Execution in Banking and Financial services
Introduction: Smart Contract is a software developed to execute commercial transactions and enforces legal agreements which can eliminate the need for intermediaries and their associated transaction costs. It is simply a digital version of traditional agreements.
For instance, suppose you rent an apartment from me. You can do this through the block chain by paying in
cryptocurrency.
You get a receipt which is held in our virtual contract; I give you the digital entry key which comes to you by
a specified date. If the key doesn’t come on time, the block chain releases a refund.
If I send the key before the rental date, the function holds it, releasing both the fee to me and key to you
respectively when the date arrives. The system works on the If-Then premise and is witnessed by hundreds of
people, so you can expect a faultless delivery. If I give you the key, I’m sure to be paid.
If you send a certain amount in bitcoins, you receive the key. The document is automatically cancelled after
the expiry of the period of agreement, and the code cannot be interfered by either of us without the other
knowing since all participants are simultaneously alerted. Impact on Banking Industry: When it comes to syndicated
loans, the clients could expect settlement periods to be shorter. Instead of 20 days, they would be reduced to 6, for instance. It would lead to an increase in annual income and to a reduction of operational expenses.
Within mortgage loan industry, the lower operational costs of every
loan would reduce expenses for banks and cut fee
expenditures of the clients.
Today, a few banking startups already make their way in the market. One of them is Polybius, a digital bank based on the Ethereum blockchain. Their ICO technically supported by Ambisafe Software was extremely successful – they
collected BTC 12,380 (over $31,00,000, as of 2017).
Issues to consider before smart contracts may be widely used in banking are that Smart contracts cannot initiate wire transfers from one account in a regular bank to another. There are no interfaces that would bring together blockchain-based banks, tax regulator, and compliance monitoring institutions. The data stored on the public blockchain has no privacy. When it comes to financial operations, not all the clients would be happy about it.
The legal status of smart contracts is not as clear as it should be. The blockchain is vulnerable to some extent
-Ayush S. Mazumdar
MBA-FA(2018-20)
