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The recent downturn in the economy has made it obvious that banks need to be re-evaluated under a new system of governance. The downfall of Dhanalakshmi Bank and Yes Bank was caused by poor corporate practices, which led Lakshmi Vilas bank into financial trouble as well. The Reserve Bank of India has acknowledged this issue.

With the number of problems that arise every day in the banking system, achieving transparency is a challenging task—and one that requires innovative solutions. One interesting suggestion is to use blockchain technology as a tool for making bank operations more transparent.

Implementing a blockchain application in the banking system would provide many advantages; however, given the number of problems that have come up with it thus far, we must examine its legal aspects before doing so.

Blockchain technology is being hyped because it allows information to be stored securely. The data on a blockchain can't be altered, which makes it ideal for the banking industry—where trustworthiness and accountability are paramount.

Blockchain applications have been recommended for solving the transparency problems that occur in finance, government and other industries. Following this comes data integrity and Management Information Systems (“MIS”). Various banks, internationally, use banking consortiums on a blockchain application to solve similar problems

Some Indian banks have considered the use of blockchain technology to address issues related to governance. The technology has also been recommended for financial reporting purposes by some experts.

Decentralized Autonomous Organizations (‘DAOs’) have also been a common suggestion to eliminate hierarchies in an organization, and voting systems for Annual General Meetings.

Legal issues

• The application of technology brings legal issues. Liability will be the first to arise before blockchain is implemented; however, with present laws in India, it is difficult to impose liability on an individual in this system. Blockchain technology may be a viable solution to many legal problems, but it's difficult to hold someone accountable for a hack when the concept has not been defined under law. A key vulnerability in the system, called the 51% rule, is enough for authorizing a transaction. In such cases where an individual gets control over the majority of hashing power, transactions can be altered or reversed.
• Banking consortiums use smart contracts to manage their money, and the same idea applies when financial reporting uses mutually agreed goals. While the enforceability of smart contracts is a big question in India, it can be compared to electronic contracts. Both have their differences and similarities. Generating hash for verifying transactions on the blockchain goes against the method of obtaining electronic signature under Section 35 of Information Technology Act, 2000. A hash’s inadmissibility under the Indian Evidence Act makes a contract relying on it unenforceable—which is undesirable for banks' corporate governance. For this reason, both the IT Act and Indian Evidence Act need to be amended.
• The jurisdictional theories that govern normal cross-border transactions will not apply to the international expansion of a technology. This is because its nodes (data centers) can be restricted within India, but it would prevent greater efficiency from being achieved elsewhere. Many financial institutions experimented with private blockchain systems in 2013-14, but those efforts did not address all the issues facing banks. As a result, countries have taken different and conflicting approaches to jurisdiction on the internet. Until a consensus is reached about how to resolve disputes, blockchain platforms can make their users agree on jurisdiction and dispute resolution by means of contract.
• In addition, implementing a blockchain system with nodes across several countries raises important issues under data protection laws. The Personal Data Protection Bill, 2019—which seems to be leaning toward data localization—would lie in sharp contrast to such an implementation.
• Though the concept of a decentralized autonomous organization (DAO) has been discussed for some time now, its closest precedent in India is MahaDAO—an initiative working toward developing a non-depreciating currency. The idea behind DAOs is to eliminate hierarchies from companies' governance structure and thereby move towards decentralization. The Indian legal framework is not sufficient to regulate the activities of a DAO. The problems discussed above need to be addressed before establishing this form of governance, as it is vulnerable to computer viruses and hackers among other issues.

While legal concerns seem to be the most prominent obstacles in adopting blockchain, there are also general concerns that have been cited by users when it comes to employing this technology within a traditional bank system. Because of its complexity, many believe adding blockchain would require training directors and regulators—as well as an overhauling of existing systems.

In the corporate governance of a traditional bank setting, blockchain technology could bring about many changes for India. By implementing it in problem areas, accountability and transparency can be increased.

However, the associated legal risks have to be weighed carefully. First, regulators should test a private blockchain set-up in order to identify any vulnerabilities and fix them before more people use this technology. Then they can amend laws as necessary with much needed clarity on blockchains.