State Bank of India (SBI) plans to pilot a blockchain-based smart contract to test the use of blockchain protocols with regard to KYC is a step in the right direction.
World over, banks are looking into blockchain to come up with easy and secure solutions for processes such as peer-to-peer payments, loans syndication, KYC, cross-border payments and virtual currencies.
One of India’s largest banks, SBI plans to beta test a Blockchain-based smart contracts system that was developed by the BankChain consortium in December 2017.
The consortium, which was launched in February, is composed of 27 banks that aim to develop Blockchain solutions for the banking industry in the country.
Smart contracts are basically contracts which use blockchain, to maintain contracts between parties. These are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.
The code and contract terms are available publicly, so that, there is no need for a regulatory agency to keep a track of the financial history of any party. These contracts are traceable ad irreversible. In short, with smart contracts consumers can effectively sign contracts electronically – without the need for a trusted third party (such as a bank, government or a lawyer) to verify the contract or transaction as valid and legal.
For instance, this could be done for buying and trading shares, making a credit/debit card purchase, transferring funds between accounts or buying property, anything of value in a transparent, conflict-free way.
Initially, SBI will test smart contracts for simple things such KYC (Know Your Customer) and nondisclosure agreements.
KYC is an expensive element of on-boarding a new client and each financial institution creates their own KYC. This means that banks have a high cost of customer acquisition, and for customers it means a painful process to go through every time a new account is opened with a new bank.
Implementation of smart contract will reduce infrastructure costs for the bank and make the process far more instantaneous, which is something consumers will value tremendously. Further, by implementing a blockchain-based smart contract, SBI is also in a way validating the reliability, security, and performance of this technology in favour of a large-scale deployment.
Integrating blockchain into banking through smart contracts is a low-risk way to test the blockchain’s capabilities, and this approach is perhaps the most sensible next step for others looking to adapt the blockchain.