Like many of you I am sure I never miss The Economist “Money Talks” podcast, which is how come I happened to hear about the bankruptcy of an Indian airline. A first glance a normal, run of the mill corporate failure…
Inaugurated in 2005, Kingfisher Airlines… never made money, not in one year. On 20 October 2010, the Directorate General of Civil Aviation (DGCA) suspended its licence to fly. Some 3,700 employees were left contemplating their future. More importantly, a clutch of largely public- sector banks is looking at writing off loans worth roughly Rs 6,000 crore as bad debt.
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Well, these things happen. The more cynical among you might just note this as another example the subverted corporatist version of capitalism that we are familiar with today, where profits are privatised and losses are socialised, and put it to one side. But the story has a particularly fascinating trajectory and one of that is relevant to the kinds of discussions going on at executive level amongst some of Consult Hyperion’s customers. Here’s why. It’s the story of an unshared ledger. Kingfisher Airline’s corporate records have vanished.
The airline’s missing accounts—apparently stored on servers seized by a vendor who had gone unpaid—is an unwelcome complication for those who had hoped the Kingfisher saga might be inching towards some sort of resolution.
Now, I hate to say it, but this is one of the few news stories that I have seen recently that actually points out a genuine use case for shared ledger technology and as far as I can see (from my single source of truth, my Twitter feed) no-one picked this up. Set against the common vague management consultant stuff about how “the blockchain” is going to transform the health care industry, the refugee crisis and insurance, this is a real example of a use case that is not based on fantasies about reduced costs or improved performance or the eradication of intermediaries or “code is law” but the solid reality of a consensus computer in operation.
So, imagine that Kingfisher had adopted something along the lines of Ian Grigg’s “triple entry” system. There’s a permissioned shared ledger that is maintained by, amongst others, the airline itself, the 17 creditor banks and the airline industry regulator. The airline and the banks update their own double-entry accounting systems using the data from the shared ledger.
If the airline goes bust or vanishes into a black hole or is infiltrated by ne’erdowells, it doesn’t matter, because everyone has a copy of the shared ledger. The banks can see that there are transactions with other banks, but may or may not see what those transactions are without permission. I assume that when a bank lends a few million quid to a company one of the first things it does is send in expensive finance-type persons to find out what other loans are outstanding and under what terms, so I don’t see my the transactions would be encrypted but I know nothing about corporate finance. But even if they were, then under warrant the regulator and law enforcement agencies would be able obtain the escrowed transaction keys needed to decrypt transactions of interest. You can sort of see how it would work. Back here to my fantasies about encrypted open books, translucent databases and shared ledger applications. Everyone would be able to see that assets exceed liabilities even though no-one (other than the relevant parties) could see what those assets or liabilities were.
If I were casting around for a practical proof-of-concept in the world of the shared ledger, I would certainly consider such an example. In this case we have a system where there are trusted participants who may become untrusted, records that must be immutable beyond the lifetime of their creator and real money to shared amongst the stakeholders. Think of all the money that could have been saved on auditing, forensic accounting and compliance! Money that could have instead been spent on customers, employees and suppliers of discretionary services.
So that’s why I used this particular story to help develop narrative in a couple of client meetings this week. As it happens, though, the story has even more to it as an exemplar. But first, a word about identity… Remember, names are attributes not identifiers. I’m a Dave Birch, but that doesn’t necessarily make me the Dave Birch in any specific instance. Now back to the story. The creditors want their money back so they are going after the guarantors of the loans made to Kingfisher where they have some evidence of the loan and the guarantor. Fair enough.
Last month it emerged that one of the aggrieved banks froze the accounts of three customers it alleged had guaranteed loans to the carrier in their role as board directors of Kingfisher. In fact, it blocked a destitute farmer, a vegetable stallholder and a security guard with similar names.
Ruh roh. So much for Know-Your-Customer (KYC). I’m sure this kind of problem will not recur, because India now has the Aadhar universal identity service. I’m sure that future loan guarantors will have to present their Aadhar card and be biometrically-identified as part of the loan process. This was, after all, part of the original vision for the Indian UID service, made clear back in 2010.
“Lack of identity is hurting people and blocking progress. Aadhar (the brand name for UID) can serve as the know your customer guidelines that banks have. It can reduce friction for the poor person who is trying to access public services like banking,” Nilekani said…[From UID can be an enabler of financial inclusion: Nilekani-Finance-Economy-News-The Economic Times]
But in other jurisdictions where universal identity is not yet the rule, some alternative might be needed. Perhaps here the shared ledger, which may in the long term be seen as a #regtech revolution and not a #fintech revolution at all, might also provide the necessary infrastructure (as I suggested in my presentation on “CRUDchains” at the Dutch national blockchain conference earlier this year). So now we have an interesting — but practical — model to work with. A shared ledger for the accounts that is linked to a shared ledger for the KYC. Anti-money laundering implemented as a process that constantly traverses both chains, not a set of expensive procedures.
I’m think I might use this example to test some of the ideas we are developing around shared ledger structures and blockchain (and other implementations) with some of our clients and partners, but as always I’m genuinely curious to hear what you have to say about the potential here.