the disposal of the participants of the network. In case one wishes to alter the data on the blocks or tamper the chain, one needs to have control over a majority of the systems.



Once registered, the data or transaction on a block or blockchain cannot be altered as it is immutable. Before a block is formed and attached to the chain, all the network participants have to validate the data on the block. This process of validation is known as Consensus.

After consensus, a block is approved and given a timestamp after which, it is connected to the previous block on the chain.

With blockchain, one can easily procure data about the origin of the asset, its journey so far and the owner of the asset.

Blockchain has curbed the problem of fabrication of data. When operating on a traditional supply chain which is tedious, businesses are prone to higher risk of data problems. With blockchain assets get provenance because of immutable transaction history, which makes it tough to falsify data.


Blockchain Can Be Permissible

There is a lot of confidential data involved in businesses for which access should not be universally available. To ensure that outsiders can’t peek into company information and insiders can’t corrupt the data, there must be a system in place. Offering permissions is one way to make such an order come into existence.

A blockchain network can be built on permission or non-permission depending upon the type and formation of the blockchain. Permission networks work great for preventing fraudulent activities as they put a restriction on who can access the system and who can’t. They are also known as private blockchains. A few advantages of private blockchain include

  • Cheaper transactions because the transactions are verified by trusted nodes and not thousands of participants.
  • It has a configurable TPS rate so you can perform a higher number of operations per second in comparison to a public network.
  • It offers advanced control so companies get hold of the blockchain and provide quick update function.
  • There is no need to provide proof of work in case of private blockchains.

Implementation of Blockchain in Fraud Prevention

Besides finance, blockchain can prove useful in preventing different types of frauds in various industries. Here are a few promising roles of blockchain fraud prevention:


Blockchain For Avoiding Identity Fraud

Identity fraud is the most significant threat of recent times. It creates a potential risk to credit card companies and financial institutions. Such companies become alert and send alerts to its customers in case an identity fraud takes place. Despite strict rules and various permissions laid, criminals get access to confidential data. Such criminals steal valuable information and use it without due permissions.

Blockchain has made it possible to create a digital identity of individuals that is tamper proof. If all the identity information is stored on a blockchain that is secured with permissions, only permitted parties will be able to verify transactions while authorised parties enjoy limited access.


Blockchain For Preventing Fraud In The Supply Chain

They very rarely see the light of the day, but cheating in supply chains is a significant issue. Owing to their complex nature and multi-party intervention, it is easy to corrupt a supply chain. There is a high chance of this fraud going undetected unless it creates a huge problem. Thanks to the blockchain, it is now possible to improve traceability and transparency of products in the supply chain. Because of its immutable nature, it is almost impossible to manipulate the data on a blockchain. To do so, one needs a consensus of the majority of participants of the network. Also, it is easy to trace the origin and ownership of any product since blockchain is a shared and distributed ledger.


Is Blockchain An Effective Way to Eliminate All Types of Fraud?

Unfortunately, blockchain cannot eliminate all types of frauds. There are chances that fraud can occur despite putting a Blockchain in place.

There are always chances that there can be some doors open, welcoming vulnerabilities despite it being a decentralised platform. Therefore, it is critically imperative to avail professional blockchain development services in account while implementing blockchain in your business model.

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