Smart contracts could transform banking—so why haven’t they caught on?

Following on my last post about the tug-of-war between interoperability and proprietary systems, I was interested to read the final trend in the Tech Vision 2021 research which Accenture conducted.

It is called “From Me to We: a multiparty system’s path through chaos.”

The pandemic has been a very good stress test for our commercial and social realities. On a social level, lockdowns revealed how important our relationships are with friends and families.

Analogously, lockdowns also revealed the importance of what the research calls “multiparty systems.”

These are systems like distributed ledgers and blockchains, where many parties are all contributing to one view of the world.

If you will indulge me being philosophical for a moment: the pandemic has showed us that no matter whether you’re a corporation or a person, everything is better together.

Distributed ledgers and blockchains have yet to take off in the mainstream financial world, and I was speculating why that might be so.

Smart contracts can handle a lot of regulatory compliance automatically. Sometimes, in my more optimistic moments, I think about the real estate market, and I dream about how smart contracts could basically automate the whole conveyancing function. All you do is set up a smart contract that lodges the deeds with the City once the bond has been approved. Easy to say, very difficult to accomplish in the real world.

Distribution of deceased estates? Smart contracts could handle 80% of that as well. Foreign exchange transactions that comply with the SA Reserve Bank regulations? No problem for smart contracts.

So why don’t we have them?

I think it has less to do with the promise of the technology and more with the structure of organizations in the first place, and how they perceive value.

Somebody in an organization has to build the capability and do the hard yards of bringing whole industries and ecosystems together. It’s time-consuming, difficult and expensive work, for arguably a small return. If a bank implemented distributed ledger technology and smart contracts for its forex transactions, would that drive up the volumes? Probably not. The demand for forex is pretty inelastic. If the only way a forex desk quantifies “value” is increased volumes, and smart contracts don’t bring them increased volumes, then why would they go to the trouble and expense of building a smart contract capability?

In this world, nobody implements the distributed ledger technology, because the effort for each individual business unit outweighs the value.

But what if the forex desk had another way of perceiving “value”? What if “value” to the bank as a whole was a more efficient system, whether it drove volumes up or not?

What if to the bank, being innovative in and of itself was seen as “value”?

In this world, the forex desk would build the distributed ledger and smart contract capability because it values efficiency. The current account people would hop on with their own requirements. Niche applications would be explored and implemented at very low additional cost, leading to a virtuous cycle.

That would be a multiparty system worth writing about. And, I would argue, it would give the brave bank an unassailable advantage.

The new world of finance will inevitably lead to multiparty systems. Whether it’s open APIs connecting fintechs, banks and other players, or smart contracts which tightly couple whole industries together, I think we will see different players coming together for their common good.

I’d love it if you read the research and gave me your perspective on it. You can find it here.