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Smart contracts in Banking and Financial sector

  • By Admin
  • April 13, 2022
  • 179 Views

Any business agreement depends on a safe, trustful and secure transaction. When a company raises funds, signs loan agreements, trades stocks, etc., transparency and consensus among the group are the fundamental values that get them invested. Smart contracts do precisely that; they help us trade/sign contracts securely.


Smart Contracts are simple programs stored on the blockchain, programmed to carry out an action/sequence of outcomes when the agreed terms/conditions meet. You can consider them paperless digital contracts; they cannot tamper. Smart contracts’ invulnerability to threats and trustless (without pre-existing trust) characteristics has made them the most sought-after option in many cases. Let’s look at a few use cases in the banking and financial sector.

Digital identity

When opening an account for an individual, the bank first creates/verifies an individual’s digital identity. But unfortunately, many citizens fall prey to identity theft. Although one of the most common threats a US citizen faces, most go unreported.

Creating a digital identity on a blockchain helps safeguard the user’s privacy. The data gets decentralized rather than handing it over to a third-party company. This negates the interference of any middleman and revolutionizes the availing of various services like education loans, mortgages, health insurance, etc.

Audit

Ever imagined the auditing process being automated and made to look like a cakewalk? Well, it’s happening now. Smart contracts support advanced bookkeeping tools which help companies keep all records stored securely and transparent for auditing purposes. 

Fund raising

The post-Covid-era has given birth to many new startups and many non-profit organizations trying to raise funds to distribute to those in need. The traditional way of raising funds involves a lot of paperwork, time, and, most importantly, validating the recipients’ legitimacy. Smart contracts help participants validate the recipient with their digital identity and carry out transactions effortlessly. The consensus-driven contract code automatically negates tampering with the contract. Thus, securing the integrity of the agreement.
After acquiring the set amount, one can automatically write the code to transfer the amount to the recipient using smart contracts. A mismatch in the goal means the amount gets sent back to the contributors. Hassle-free!

Decentralized Finance (DeFi)

Unlike the current centralized banking system, where the bank controls the money flow, Defi is decentralized. In DeFi, no one owns the money. But wait, isn’t that unreliable? No, this is because it runs on immutable code. The bank’s interest rates and waiting time make transactions expensive and less attractive.


DeFi is a highly complex smart contract that executes automatically. It gives way for new financial instruments and digital assets, like cryptocurrencies. Another significant advantage of DeFi is its interoperability. DeFi applications are built on the Ethereum blockchain to integrate with other existing protocols. This is why DeFi protocols are also called “money legos.” The openness and permissionless character of Defi enables anyone with the crypto wallet and internet to access their data and assets securely.

Loans and Mortgages

Smart contact’s immutable and transparent characteristic enables all individuals a shot at building their credit score. Maintaining a digital identity allows them to avail numerous bank services such as acquiring a loan and mortgages. Depending on the individual’s history, the bank disburses the amount if the requirements are satisfied. Smart contracts can help banks follow up on mortgage payments and release the property when the loan gets paid off.

Smart contracts can undoubtedly unlock valuable insights and opportunities for banks and financial sectors to build long-lasting customer relationships by providing satisfactory services.

If you’d like to learn more about smart contracts and the plethora of benefits it brings to your business, please reach out to our Agiratech strategist and we will help you reach your goal.