How Smart Contracts Bring Real-World Improvements To Post-Trade Settlement
Digital transformation continues to speed up the pace of business. Yet asset-based transactions continue to run on slow, sequential settlement processes that are fraught with high costs and high risks. Smart contracts — digital records that encapsulate terms and mutualize workflows — offer an alternative.
The typical financial transaction uses a delivery versus payment (DVP) settlement process – a sequential transfer process that requires the purchasing party to act first and without certainty that the seller will deliver. Additional operational steps are required to verify that all parties have met their obligations. This reconciliation occurs after a party has acted, so it can’t prevent the risk of partial fulfillment or transaction failure.
The sequential settlement process also has high transaction costs. Despite these costs, there's little transparency. Without visibility, there's no certainty on the finality of the settlement. The purchasing party doesn't know the transaction status until after they've acted. The delivering party may have met the contract obligations; they may not have.
It's a costly, inefficient process. Smart contracts are a mechanism to replace the sequential settlement process and remove its inherent costs and risks.