Smart Contracts in Financial Services: Getting from Hype to Reality

What is a ?

Programmable contract capable of automatically enforcing itself upon the occurrence of pre-defined conditions

How Smart Contracts Work in a Permissioned System

Smart Contracts Physical Contracts Lower operational overheads and costs leading Alice Bob to economical financial Physical Contract products

1 2 3 4 5 Banks, Insurers, 6 Smart Contract Smart Contract 7 Capital Markets

1 2 1 3 2 4 3 Act as custodians of 4 Alice Bob 5 Smart Contract 5 6 7 6 assets, validators and 7 1 authorizers of all contracts 2 3 A software program and transactions 4 5 on the distributed . . , allowing an Blockchain/permissioned ledger, . immutable, verifi- . Programming and Encryption 10 able and secure record of all Reduced contracts and administration and transactions Faster, simpler and service costs owing hassle-free processes, to automation and reduced settlement and ease of times Smart Contract compliance and 1 2 3 reporting 4 5 6 7

Regulators/Auditors Central authorities that keep Transacting parties a tab on the system with a wide-ranging read-access Alice Bob Individuals or Institutions to blockchain

Smart Contract Lifecycle

Record the termsConnect with internal Evaluate Self-Execute and external systems

Alice Bob Oracle Transacting parties Services Alice Bob

A smart contract The smart contract The contract waits for The contract records the terms connects with external triggers to self-executes upon of a contract banks’ internal evaluate pre-defined fulfilment of between Alice and systems or external conditions conditions via triggers Bob on a distributed world, e.g. account ledger shared balance, share between all prices etc. Provides data for Provides data for participants and compliance and compliance and validated by reporting reporting validators

Banks, Insurers, Regulators/ Regulators/ Capital Markets Auditors Auditors

When will Smart Contracts Become Mainstream?

Mainstream adoption begins

Take-off 2020

Experimentation 2018-2019 Mainstream adoption of smart contracts begins 2015-17 Regulations and Origin laws to bring Emergence of blockchain and new products and 2014-15 R3CEV initiative smart contracts services enabled consortium of under the purview by smart banks, insurers of law arrive on contracts 2012-14 Smart Contract and IT service scene solutions providers is introduced formed Expected first 1997 Basic smart in-production Banks and other Several POCs implementation of contract companies set up capabilities added succeed, smart contracts labs to develop implementation Nick Szabo coins to by financial proofs-of-concept gathers speed services firms the idea of smart (POCs) contracts 2009 introduces the concept of block- chain

Why do we Need Smart Contracts?

Offer a Higher Reduced Potential to Weed out Degree of Trust Administration and Inefficient Business and Reduced Risks Service Costs Processes

What are the Opportunities in Financial Services Industry?

Capital Markets and Commercial and Insurance Investment Banking Retail Banking

Corporate Finance: Trade Finance: Automated claims processing Initial Public Offers (IPOs), Supply-chain documentation, in motor insurance, crop Private equity invoicing and payments insurance, etc.

Structured Finance: Syndicated Mortgage Lending Fraud prevention in luxury loans, leveraged loans goods Loans and crowdfunding for Stock exchange market startups and small and medium New products: insurance for infrastructure enterprises the sharing economy, autonomous vehicles, peer-to-peer insurance, cyber insurance

Regulatory reporting and compliance; Know Your Customer (KYC) and Anti-Money Laundering (AML)

What do Financial Services Firms and their Customers Stand to Gain from Smart Contracts?

Syndicated Loans Business

Faster Trade Increased fee income Settlement in US $2 - $7 billion Clients 6 - 10 Investment days per loan in the US Banks per annum globally

Mortgage Loan Origination Lower Processing Fees Lower operations costs $480 - $960 US $3 - $11 billion Customers savings per loan in the US Banks per annum in the US and EU

Motor Insurance Policy Servicing Lower claims Lower Insurance Premiums settlement cost $45 - $90 US $21 billion Customers savings per annum in the US and EU Insurers per annum globally

Key Challenges in Smart Contract Adoption

Technological Challenges Legal Challenges Organizational Challenges Scalability Governance in speed of execution Regulatory Challenges of in applicable laws Interoperability Lack of Talent with legacy systems in smart contracts

Common Challenges

Privacy and Security Inflexibility of users and transactions of smart contracts

How can the Financial Services Industry Realize the Full Potential of Smart Contracts?

Be Prepared for Critically Evaluate Conceptualize Build Capabilities Take a Portfolio the Arrival of Your Needs – Do New, Smart and Approach to Smart Contracts We Really Need Contract-Enabled Fast-Forward Smart Contract Smart Contracts? Products and Smart Contract Experimentation Services Innovation with Strategic Partners

Reach out: Interested in reading the full report? https://www.capgemini-consulting.com/blockchain-smart-contracts Follow us on Twitter @capgeminiconsul or email [email protected]

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