How Can Blockchain Put An End To Fraud In Financial Transaction?

How Can Blockchain Put An End To Fraud In Financial Transaction?

Experts suggest 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. In the recent years, many exponential financial frauds surfaced in public and private sectors banks. As reported by the Reserve Bank of India, answering an RTI, state-run banks have said as many as 8,670 “loan fraud” cases totalling Rs 61,260 crore over the last five financial years up to March 31, 2017.

Cyber-attacks and data tampering problems have posed severe threats, Blockchain is a highly recommended process to check these maladies. In fact, 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 first to start protecting their electronic payments using blockchain.

What is the Blockchain?

The Blockchain is as a promising, secure, tamper-proof digital recordkeeping platform. It maintains the asset transfer record thoroughly and in a stable manner. When a transfer is performed using blockchain network, the payee or any other party has the right and ability to trace the complete wire transfer/s. This promising attribute is one of the primary reason financial institutions are exploring Blockchain technology and its implementation in financial framework.

Most of the internet savvy population relates blockchain with the digital currency Bitcoin only. 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.

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

How Blockchain functions?

The Blockchain is a bookkeeping system that functions on connected computers recording every transaction. Every transaction made over blockchain platform is visible and traceable, if need be. For easy comparison, blockchain is just like 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 an average, a security transaction in the market space takes approximately three days to complete. However, with blockchain technology, it can be quickly achieved in minutes or maybe seconds. The current payment processing services are complicated and slow moving, making it tedious to follow the flow of money. Blockchain allows tracking transactions until it reaches the end user.

How does Blockchain help fight fraud?

The Blockchain has a complex functionality wherein digital records combine into blocks, and such blocks make a chain cryptographically and chronologically connecting 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’ numbers 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 notice of the same. The information on this block cannot be changed or altered. The participants can only add value to the existing old information.

Three Applauding Features Of Blockchain That Help Prevent Fraud

Features of Blockchain to prevent Fraud

As per the study performed by Association of Certified Fraud Examiners, “typical organisation loses five percent of revenues to fraud each year.” Here are three features of blockchain that makes it a perfect fraud preventing technology:

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 and transparent, so there is no one place to commit fraud. There are many methods used by criminals to instigate frauds. Some of the standard practices include deleting or altering data in the records, creating corrupt files, altering or creating digital/ electronic papers and more. Because 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 to end. 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 the majority of the systems.


Once registered, the data or transaction on a block or blockchain cannot be altered (changed or deleted) and thus is immutable. Also, 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 only, a block is approved and given a timestamp after which, it is connected to the previous block on the chain. If you wish, you can create a new transaction, but it will not affect the already available data in the blocks.

So, with blockchain, one can easily procure the 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. Most of the industries including clothing, food, luxury items, pharmaceuticals and more have been affected by this problem. When operating on a traditional supply chain, which is tedious, lengthy and time taking, businesses are prone to higher risk of data problems. With blockchain assets get provenance because of immutable transaction history, which makes it tough to false data.

Blockchain Can Be Permissible

There is a lot of confidential data involved in businesses, offering access to just anyone is not wise. To ensure that outsiders can’t peep into the company information and insiders can’t corrupt the data, there must be some system. 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. Such 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

Also read: Different Types of Blockchains

  • Cheaper transactions because the transactions are verified by trusted nodes and not hundreds and 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 are put in 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. Because of their complex nature, as well as a multi-party intervention, it is easy to corrupt a supply chain. There are high chances of these frauds going undetected until and unless they create 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 Frauds?

Sadly, no, blockchain cannot eliminate all types of frauds. There are chances that frauds can occur despite putting a Blockchain in place. Although, such kinds of thefts are a part of attempting to layer service on the top of blockchains and cannot affect the core technology.

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.