How Smart Contracts are Disrupting Traditional Markets – Part 1

Posted on March 02, 2020

By Natalie Lord

Over the past few years we’ve heard lots of speak about blockchain. It’s everywhere we turn and people are either running from it confused, or embracing it. In the upcoming few weeks we’ll be looking at how blockchain is transforming everything from payment transactions to how money is raised in the private market. Specifically, we’ll be looking at the banking industry and seeing how the technology is being welcomed and what the risk parameters for traditional institutions are.

In September last year, Jamie Dimon, the CEO of JPMorgan Chase, said of Bitcoin: “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.”

Meanwhile, Lloyd Blankfein, Head of Goldman Sachs echoed the sentiment: “Something that moves 20% [overnight] does not feel like a currency. It is a vehicle to perpetrate fraud.”

But in spite of the scepticism, the question of whether blockchain and decentralized ledge technology (DLT) will replace or revolutionize elements of the banking system remains. The question is whether banks have anything to be afraid of with the uptake of blockchain technology and the answer appears to be “yes”.

Essentially, blockchain technology enables trusted parties to come to an agreement on the state of a database without using a middleman. By providing a ledger that nobody administers, a blockchain can provide specific financial services like payments or securitization without using a stop gap party, like a bank for example.

Further, blockchain allows for the use of tools like “smart contracts,” which can potentially automate manual processes from compliance and claims processing to distributing the contents of a will.

In situations where a high degree of decentralization isn’t necessary but better coordination could be, distributed ledger technology (DLT) can provide an excellent solution. It can help corporations establish improved governance and standards around collaboration and data sharing.

The global banking industry is currently worth approximately US$134 trillion. Between them, blockchain and DLT could disrupt and vastly improve a key banking services including payments, clearance and settlement systems, fundraising, securities, loans and credit and trade finance. But how?

Where payments are concerned, by establishing a decentralized ledger for payments, blockchain technology could facilitate faster payments at lower fees than banks.

With clearance and settlement systems, distributed ledgers can reduce operational costs and bring real-time transactions between financial institutions closer.

In fundraising, Initial Coin Offerings (ICOs) are experimenting with a new model of financing that unbundles access to capital from traditional capital-raising services and firms.

By tokenizing traditional securities such as stocks, bonds, and alternative assets, and placing them on public blockchains, blockchain technology could create more efficient, interoperable capital markets.

By removing the need for gatekeepers in the loan and credit industry, blockchain technology can make it more secure to borrow money and provide lower interest rates.

And in trade finance, by replacing the cumbersome, paper-heavy bills of lading process in the trade finance industry, blockchain technology can create more transparency, security, and trust among trade parties globally.

It’s evident that blockchain and DLT have the power to revolutionise the banking industry. In the next few weeks we’ll look with greater specifics at each of the areas, assess the potential for change and benefit and see how the technology is being utilised.




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Singapore Cryptocurrency and Blockchain Industry Association

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