A smart contract is a digital contract that lives in a distributed network. Bill Gates may have been referring to smart contracts when he made his oft-quoted prophecy "banking is necessary; banks are not". Although many state that smart contracts are neither 'smart' nor a 'contract’ yet, the concept of smart contracts is potentially transformative for the financial sector.

We all know there already is a lot of excitement in the financial sector around blockchain-inspired technology. A large part of this enthusiasm focuses on the potential benefits of combining two components. The first is a distributed and synchronised ledger shared by all participants in a supply chain and the second involves the automation of tortuous workflows using smart contracts which act on the ledger. Developments related to both components are moving fast and will be ready to scale in 2018. So yes, in 2020 the combination will have a significant impact on the financial sector.

Imagine a world governed by self-executing smart contracts. Smart contracts that are legally binding and easily created by anyone with basic coding skills. Contracts that cover all sorts of transactions, based on a multitude of conditions and events. Combine this concept with a scenario in which many of us are producers and consumers of electricity, mortgages are crowdfunded and value is distributed over the internet as information is today. Smart contracts will bring us more efficiency in tomorrow’s processes and supply chains, as well as connecting the ‘Internet of Things’ with the ‘Internet of Value’. This will inspire many creative minds and spark even more business model innovation in the Fintech industry.

The best way to learn is to experiment

At ABN Amro, we are running experiments on many DLT platforms, including Corda and Ethereum. We are also gearing up to start experimenting with the new Digital Asset Platform. Each platform is rooted in different design choices, is aimed at solving a different fundamental problem and, as a consequence, comes with a different implementation of ‘smart contracts’.

Although Ethereum, the Digital Asset platform, and Corda are fundamentally different, they can make supply chains more efficient in light of their own definitions of what ‘smart contracts’ are and what they are able to do. At a DLT level, it is important to understand the difference between permissioned and permissionless platforms. In the case of permissioned platforms, only approved parties are allowed on the network, while everyone is welcome on a permissionless platform.
Different purpose, different platform

Ethereum can be seen as a large virtual globally distributed computer. Anyone can build and run applications on it, with no worries about censorship, downtime or third party interference. Ethereum is a permissionless platform that is totally transparent, meaning that the code of the smart contracts can be read by all parties within the network. This makes it less suitable for regulated financial services because of the lack of privacy. Another consideration is the fact that a smart contract is limited in its ability to connect with resources outside of the platform (data and APIs). So-called ‘oracles’ can come to the rescue, but they also introduce new challenges.

The Digital Asset Platform is designed to build financial services applications. It consists of a permissioned distributed ledger and a separate business logic layer. The distributed ledger has a ‘Private Contract Store’, where all the participants’ smart contracts are stored, and a Global Synchronization Log, which keeps the ledger data up-to-date. Smart contracts can be written using the Digital Asset Modeling Language (DAML). DAML promises privacy, ease of use and legal certainty.

Corda is also a permissioned distributed ledger platform and was also explicitly designed for the highly regulated financial sector. In Corda, smart contracts contain legal prose, which means that all rights and obligations in the smart contract are legally enforceable. Hence, Corda promises the reliable execution of financial agreements.

Understand the difference

It is becoming increasingly important to understand the differences between the available DLT platforms and the implementation of ‘smart contracts’ within a specific platform. The knowledge and insights provided by running various experiments allows us to subsequently make appropriate decisions in regard to partnerships, educational programs, architectural choices and investments pertaining to the integration of DLT solutions with existing systems and data sources.

The financial sector is largely defined by a multitude of contracts between banks, businesses and individuals. So there is definitely a demand for smart contracts in the sector, with the aim of making it more efficient, fast, dynamic and client-focussed. That means we will continue experimenting and will develop or join programmes to train contract programmers, smart contract auditors and code lawyers, since these are new areas of expertise to develop over the next few years.

Such efforts will hopefully be accelerated by new academic educational programmes, where code writing skills and legal expertise are combined into fresh legal tech minds. And if the new 'code lawyers' and 'contract programmers' join forces with AI experts, the financial sector of the future will undoubtedly be more autonomous than it is today.