How smart contracts are set to reshape the business world
Smart contracts will have a major impact on how companies operate in future. Two Barclays innovation experts share how they’re set to shake up the business world for the better – in banking and beyond.
“You may not have heard of smart contracts before, but they’re on the brink of changing the way and the speed at which business gets done,” says Dr Lee Braine, Director of Research and Engineering in Barclays’ Chief Technology Office.
Braine explains that smart contracts, which are automated agreements that are typically built on blockchain technology, are “making processes simpler, more efficient and faster than ever before, due to their standardised processes and reduced need for human input”.
This could radically change current ways of working for both businesses and customers when they enter a legal agreement. Standardisation will ensure a smoother and more efficient process for banks, and reduce costs, creating an easier experience for customers with a number of financial benefits too.
What’s so exciting is that the positive impact of smart contracts will be felt collectively, rather than by any one business alone. Thanks to collaborative initiatives, especially within the banking sector, Braine explains that “the prize on offer is billions of pounds in industry savings”.
And because everyone is working together towards the same goals, the development of smart contracts and their practical use in banking is accelerating. This is bringing the tangible benefits closer to becoming an everyday reality.
What are smart contracts and how do they work?
Although there are differing definitions of smart contracts, some of which include a lot of jargon, Braine explains that Barclays sees smart contracts as simply “automatable and enforceable agreements”.
Traditional contracts and agreements have many elements and actions that typically need to be completed and checked by human intermediaries.
Within the next few years, we’re likely to see smart contracts being used more frequently in the business world, with financial services being one of the frontrunners
Director of Research and Engineering in Barclays’ Chief Technology Office
In contrast, smart contracts leverage distributed ledger technology, working automatically to not only simplify the process and reduce the workload, but also making them safe, secure and easier to understand.
One example of how smart contracts can be used would be startups using smart contracts to raise funds.
If a startup uses an ordinary crowdfunding platform to raise funds, then there can be a complicated scenario of contact, explanations and refunds if the funding goal isn’t met. But if they use a smart contract, this can be coded to receive funds and execute appropriate rules. The supporters transfer their money to the smart contract. If the goal is met, then the money is automatically released to the startup. If it isn’t, then the money is automatically refunded. It’s simple, transparent, and safe.
As Nicole Sandler, Barclays Head of Digital Policy, notes: “The potential benefits of such digitalisation are vast and range from cost reductions, to improving efficiencies, to risk reduction.” Braine is also clear on the benefits, adding: “There’s no central administrator and a reduced need for intermediaries – which could help cut down the time spent on manual analysis and the number of legal disputes over contracts.”
An element of human control however will likely always be required for certain agreements, for example in dispute resolution.
Creating a better experience for customers and clients
“Barclays is very customer-centric,” says Sandler. “When we’re looking at things that help the bank, we’re looking at things that help our customers and clients. So with smart contracts, we are ultimately aiming at improving their day-to-day experience.”
Barclays is very customer-centric. When we’re looking at things that help the bank, we’re looking at things that help our customers and clients
Barclays Head of Digital Policy
“Syndicated loans, for example, are one area that could be vastly improved by smart contracts,” says Braine. “It can sometimes take the industry weeks to syndicate a loan product because of the manual processes, number of parties and other variables involved. But using smart contracts would allow for radical simplification and cost reductions.”
And Braine’s example opens up an important point: in order to maximise the benefits for customers, Barclays needs to work with others in the industry to replicate the successes that smart contracts bring.
Shaping the future through collaboration
“Collaboration is key for smart contracts to be deployed and adopted across businesses and industries,” says Braine.
To promote and perfect this industry-wide work, Barclays is working with other financial institutions that are also developing smart contracts, to contribute to an umbrella of understanding across the financial sector.
One of Barclays’ key aims is to collaborate on smart contracts that can be used by industry peers. Instead of designing smart contracts for Barclays alone, the bank wants to help contribute to industry-wide frameworks.
Such initiatives make it easier for banks to collaborate with each other, and to engage with customers and clients making processes such as clearing and settlement easier to perform.
Braine explains: “Many large institutions have been developing smart contracts themselves, partnering with specialist blockchain fintechs, and participating in market infrastructure consortiums that are developing smart contracts collectively.”
But working collaboratively doesn’t just mean working with other firms. Sandler adds: “it’s absolutely essential for the deployment of smart contracts within international financial markets that policymakers be involved.”
Barclays meets regularly with politicians and regulators, along with working groups within the industry.
With everyone from banks to startups, and from insurers to academics, contributing to this collaborative effort, different angles are outlined and understood, and improvements can be made.
And Barclays is sharing expertise on the research and development that the bank has done so far. Sandler explains that “we want to provide thought leadership, feedback, and advice where we can because it’s really important to be involved in upskilling our policymakers (and others in the industry) on innovative use cases, in order to understand how they would regulate them.”
In short, Barclays is helping policymakers to plan for the future of smart contracts.
“Smart contracts are now coming out of their research and experimentation phase,” Braine explains. That means we won’t have long to wait. As Braine goes on to add: “Within the next few years, we’re likely to see smart contracts being used more frequently in the business world, with financial services being one of the frontrunners.”
And when smart contracts are in place, the banking sector’s unified approach means that the benefits will be felt quickly. Having taken a lead in some of the research so far, Barclays will aim to pass these benefits on to customers as soon as possible, while also supporting peers and policymakers to ensure that smart contracts are not just fit for purpose, but continuing to drive the sector’s evolution.
Financial innovation is undoubtedly coming with the development of smart contracts, and Barclays is proud to be at the forefront of this.