Smart Contracts Aren’t New And Could Be Implemented Without Blockchain

by Tim Sloane 0

This article in American Banker points out that there are only a few unique cash flow patterns that need to be automated utilizing smart contracts:

“The financial world has tens of thousands of unique financial products. At first blush the task of turning such a large universe of financial products into smart contracts seems like a daunting task. However, on closer examination, it turns out that there are only a limited number of cash flow exchange patterns generated by financial obligations. In fact, almost all financial obligations can be represented by less than three dozen cash flow patterns and, by extension, less than three dozen smart contracts.”

It goes on to point out that most large institutions have already automated their side of the contract:

“Many assume that a “smart contract” is something totally new. However, banking has used imperfect implementations of smart contracts for at least three decades. When the volume of business became so large that it overwhelmed the capabilities of manual processes, banks turned to smart contracts. The transaction processing systems (TPS) of banks use automated systems based on software algorithms, which resemble smart contracts, to compute the bank’s daily payment obligations and expected receipts. These systems grew up incrementally and without any standardization. A bank may have multiple TPS that are programmed in different languages and use different data dictionaries to handle different products.

TPS do not conform to a standard; however, they generate payment obligations, which while not perfect, are deemed to be good enough. The TPS of different counterparties generate numbers that are close, but usually not identical. The differences are not large enough to go to court to resolve, but they do impose costs required for reconciliation.”

This observation that each party has automated its own backend, but that each party also perceived that automating the entire solution was too far out of scope. What blockchain smart contracts provide is a major shift in our collective mindset that enables institutions to think in new ways. Now the advantages available to all participants if they utilize the same contract automation technology becomes obvious. The article continues with a description of issues that must be addressed if smart contracts are executed in distributed software, but I would argue that the benefits can be accrued more easily if performed in the cloud utilizing existing contract law and organizational structures.

Pega, SAP, Oracle, IBM, Google, Microsoft, or any other major cloud supplier could build a solution that all participants could leverage. For this to happen though, these major players must agree to a standard implementation model and business language to make solutions interoperable. This is unlikely to happen if everyone’s energy is focused on blockchain and smart contracts, but if we want these solutions to be available sooner rather than later, providing tools that work within existing contract law would almost certainly speed things up!

Overview by Tim Sloane, VP Payments Innovation Advisory Service at Mercator Advisory Group

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