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How Smart Contracts Bring Real-World Improvements To Post-Trade Settlement

Steve Murphy by Steve Murphy
January 8, 2021
in Analysts Coverage, APIs, B2B, Blockchain, Cross-border Payments
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How Smart Contracts Bring Real-World Improvements To Post-Trade Settlement

How Smart Contracts Bring Real-World Improvements To Post-Trade Settlement

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Members of the CEP service will be familiar with our coverage around blockchain as applied to corporate banking scenarios. In the last member report we released on the subject, the expected B2B use cases were around cross-border payments and trade services, with a nod to fraud management to some extent as well. 

The referenced posting in Forbes is about smart contracts, which is part of the trade services use case, and one could reasonably assign security to it as well. Blockchain remains one of those new age tech spaces that most people don’t really understand. The article’s author is a C level at a blockchain firm, so this establishes a form of experiential credibility. So the piece is all about the advantages of smart contract utilization in conducting trade transactions.

‘Digital transformation continues to speed up the pace of business. Yet asset-based transactions continue to run on slow, sequential settlement processes that are fraught with high costs and high risks. Smart contracts — digital records that encapsulate terms and mutualize workflows  — offer an alternative….The typical financial transaction uses a delivery versus payment (DVP) settlement process – a sequential transfer process that requires the purchasing party to act first and without certainty that the seller will deliver. Additional operational steps are required to verify that all parties have met their obligations. This reconciliation occurs after a party has acted, so it can’t prevent the risk of partial fulfillment or transaction failure….The sequential settlement process also has high transaction costs. Despite these costs, there’s little transparency. Without visibility, there’s no certainty on the finality of the settlement. The purchasing party doesn’t know the transaction status until after they’ve acted. The delivering party may have met the contract obligations; they may not have.’

One of the author’s points of comparison is APIs versus blockchain in these trade contract execution scenarios, with the distinction being that APIs, while of course involving digital interconnectivity with other systems, still involve execution in a sequential manner, implying additional time and settlement risk. 

Smart contracts on the other hand involves verifiable activities with and simultaneous settlement via access to a single, immutable record. The article summarizes in some detail five properties of smart contract technology. One important note is that smart contracts do not necessarily have to be run through a blockchain network. Worth a read to improve awareness.

‘Organizations don’t require blockchain or distributed ledger technology to benefit from smart contracts. They’re already improving complex multi-party transactions. One Asia-based exchange used smart contract technology to complete the region’s first digital bond issuance. The exchange used smart contracts to digitize and model the bond and its distributed workflows for issuance and asset servicing over the bond’s life-cycle. Other companies are using smart contracts to digitize a variety of  assets, including securities, real estate, and art, They’re also smart contracts to automate regulatory reporting requirements or simply to improve collaboration and connect businesses through multi-party applications.’

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group

Tags: APIAPIsB2Bb2b paymentsBlockchainCross-Border Payments
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