Use of Smart Contracts Revolutionize the Banking Industry

15 Jun

Since the inception of the internet, it has paved the way for the creation of a plethora of innovative technologies, one of which is the blockchain technology, which is also the underlying technology for cryptocurrency.

Basically, blockchain is a decentralized distributed ledger technology that is also immutable, as well as other amazing features. 10 years ago when blockchain was introduced to us via the launch of Bitcoin, only a few people were positive about its future development. Just like the internet became a hub for different activities, it has been discovered that the blockchain technology is more than just the underlying technology, as several use cases for the technology have been discovered. One area where blockchain is causing disruptions in the financial industry. One of the tools that the blockchain technology has made available to us is Smart Contracts.

What is a Smart Contract?

A Smart Contract refers to the encoding of a collection of terms and conditions that involves participants to an agreement, and then functions as an automated lawyer or broker. The Smart Contract executes the terms contained within the agreement based on the conditions met by the participants. It may interest you to know that the contract enforces itself, and thus eliminates the need for a 3rd party.

When you bring a technology like Smart Contracts into a decentralized distributed ledger system, a lot of the functions we are used to in the financial industry will become decentralized too. Funds transfers, loan servicing, lending decisions, insurance, issuance of securities, compliance work, etc. will be able to function effectively with the aid of Smart Contracts.

Smart Contracts in the Banking Industry

Legal documentations in banks can be a very complicated and time consuming process, especially when it has to do with bringing new customers onboard in order to comply with the Know Your Customer (KYC) processes. With Smart Contracts, there would be no need for the time wastage and having to deal with the complications of legal paperwork. Furthermore, it will make it easier for the customer information to get verified based on the records that are available on the blockchain, which in turn can satisfy other conditions that may be needed to unlock more services that are smart-contract based.

There are high administrative costs attached to clearing and settlement processes, because the payments and transactions need to get matched first, before getting their verification. When Smart Contracts gets involved, the administrative costs involved gets outright elimination, because, the agreements are designed to be executed autonomously.

In 2018, the Australian authorities went to the drawing board to come up with a plan that would see the facilitation and implementation of a blockchain-based system created by Digital Asset Holding, as a replacement of the Clearing House Electronic Sub-register System (CHESS), which is a securities ledger in its electronic form, and it functions as a facilitator of ownership transfers between the participants in various transactions. Hence, there is the need for more smart contract development services that will aid the automation and decentralization of agreements between parties, and thus increase efficiency, and productivity of the systems where the smart contracts get implemented.

Decentralization and Disintermediation

When decentralized consensus systems become implemented, banks would have to do away with the inclusion of 3rd parties especially, because Smart Contracts would take over the various services that would have required the input of a 3rd party.

Basically, most of the core banking functions like payment systems, custodial deposit services, loan processing, etc will get decentralized and thus take away the intermediation from the system.

A close look at the banking system reveals that the only advantage the bank has over blockchain is the ability to create money at their discretion. However, it is important to know that one of the reasons for the creation of blockchain and crypto is to decentralize the supply of money, by taking it from the hands of financial institutions, and having algorithms take over the process. In light of this, different blockchain smart contract development startups have emerged

What’s next?

The integration of blockchain into banking decentralizes ownership, and will take away the need for traditional payment systems and institutions for deposit-taking, because transactions and user-balances will get stored on the distributed ledger of the blockchain network, and because it is immutable, it has more security and safety advantages that the centralized database does not have.

Interestingly, by having blockchain for smart contracts, it will help boost blockchain’s potential, because it can help cryptocurrency perform more than the usual fiat currency, which will invariably create a plethora of new services in the banking and finance industry. If banks begin to integrate smart contracts, it will become a win-win situation for both the banks and the users.

There are diverse possibilities with blockchain and smart contract development, and it may interest you to know that these possibilities are not just for the banking and finance industry, but can be implemented in other industries, because at the moment, a lot is yet to be discovered about blockchain and smart contracts.

Conclusion

The blockchain technology has not become a mainstream technological system yet, however, it has been able to achieve so much in ten years. If we are able to conduct a lot of economic activity on blockchain networks, there will be seamless interoperability between the various blockchains involved, which will invariably boost the link between the fiat and blockchain economy, and be a beneficial innovation to everyone.

There are various advantages of using blockchain and smart contract services, however, taking away the trust and centralization, while improving the security of the system, are features that makes technological innovations amazing. Banking and financial institutions have a lot to gain from integrating Smart Contracts into their systems, as it will facilitate seamless connectivity and transactions, while also saving participants the costs of hiring brokers and lawyers, as well as saving the time needed to process different legal documentation and paperwork.

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