Demonetisation + Blockchain: The Match Made In Financial Heaven

The Tech Upgrade Demonetisation Missed

Jan 11, 2025

India’s 2016 demonetization was a bold and unprecedented move aimed at rooting out black money, counterfeit currency, and corruption. However, while it succeeded in accelerating the adoption of digital payments and financial inclusion, it was riddled with operational challenges and loopholes that undermined its intended impact.

One of the biggest flaws? The inability to track cash transactions effectively and prevent people from converting black money into white using clever tricks. What if blockchain-based currency tracking existed back then? Could it have prevented illegal activities and created a more transparent system? Let’s explore.

Cashless dreams, endless screams!

On November 8, 2016, the Indian government announced the demonetization of ₹500 and ₹1,000 currency notes, which together accounted for 86% of the currency in circulation nearly ₹15.44 lakh cores. The move aimed to:

Curb black money (undeclared income kept in cash).
Eliminate counterfeit currency
Push India toward a cashless economy by boosting digital payments.

The announcement led to:

• Cash Chaos: Long queues at banks and ATMs as people rushed to deposit old notes and withdraw new ones.

• Economic Disruptions: Small businesses, daily wage workers, and farmers, heavily reliant on cash, suffered greatly.

• Loophole Exploitation: People devised innovative ways to launder black money, taking advantage of the system.

Despite the government’s best efforts, clever individuals found ways to convert their unaccounted cash into white money. Here’s how:

Using “Benami” Accounts:

Individuals deposited large sums into bank accounts belonging to family members, employees, or even strangers. These “benami” account holders were paid a small commission in exchange for allowing their accounts to be used.

Gold Purchases:

Many people rushed to buy gold or jewelry with old notes, converting black money into valuable assets.

Poor Exploited for Commissions:

Daily wage workers and rural villagers were handed bundles of cash to deposit into their accounts. They were paid a small fee (2–10%) in return. For example, someone with ₹10 lakh in black money might distribute it across 20 accounts, each depositing ₹50,000.

Loans to Friends and Family:

Black money holders lent cash to others with the understanding that it would be returned later as legal tender.

These activities showed the limits of the banking system in identifying suspicious transactions and tracking cash flow.

Blockchain Could’ve Made Demonetisation Smart, Not Shaky!

Imagine if India had a blockchain-powered currency tracking system during demonetization. Here’s how it could work and solve the above problems:

1. A “Digital Twin” for Every Currency Note

Imagine every ₹500 and ₹1,000 note in circulation having a unique, digital fingerprint on the blockchain. That’s right—each currency note would have a “digital twin,” making it traceable through every transaction it enters into.

How would it work?

• Each currency note would be assigned a unique digital ID on the blockchain, and this ID would be recorded whenever the note is involved in any transaction (e.g., deposit, withdrawal, or purchase).

• So, if you took ₹1 crore in cash and deposited it across multiple accounts, the blockchain would track the origin of each note, leaving a transparent trail that’s impossible to erase.

• Immutability ensures that once a note’s details are logged on the blockchain, they cannot be altered. Any illicit movement of money, like notes moving from one account to another suspiciously, would be easy to track.

For instance, if ₹1 crore is deposited across several accounts, the blockchain would track the exact journey of each note and flag any suspicious patterns. Were the same set of notes appearing repeatedly in different accounts? The blockchain would catch it.

With blockchain, the days of anonymous cash movement are over. The transparency provided by a digital twin for every note would drastically reduce the chances of money laundering and ensure each note’s origin is verified.

2. Transparency in Deposits and Withdrawals

With blockchain, every deposit and withdrawal would be automatically recorded in real-time on the blockchain ledger, making the entire process transparent and traceable.

Here’s how it works:

• Every cash transaction, whether it's a deposit at a bank or a withdrawal from an ATM, would be logged automatically. This means that every time you deposit or withdraw cash, the details—including the amount, location, and parties involved—would be securely stored on the blockchain.

• If someone tries to bypass detection by using multiple accounts for deposits, blockchain can track that too. For example, if a black money holder tries to spread ₹50,000 across 20 different accounts to avoid scrutiny, blockchain’s traceability would flag this activity immediately.

Example:

• If ₹50,000 in cash is split and deposited into 20 accounts that are connected to the same individual or entity, blockchain will instantly detect that the notes came from the same source—the same initial deposit.

• These suspicious accounts would then be flagged for further scrutiny by authorities, who can dive deeper into the transaction patterns. The system would also offer a clear trail of who deposited the money and where it went.

In this setup, black money holders would have no room to conceal their illicit transactions or manipulate the system. Blockchain ensures that every movement of currency is tracked and transparent, making fraudulent activities easier to detect and prevent.

By providing real-time, automatic logging, and the ability to trace accounts linked to suspicious transactions, blockchain would drastically improve the accountability of the banking system and ensure greater financial transparency.

Mission Possible: Korea Caught the Tax Evaders

South Korea uses blockchain to track tax payments and monitor suspicious activities. This system has drastically reduced tax evasion and ensures real-time auditing. A similar blockchain infrastructure could transform India’s cash ecosystem and prevent laundering during events like demonetization.

The Benefits of Blockchain-Based Currency Tracking

Transparency: Every cash transaction is recorded, reducing opportunities for fraud.
Accountability: Black money holders cannot manipulate the system without being detected.
Efficiency: Automated systems reduce the burden on human auditors.
Fairness: Honest taxpayers are no longer penalized for the actions of those who evade detection.

Demonetization was a bold move that exposed the cracks in India’s financial system. While the intention was noble, the execution fell short because the system lacked transparency and traceability.

Blockchain-based currency tracking could change this narrative. By ensuring every rupee is traceable, illegal activities would become exponentially harder to execute. Not only would this curb corruption, but it would also build trust in the financial system, paving the way for a cashless, corruption-free India.

The question isn’t if blockchain will become a part of India’s financial system—it’s when. The lessons of 2016 make the case for this transformation clearer than ever.

Thanks for diving into Stacked On Blockchain! If this post sparked your curiosity (or gave you an 'aha' moment 🤯 ), don’t keep it to yourself—share the wisdom. After all, blockchain is better when the network grows!

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