CFO Insights

June 2016

CFO Insights
Getting smart about
smart contracts
Blockchain technology is generating For evidence of the growing interest in • The Post-Trade Distributed Ledger
significant interest across a wide range smart contracts, consider the following: Group, an organization launched to
of industries. As the field of applications explore post-trade applications on the
grows, industry leaders are customizing • Smart contract venture capital-related blockchain, has 37 financial institutions
and tailoring the technology to fit very deals totaled $116 million in Q1 of as members;4
particular uses.1 Blockchain-based 2016, more than twice as much as the
smart contracts—self-executing code prior three quarters combined and • Five global banks are building proof-of-
on a blockchain that automatically accounting for 86% of total blockchain concept systems with a trade finance
implements the terms of an agreement venture funding; and supply chain platform that uses
between parties—are a critical step smart contracts.5
forward, streamlining processes that • An Ethereum-based organization
are currently spread across multiple has raised more than $150 million to While smart contracts in the commercial
databases and ERP systems. experiment with and develop smart realm have not yet been proven, we
contract-driven applications;2 believe that permissioned blockchains
(those that are privately maintained by
• The Australian Securities Exchange a small group of parties) in particular
is developing a blockchain-based will find near-term adoption. And in this
post-trade solution to replace its issue of CFO Insights,* we will examine two
current system;3 blockchain-based smart contract use
CFO Insights Getting smart about smart contracts

cases—(1) securities trade clearing and Technology leaders envision many Lower cost. New processes enabled
settlement and (2) supply chain and applications for blockchain-based smart by smart contracts require less human
trade finance document handling—that contracts, from validating loan eligibility intervention and fewer intermediaries and
carry important lessons for business and to executing transfer pricing agreements will therefore reduce costs.
technology leaders interested in smart between subsidiaries.7 Importantly, before
contract applications. blockchain this type of smart contract was New business or operational models.
impossible because parties to an agreement Because smart contracts provide a low-
What are blockchain-based of this sort would maintain separate cost way of ensuring that the transactions
smart contracts? databases. With a shared database running are reliably performed as agreed upon,
Smart contracts represent a next step in the a blockchain protocol, the smart contracts they will enable new kinds of businesses,
progression of blockchains from a financial auto-execute, and all parties validate the from peer-to-peer renewable energy
transaction protocol to an all-purpose utility outcome instantaneously and without need trading to automated access to vehicles
(see sidebar below: What is blockchain for a third-party intermediary. and storage units.8
technology?). They are pieces of software,
not contracts in the legal sense, that extend But when should companies employ Smart contract use cases
blockchains’ utility from simply keeping blockchain-enabled smart contracts To determine high-impact areas of
a record of financial transaction entries rather than existing technology? They can potential, Deloitte’s analysis of smart
to automatically implementing terms of be a worthwhile option where frequent contract use cases considered a number
multiparty agreements. Smart contracts transactions occur among a network of of factors, including: a sizable market
are executed by a computer network parties, and manual or duplicative tasks opportunity; the presence of active,
that uses consensus protocols to agree are performed by counterparties for each relatively well-funded start-ups targeting the
upon the sequence of actions resulting transaction. The blockchain acts as a shared opportunity; the participation of prominent
from the contract’s code.6 The result is a database to provide a secure, single source investors; technical feasibility and ease of
method by which parties can agree upon of truth, and smart contracts automate implementation; and evidence of multiple
terms and trust that they will be executed approvals, calculations, and other transacting pilots or adoption by corporations. The
automatically, with reduced risk of error or activities that are prone to lag and error. lowest-hanging fruits today are applications
manipulation. in which contracts are narrow, objective, and
Increased speed; lower costs mechanical, with straightforward clauses
For a wide range of potential applications, and clearly defined outcomes.
What is blockchain blockchain-based smart contracts could

technology? offer a number of benefits: We have identified a range of applications—

ranging from smart health records to pay-
Speed and real-time updates. Because as-you-go insurance—that companies are
The protocol for blockchains allows smart contracts use software code piloting right now. Using the criteria above,
multiple parties that do not know to automate tasks that are typically two use cases stand out for their immediacy
or trust each other to maintain accomplished through manual means, they to market: trade clearing and settlement and
consensus as to the state of and can increase the speed of a wide variety of supply chain and trade finance.
changes made to a shared business processes.
database. Bitcoin has leveraged this Trade clearing and settlement
technology to enable payment Accuracy. Automated transactions are not Blockchains provide a single ledger as the
transactions between strangers only faster, but less prone to manual error. source of truth, and smart contracts offer
without need for a third-party the ability to automate approval workflows
financial intermediary (that is, a Lower execution risk. The decentralized and clearing calculations that are prone
bank). The range of potential process of execution virtually eliminates to lag and error—thus reducing errors,
applications is broad and extends the risk of manipulation, nonperformance, cost, and the time to settlement. Trade
to almost every industry, sparking or errors, since execution is managed clearing and settlement often entails labor-
wide interest and investment in automatically by the network rather than an intensive activities that include various
blockchain technology over the individual party. approvals and/or complex internal and
past year. For a detailed discussion external reconciliations. Banks maintain
of the technology, see Beyond Fewer intermediaries. Smart contracts can substantial IT networks, but independent
bitcoin: Blockchain is coming to reduce or eliminate reliance on third-party processing by each counterparty causes
disrupt your industry. intermediaries that provide “trust” services discrepancies that lead to costly resolutions
such as escrow between counterparties. and settlement delays.9

2
CFO Insights Getting smart about smart contracts

The opportunity to streamline clearing and

settlement processes with the blockchain
and smart contracts is immense. In 2015,
the Depository Trust & Clearing Corp. (DTCC)
processed more than $1.5 quadrillion worth
of securities, representing 345 million
transactions.10 Santander Bank’s innovation
fund, Santander Innoventures, expects
blockchain technology to lead to $15–20
billion in annual savings in infrastructure
costs by 2022.11 Seven start-ups, retaining
funding of more than $125 million, have
platforms or services targeting this space:
The list of more than 35 investors behind
these companies is equally impressive; it
includes not only major venture funds such
as Khosla Ventures and SV Angel, but also
large banks such as Citigroup, JP Morgan,
and Santander, and other organizations
such as NASDAQ and the DTCC itself.12

Wall Street has also been busy exploring this

space. More than 40 global banks within the
R3 consortium participated in testing that can provide secure, accessible digital transfer payments to ports upon arrival.24
included clearing and settlement activity,13 versions to all parties in a transaction, and Bank of America, Standard Chartered, and
and many of those banks have pursued smart contracts can be used to manage the the Development Bank of Singapore are
further trials individually. The Australian workflow of approvals and automatically also among the banks pursuing proof-of-
Securities Exchange is also working on a transfer payment upon all signatures being concepts of their own.25
smart contracts-based post-trade platform collected.18
to replace its equity settlement system,14 Considerations for corporations
and four global banks and the DTCC recently Because current paper systems drive $18 Business leaders who may not be closely
ran a successful trial of a smart contracts trillion in transactions per year,19 there’s an following blockchain developments should
solution for post-trade credit default swaps.15 attractive opportunity to decrease costs and consider examining the technology and
improve reliability in supply chain and trade evaluate how it can be paired with smart
Supply chain and trade finance finance. Four start-ups have emerged in this contracts to drive efficiencies or new
documentation area, all of which have noted engagement business capabilities.
Blockchains can make supply chain and with banks in proof-of-concept activities.20
trade finance documentation more efficient, Funding has not been disclosed, but backers Operations executives should look to their
by streamlining processes previously spread include three respected venture funds in own processes to evaluate where smart
across multiple parties and databases addition to Barclays Corporate Bank.21 contracts may be applicable. Some factors
on a single shared ledger. All too often, to look for include complex and manual
supply chains are hampered by paper- A number of corporations have also shown work flows, multiparty agreements, lack of
based systems reliant on trading parties mounting interest in this area. Seven banks trust between parties, and interdependent
and banks around the world physically have revealed proof-of-concept testing, transactions. Likewise, ideating on new
transferring documents, a process that can and the numbers noted by start-ups capabilities that could be made possible
take weeks for a single transaction. Letters indicate more that haven’t been publicly by smart contracts should be considered
of credit and bills of lading must be signed revealed. One start-up in particular noted in the context of current strategy or
and referenced by a multitude of parties, implementation roadmaps with five banks innovation efforts.
increasing exposure to loss and fraud.16 as well as a major insurer.22 Barclays
Current technologies haven’t addressed Corporate Bank recently partnered with Given that smart contracts represent a new
this issue because digital documents are one of the start-ups, Wave,23 a platform model of computing, software development
easy to forge; even current IT systems at that stores bill-of-lading documents in the teams and IT leaders should consider ex-
banks simply track the logistics of physical blockchain and uses smart contracts to ploring the implications of this approach.
documents for trade finance.17 A blockchain log change of ownership and automatically Implementing smart contracts on a

3
CFO Insights Getting smart about smart contracts

blockchain will require significant integration

work, and it will be important to understand Endnotes
the new protocols and considerations 1. Deloitte, Blockchain: Enigma. Paradox. Opportunity, 2016, www2.deloitte.com/content/dam/Deloitte/uk/
Documents/Innovation/deloitte-uk-blockchain-full-report.pdf; David Schatsky and Craig Muraskin, Beyond bitcoin:
when evaluating these applications for the
Blockchain is coming to disrupt your industry, Deloitte University Press, December 7, 2015, http://dupress.com/
enterprise. articles/trends-blockchain-bitcoin-security-transparency/.
2. Nathaniel Popper, “A venture fund with plenty of virtual capital, but no capitalist,” New York Times, May 21, 2016,
*This article was adapted from “Upgrading www.nytimes.com/2016/05/22/business/dealbook/crypto-ether-bitcoin-currency.html.
blockchains: smart contract use cases in industry,” 3. Samburaj Das, “Australian Stock Exchange confirms upcoming blockchain for settlements,” CryptoCoinsNews,
Deloitte University Press, June 2016. January 22, 2016, www.cryptocoinsnews.com/australian-stock-exchange-confirms-upcoming-blockchain-for-
settlements/.
4. Pete Rizzo, “Post-Trade Distributed Ledger Group grows to 37 members,” CoinDesk, May 3, 2016,
www.coindesk.com/ptdl-group-37-members-post-trade-ledgers/.
5. Phone interview with Skuchain, April 25, 2016.
6. Kevin Delmolino, et al., Step by step towards creating a safe smart contract: Lessons and insights from a cryptocurrency
lab, University of Maryland, November 18, 2015, https://eprint.iacr.org/2015/460.pdf.
7. A use case Deloitte is currently developing for clients.
8. Ian Allison, “RWE and Slock.it—Electric cars using Ethereum wallets can recharge by induction at traffic lights,”
International Business Times, February 22, 2016, www.ibtimes.co.uk/rwe-slock-it-electric-cars-using-ethereum-
wallets-can-recharge-by-induction-traffic-lights-1545220; Giulio Prisco, “Blockchain technology could enable
next-generation, peer-to-peer energy microgrids,” Bitcoin Magazine, April 25, 2016, https://bitcoinmagazine.com/
articles/blockchain-technology-could-enable-next-generation-peer-to-peer-energy-microgrids-1461596932; Giulio
Prisco, “Slock.it to introduce smart locks linked to smart Ethereum contracts, decentralize the sharing economy,”
Bitcoin Magazine, November 5, 2015, https://bitcoinmagazine.com/articles/slock-it-to-introduce-smart-locks-linked-
to-smart-ethereum-contracts-decentralize-the-sharing-economy-1446746719.
9. Ignatius John, “Trade break pain—feeling unsettled?,” TABB Forum, October 5, 2015, http://tabbforum.com/
opinions/trade-break-pain-feeling-unsettled.
10. DTCC, “Performance dashboard,” www.dtcc.com/annuals/2015/index.php#performance-dashboard, accessed
May 27, 2016.
11. Santander Innoventures with Oliver Wyman and Anthemis Group, The Fintech 2.0 paper: Rebooting financial
services, 2015, http://santanderinnoventures.com/wp-content/uploads/2015/06/The-Fintech-2-0-Paper.pdf.
12. Deloitte analysis from Coindesk.com and Crunchbase.com.
13. Ian Allison, “R3 completes trial of five cloud-based blockchain technologies with 40 banks,” International Business
Times, March 3, 2016, www.ibtimes.co.uk/r3-completes-trial-five-cloud-based-blockchain-technologies-40-
banks-1547260.
14. Daniel Palmer, “ASX details blockchain strategy in financial update,” CoinDesk, February 12, 2016,
www.coindesk.com/asx-blockchain-strategy-financial-results/.
15. DTCC, “DTCC and Digital Asset to develop distributed ledger solution to drive improvements in repo clearing,”
March 29, 2016, www.dtcc.com/news/2016/march/29/dtcc-and-digital-asset-to-develop-distributed-ledger-
solution.
16. CoinDesk, “Trade finance and supply chains,” April 20, 2016, www.coindesk.com/research/supply-chains-report/.
17. Ibid.
18. Phone interview with supply chain and trade finance start-up, April 25, 2016.
19. World Trade Organization, International Trade Statistics 2015, 2015, www.wto.org/english/res_e/statis_e/its2015_e/
its2015_e.pdf, p. 41.
20. Luke Parker, “Blockchain tech companies focus on the $40 trillion supply chain market,” Brave New Coin, February
2, 2016, http://bravenewcoin.com/news/blockchain-tech-companies-focus-on-the-40-trillion-supply-chain-
market/; Hans Lombardo, “Skuchain Intersects with IoT and blockchain-enabled trade finance,” AllCoinsNews,
April 3, 2016, http://allcoinsnews.com/2016/04/03/skuchain-intersects-with-the-iot-and-blockchain-enabled-trade-
finance/; Rizzo, “Wave brings blockchain trade finance trial to Barclays.”
21. Pete Rizzo, “Wave brings blockchain trade finance trial to Barclays,” CoinDesk, October 15, 2015,
http://www.coindesk.com/wave-blockchain-trade-finance-barclays/ “
22. Phone interview with supply chain and trade finance start-up, April 25, 2016.
23. Giulio Prisco, “Chainalysis and Wave showcase blockchain fintech products at New York Barclays accelerator,
sign deal with Barclays,” Bitcoin Magazine, October 21, 2015, https://bitcoinmagazine.com/articles/
chainalysis-and-wave-showcase-blockchain-fintech-products-at-new-york-barclays-accelerator-sign-deal-with-
barclays-1445454899.
24. Evry, Blockchain: Powering the Internet of Value, 2016, www.evry.com/globalassets/insight/bank2020/bank-2020—
blockchain-powering-the-internet-of-value—whitepaper.pdf. For additional information on blockchain and smart
contract applications in trade finance, see Eric Piscini et al., Blockchain: Disruptions and opportunities in banking,
Deloitte, forthcoming in June 2016.
25. Pete Rizzo, “How Standard Chartered is using Ripple to rethink trade finance,” CoinDesk, February 29, 2016,
www.coindesk.com/how-standard-chartered-is-using-ripple-to-rethink-trade-finance/.

4
CFO Insights Getting smart about smart contracts

Contacts:
What’s next for smart contracts?
Yang Chu
Smart contract technology is still in its early stages. Business and technology Senior Manager
leaders who want to stay current on implications of smart contracts should track Deloitte & Touche LLP
both technology and business developments surrounding smart contracts. [email protected]

On the technology side, certain advances will help broaden the applications and
John Ream
adoption of smart contracts.
Manager
Deloitte LLP
Scalability. Smart contract platforms are still considered unproven in terms of
[email protected]
scalability.

External information. Because smart contracts can reference only information David Schatsky
on the blockchain, trustworthy data services—known as “oracles”—that can push Senior Manager
information to the blockchain will be needed. Approaches for creating oracles are Deloitte LLP
still emerging. [email protected]

Deloitte CFO Insights are developed with the guidance

Real assets. Use cases that effectively link smart contracts to real assets are still
of Dr. Ajit Kambil, Global Research Director, CFO
in their infancy. Program, Deloitte LLP; and Lori Calabro, Senior
Manager, CFO Education & Events, Deloitte LLP.
Flexibility. The immutability of blockchain-based smart contracts today means
that developers must anticipate any conceivable scenario necessitating changes to
About Deloitte’s CFO Program
the contract. The CFO Program brings together a
multidisciplinary team of Deloitte leaders and
Privacy. The code within smart contracts is visible to all parties within the subject matter specialists to help CFOs stay ahead
network, which may not be acceptable for some applications. in the face of growing challenges and demands.
The Program harnesses our organization’s broad
capabilities to deliver forward thinking and fresh
Latency. Blockchains suffer from high latency, given that time passes for each insights for every stage of a CFO’s career—helping
verified block of transactions to be added to the ledger. For Ethereum, the most CFOs manage the complexities of their roles, tackle
their company’s most compelling challenges, and
popular blockchain for smart contracts, this occurs approximately every 17
adapt to strategic shifts in the market.
seconds—a far cry from the milliseconds to which we are accustomed while using
non-blockchain databases. For more information about Deloitte’s CFO Program, visit
our website at: www.deloitte.com/us/thecfoprogram
Permissioning. While excitement for smart contracts is growing in the realm of
Follow us @deloittecfo
both permission-less and permissioned blockchains, the latter is likely to see
faster adoption in industry, given that complexities around trust, privacy, and
scalability are more easily resolved within a consortium of known parties.
This publication contains general information only
Watch for major trials or deployments that achieve new milestones in scalability, and is based on the experiences and research of
Deloitte practitioners. Deloitte is not, by means of this
or technologies that successfully address issues of privacy or enable greater trust
publication, rendering accounting, business, financial,
of oracles. These are key signs of maturity, signaling that smart contracts are investment, legal, tax, or other professional advice or
positioned for wider adoption. services. This publication is not a substitute for such
professional advice or services, nor should it be used as
On the business side, new capabilities and business models that extend beyond a basis for any decision or action that may affect your
business. Before making any decision or taking any
the digital realm driven by smart contracts will emerge in the coming months. For action that may affect your business, you should consult
instance, start-ups have already paired smart contracts with IoT devices to provide a qualified professional advisor. Deloitte shall not be
access via smart locks or automatically enable electric vehicle charging stations. responsible for any loss sustained by any person who
relies on this publication.
Pushing IoT sensor data to the blockchain will also open up countless possibilities;
among them, look for new business models that are based on usage rather than As used in this document, “Deloitte” means Deloitte LLP
time, and applications that employ micropayments automatically. and its subsidiaries. Please see www.deloitte.com/us/
about for a detailed description of the legal structure of
Revised legislation that accommodates smart contracts or recognition of smart Deloitte LLP and its subsidiaries. Certain services may
not be available to attest clients under the rules and
contracts by legal authorities will also be critical for some applications of smart
regulations of public accounting.
contracts. This will be another signal to watch for that indicates the technology is
positioned for wider adoption. Copyright© 2016 Deloitte Development LLC.
All rights reserved.