Three main points arose during the Smart Contracts and Financial Services panel at the 2017 Canada Fintech Forum in Montreal: smart contracts are only as smart as the code they run, not every blockchain innovation will be as destructive as it sounds, and that it could be a decade before the appearance of a fiat-backed digital currency.
“If you’re a FinTech startup and you walk into the room, you just need to say blockchain, AI, maybe throw in some big data, and millions of dollars will be thrown your way,” joked panel moderator Robert Dawkins, an associate at Borden Ladner Gervais LLP. “but technological determinism of that kind isn’t necessarily the best way to improve the customer experience.”
Defined by Dawkins as “computerized transaction protocols that execute the terms of a contract,” smart contracts can potentially lower fraud loss, arbitration enforcement costs, and other transaction costs by automating a series of transparent transactions where all parties have agreed to the terms, he says.
Every transaction is a smart contract, and every smart contract is a transaction. Without the satisfaction of those terms, the next transaction in the blockchain cannot proceed.
“The current regulatory structures and mandates have not evolved to the point that they can support smart contracts.”
– Soumak Chatterjee
For example, a transfer of funds after a payment following the receipt of goods requires the final recipient, the shipper, the manufacturer, and any intermediaries involved to have all agreed to the blockchain contract, which is timestamped to be easily verified at each block in the chain. In a real-world example, users can now buy flight delay and cancellation insurance from fizzy, a new platform from French insurance company AXA, which is designed to pay out automatically when a flight is cancelled.
But “smart contracts aren’t smart and they aren’t contracts,” says Dawkins. According to Koho CTO Kris Hansen, they’re just code that run.
“Whether they’re a good and effective process remains to be seen,” added Dawkins. Their perceived intelligence comes from how well they’re defined when creating the blockchain contract, meaning there will still be a need for lawyers and auditors in the near future.
A former auditor herself and now founder of ColliderX Blockchain R&D Hub, Iliana Oris Valiente said that blockchain depends on such a high level of transparency that conducting all business transactions on blockchain in the future, though perhaps more efficient, isn’t likely.
Smart contracts might not be smart, but those who see their potential value are learning.
“Say you’re auditing client A and they have the majority of their business with supplier B, and you send a note to supplier B with a sample of transactions that party A has on their books, and you ask supplier B to confirm the transactions. And you ask them to send you back a confirmation letter.”
She adds that blockchain automatically creates a confirmed ledger that tells you the “state of the union” at any given time that’s confirmable and no one can modify — meaning a lot of the activities may become redundant.
“But ask yourself one question: if you work very closely with a small group of parties — which businesses do — would you feel comfortable opening up access to your database? And saying, ‘Okay suppliers and customers, you are my most trusted group of 10 parties that I deal with regularly,” she said. “Instead of you keeping your set of books and me keeping my set of books and spending a lot of time doing reconciliations, paying for internal and external audit functions, why don’t we just write things to a shared ledger and I’ll just give you access to my whole SAP instance?’ If you were to propose that to your leadership and say that this is to become far more efficient, you’ll probably get laughed out of the room and possibly escorted out by the security team because it’s a ludicrous prospect.
What we’re seeing with blockchain is a tool that enables these trusted parties to share information and transfer value without the proverbial complete opening up of the SAP databases.”
What data-sharing companies are willing to do with each, however, will prove the potential of blockchain and smart contracts for financial industry disruption – which shouldn’t be underestimated, says Catallaxy co-founder Francis Pouliot. Atomic swaps, for example, could undercut financial institutions with instant blockchain foreign exchange transactions.
Canada Fintech Forum getting ready to welcome 1500 attendees, 60 speakers and 30 exhibitors @financemontreal #FintechMTL @bdcit_fund pic.twitter.com/l7r4n2Ro0V
— Claudio Rojas (@claudio__rojas) October 10, 2017
“Imagine the amount of intermediaries, settlement, auditors, and clearing banks when you’re doing a forex transaction. With atomic swaps, different cryptocurrencies are automatically settled on each party’s blockchains,” he explained. “Now, atomic swaps are only possible on cryptocurrencies, but when we have widely distributed fiat-based crypto-currencies, we’re going to be able to do forex instantly on the blockchain. You’re looking at a major revenue of financial institutions that’s just going to go away.”
State-backed digital currency could come within a decade, said Soumak Chatterjee, senior manager of payments, blockchain and product innovation at Deloitte Canada. “By that, I mean a digital form of the currency that is backed by legal tender and is accepted as a form of money. And I think that will remove a lot of friction from the system.”
But until that happens, he doesn’t expect to see an end-to-end smart contract for regulated financial institutions in Canada. “The current regulatory structures and mandates have not evolved to the point that they can support it. Regulators are smart. They’re figuring things out. So today, no, but definitely over the next 10 years,” said Chatterjee.
The transition to the use of blockchain itself, however, could be smoother, its potential value already being widely acknowledged. Managing partner and founder of ConsenSys Enterprise Igor Lilic says his company is the blockchain city advisor for Dubai, which plans to be on blockchain by 2020.
And while a 2017 Deloitte survey of 300 executives from US companies found that 39 percent still have little or no knowledge of blockchain, more than half of the 61 percent remaining felt that their company would be at a competitive disadvantage if it failed to adopt the technology.
Smart contracts might not be smart, but those who see their potential value are learning.