Smart contracts — self-executing programs on blockchains — are expanding beyond cryptocurrency into traditional banking. Major financial institutions from Citigroup to HSBC are testing these automated agreements to connect decentralized finance with conventional banking systems, potentially transforming how transactions are processed worldwide.
What to Know:
- Smart contracts automatically execute agreements when predetermined conditions are met, eliminating intermediaries and reducing settlement times from days to minutes
- Major banks including JPMorgan, HSBC and Citigroup have implemented blockchain pilots handling billions in transactions with smart contract technology
- While regulatory hurdles remain, these innovations could fundamentally change financial services by merging traditional banking security with DeFi's automation capabilities
Smart contracts function as software-based agreements that self-execute when coded conditions are met, enforcing contract terms without human intervention.
Operating on blockchain networks, they remove the need for trusted intermediaries by ensuring that "the code is law" — once conditions are fulfilled, the contract automatically executes. In public blockchain ecosystems like [Ethereum], smart contracts enable peer-to-peer transactions without centralized oversight.
Originally developed in the cryptocurrency world, smart contracts offer significant benefits that have attracted mainstream financial institutions. Their presence on immutable blockchain ledgers allows all parties to view the same transparent transaction record, reducing opportunities for disputes. They also eliminate many middlemen and manual processes, cutting costs and delays in payments, settlement and trade finance.
Funds held in escrow by a smart contract might be released immediately once delivery confirmation occurs, bypassing lawyers or escrow agents. Financial trade settlement could shrink from days to seconds, improving liquidity.
These efficiencies explain why over half of IT leaders in finance plan to implement smart contracts soon, with many expecting the technology to eventually replace conventional processes.
The potential for 24/7 operation with near-instant automated execution represents a significant advancement for an industry accustomed to transaction cutoff times and settlement delays. Banks are actively exploring how to incorporate smart contracts within regulated financial frameworks, aiming to combine banking reliability with DeFi programmability.
If agreements like loans or swaps can be encoded and auto-executed, they might reduce operational risks and costs. Virtually any agreement following defined rules could theoretically become a smart contract. Blockchain consortia and pilot programs have emerged throughout the banking sector to test these possibilities.
However, integrating code-based contracts into heavily regulated finance presents challenges. Banks must ensure digital contracts align with legal requirements and can handle large transaction volumes securely. Despite these hurdles, progress continues through various projects and trials.
From DeFi to TradFi: How Smart Contracts Are Crossing Over
In decentralized finance (DeFi), smart contracts already power numerous financial services, including automated lending platforms where users earn interest by supplying assets, decentralized exchanges for token swaps, and algorithmic stablecoins governed entirely by code. These services function through self-executing software that enforces rules without human intervention.
For example, lending protocols automatically liquidate borrower collateral if its value falls below predetermined thresholds. The result is an always-on financial system where DeFi protocols operate continuously and funds move in minutes instead of days.
This efficiency comes with trade-offs — transparent but unforgiving code means errors can lead to losses with no central authority for appeals.
DeFi's growth has demonstrated smart contracts' innovative potential while highlighting their operation outside traditional financial safeguards. Regulators have expressed concerns about money laundering and security vulnerabilities, underscoring that DeFi's trustless freedom introduces new risks.
Traditional finance ("TradFi") incorporates legal structures, consumer protections and central bank oversight that cannot simply be discarded. Nevertheless, banks see opportunities to import DeFi efficiencies into their operations. Any process involving verifiable rules and repetitive steps could potentially utilize smart contracts.
Payments and remittances exemplify this potential — instead of messages passing through multiple correspondent banks and clearinghouses, smart contracts could instantly transfer tokenized money when conditions are met. Settlement finality might occur in seconds on shared ledgers, as several pioneering projects have demonstrated.
Trade finance and supply chain transactions represent another focus area. Traditionally paper-intensive and slow, these processes could transform through digitized documents like letters of credit with workflows embedded in code.
A shipment's bill of lading might trigger automated payment upon delivery confirmation, recorded on blockchain for auditability.
Securities trades and post-trade processing stand to benefit significantly. Smart contracts can manage clearing and settlement tasks, ensuring simultaneous movement of securities and cash without requiring central clearing parties. This accelerates settlement while freeing capital by reducing collateral requirements during waiting periods.
Several large institutions are conducting controlled pilots exploring these concepts. Asset "tokenization" frequently accompanies smart contract implementation, with banks creating digital tokens representing real-world assets like deposits, bonds or equities on blockchains. Smart contracts then manage their transfer and settlement.
For instance, tokenized bond issuance might program coupon payments to distribute automatically to token holders on schedule. Similarly, tokenized bank deposits could move across blockchain networks continuously, with smart contracts instantly routing payments as needed. While these tokens remain claims on issuing institutions, they enable new transaction methods.
To effectively bridge DeFi and TradFi, common standards or interconnected networks may be necessary for seamless smart contract operation across institutions. Regulation and legal enforceability present additional considerations. While smart contracts might perfectly execute transactions, their recognition as valid contracts under law remains crucial.
Banks are exploring "smart legal contracts" combining code with traditional documentation (often called "legal wrappers") to ensure enforceability. Regulators closely monitor these developments, requiring resolution of data privacy, operational resilience and consumer protection concerns before widespread implementation.
Despite these challenges, banks steadily enhance their blockchain and smart contract capabilities. "We will continue operating in a hybrid world for years," notes Julien Clausse, head of digital assets at BNP Paribas, with some activities transitioning to blockchain while others remain traditional.
Real Use Cases of Smart Contracts in Banking
Below are ten notable examples where financial institutions have implemented smart contracts. These range from global banks streamlining cross-border transfers to regional institutions accessing DeFi protocols, highlighting various applications from payments to trade finance.
Together, they illustrate how smart contract automation begins bridging decentralized finance with banking mainstream.
1. Citi's Tokenized Deposits for Always-On Banking
Citigroup has piloted smart contracts to enhance core transaction services. In 2023, Citi's Treasury and Trade Solutions division launched "Citi Token Services," using blockchain and smart contracts to tokenize customer deposits and automate trade finance processes.
In a test with shipping giant Maersk and a canal authority, Citi created a digital solution replacing paper-intensive bank guarantees. When certain shipping transaction conditions were met, a smart contract automatically triggered instant payment to the service provider from a tokenized deposit, similar to a letter of credit but significantly faster.
This "programmable transfer of tokenized deposits" provided near real-time settlement via smart contract. For both buyer and seller, the entire process was digital — documents, payment and verification — reducing what normally takes days into minutes.
Citi also tested tokenized deposits for internal cash management. In another pilot, a corporate client transferred liquidity between Citi branches worldwide on a 24/7 basis. Under traditional banking infrastructure, cross-jurisdictional fund movement faces delays from cutoff times or holidays, but blockchain-based deposit tokens can settle anytime.
Citi's system operates on a private, permissioned blockchain owned by the bank, allowing clients to avoid managing blockchain nodes or dealing with cryptocurrency volatility. This approach prioritizes compliance and control while leveraging smart contract automation benefits.
Citi executives describe these digital asset pilots as part of a "journey to deliver next generation transaction banking" within existing legal frameworks. The head of Citi's services unit noted that such technologies could upgrade the regulated financial system by applying innovation to established instruments.
2. JPMorgan's Onyx: From JPM Coin to DeFi Pilots
JPMorgan Chase has pioneered blockchain and smart contract integration into traditional banking. In 2019, it became the first major U.S. bank launching its own digital currency for internal use — JPM Coin, a token representing bank deposits for settling payments between JPMorgan and clients.
Running on the bank's proprietary network (now called Onyx), JPM Coin allows wholesale clients to make dollar and euro payments to each other via blockchain instead of correspondent banking. The token's value matches the underlying fiat currency, with each transaction settled by a smart contract moving tokenized deposits between parties instantly. By 2023, JPM Coin processed approximately $1 billion in daily transactions.
While representing a small fraction of JPMorgan's total payment flows, this proved the concept: value can transfer via bank-issued tokens continuously, providing clients 24/7 settlement flexibility.
The bank also operates a blockchain-based repo market application where smart contracts facilitate intraday repurchase agreements. In late 2020, JPMorgan executed an intraday repo trade in minutes rather than hours. By 2023, the bank reported processing nearly $700 billion in tokenized short-term loan transactions through Onyx smart contracts.
These repo trades benefit from atomic settlement (simultaneous exchange of cash and collateral tokens) and flexible timing enabled by smart contracts.
Beyond internal networks, JPMorgan has explored public blockchain and DeFi interoperability. In November 2022, during Singapore's Project Guardian trial, JPMorgan executed its first live DeFi trade on a public blockchain. The bank and partners DBS Bank and SBI conducted foreign exchange trades and government bond transactions using tokenized bond and deposit liquidity pools on a modified DeFi protocol.
A live cross-currency swap between tokenized Japanese yen and Singapore dollar deposits completed successfully using a smart contract on public blockchain. Essentially, JPMorgan placed "real world" assets in a DeFi environment to test direct trading between participants using automated market-making and smart contract logic.
The transaction executed and settled on-chain, demonstrating regulated banks could interact with decentralized protocols in controlled environments. Umar Farooq, CEO of Onyx, said such pilots reveal opportunities to "reassess how infrastructure works end to end" and potentially standardize data and processes using blockchain.
JPMorgan's strategic approach combines internal platforms with external experiments, finding practical applications in payment clearing and collateral management. Corporate treasury clients use JPM Coin to transfer money across borders outside normal business hours, avoiding day-long wire transfer delays. Fund managers can use the tokenized repo market for short-term liquidity by trading Treasury bonds with the entire sequence managed by code.
JPMorgan executives have publicly supported this direction: the bank's wholesale payments head called tokenization "a killer app for traditional finance," noting private markets could gain liquidity through 24/7 blockchain trading. These new systems develop carefully under regulatory oversight, with JPMorgan's Singapore DeFi venture conducted in partnership with regulators using permissioned liquidity pools ensuring compliance.
3. HSBC and Wells Fargo Settle FX Trades on Blockchain
Two global banking giants, HSBC and Wells Fargo, have applied smart contract technology to foreign exchange markets. In December 2021, they began using a shared blockchain ledger for direct bilateral FX trade settlement, eliminating traditional third-party settlement networks.
Typically, when banks trade currencies, settlement occurs through CLS Bank, a specialized intermediary guaranteeing payment-versus-payment for global FX transactions. This process takes several hours and involves additional costs. Using distributed ledger technology, HSBC and Wells Fargo now settle transactions in under three minutes directly between themselves.
The platform, provided by fintech firm Baton Systems (through its Core-FX DLT solution), uses smart contract logic ensuring currency payments release only when corresponding payments in other currencies are ready — achieving critical PvP (payment versus payment) settlement safely.
By avoiding CLS and settling peer-to-peer, the banks reduce settlement risk exposure and free capital otherwise held as buffers during pending trades. A Reuters report called this a significant sign of blockchain technology "spreading to more mainstream activities" beyond experimentation.
The initial 2021 phase covered four major currencies (USD, GBP, EUR, CAD). Building on success, HSBC and Wells Fargo expanded the system in 2022 to include offshore Chinese yuan (CNH), making it the fifth currency on their DLT platform. This expansion marked the first settlement of a non-CLS currency using PvP on distributed ledger technology, demonstrating the approach's flexibility.
Since implementation, the banks have reportedly settled over $200 billion in FX trades using the shared ledger. The process operates fully automatically: when HSBC and Wells Fargo agree on a trade, both send payment instructions to the shared blockchain. A smart contract coordinates simultaneous exchange, debiting one bank's tokenized currency while crediting the other's, completing the swap in a synchronized, atomic transaction.
If one side's payment fails to arrive or discrepancies occur, the smart contract prevents settlement execution, protecting all parties.
This initiative demonstrates how smart contracts modernize core banking operations. By leveraging joint blockchain ledgers, HSBC and Wells Fargo created a private peer-to-peer settlement network operating continuously, potentially enabling multiple daily settlements rather than end-of-day batching. The speed (minutes versus hours) releases liquidity faster as banks immediately receive purchased currencies for reuse.
From a risk perspective, reduced settlement timeframes minimize opportunities for counterparty defaults before delivery. The banks emphasize this operates within existing regulatory frameworks — using a closed network where exchanged value remains central bank money, merely mirrored on the ledger.
4. UBS Issues Digital Bond on Distributed Ledger
In November 2022, Swiss banking giant UBS achieved a capital markets milestone by issuing a $370 million bond existing simultaneously on blockchain and traditional exchange systems. UBS's three-year senior unsecured bond became the world's first digital bond publicly traded and settled on both blockchain-based and conventional market infrastructure.
The bond registered on the SIX Digital Exchange (SDX) blockchain — a regulated distributed ledger platform — while remaining available for purchase or sale via either the SDX system or conventional SIX Swiss Exchange. Investors could settle the bond through either the new DLT-based central securities depository or traditional clearing systems thanks to an interoperability link.
Crucially, UBS structured the digital bond to maintain identical legal status and investor protections as standard UBS senior notes. The innovation lay in issuance and settlement technology rather than legal characteristics.
Using SDX smart contract infrastructure, UBS implemented automated settlement processes. Settlement occurs instantly without central clearing counterparties or T+2 settlement cycles. The bond's smart contract ensures that when trades execute on SDX, buyer's cash (tokenized CHF) and seller's bond token swap simultaneously (delivery versus payment) within seconds.
This reduces counterparty risk through near real-time ownership transfer versus multi-day waits in traditional markets. UBS's group treasurer emphasized pride in "leveraging distributed ledger technology" for this launch, highlighting support for new market infrastructure development.
Beyond faster settlement, investors potentially benefit from extended trading hours and flexibility since blockchain platforms can operate beyond exchange time limitations. The regulated SDX platform provided necessary trust and legal frameworks — essentially functioning as a digital twin of the Swiss exchange operated by code.
UBS's digital bond builds upon smaller previous experiments (like the European Investment Bank's 2021 blockchain bond). However, UBS's issue stands out for its substantial size (CHF 375 million) and integration with existing market systems rather than standalone testing. The bond pays 2.33% coupon with 2025 maturity. Investors may hold it in either form; both SDX and traditional listings represent the identical security.
This approach ensures no investor faces forced blockchain adoption while offering efficiency benefits to those who opt in. By bridging old and new systems, UBS demonstrated how smart contracts could gradually integrate into capital markets without disruption.
5. ANZ's Stablecoin Blazes a Trail for Digital Currency
In March 2022, Australia and New Zealand Banking Group (ANZ) became Australia's first bank to mint a stablecoin — a digital coin pegged 1:1 to the Australian dollar — opening new transactional smart contract applications in banking.
The bank created 30 million AUD of these tokens, called A$DC, on blockchain via smart contract, facilitating actual client payment. ANZ delivered A$DC to private digital assets investment firm Victor Smorgon Group through platform Zerocap. Recipients later redeemed tokens for traditional currency.
This demonstrated a complete cycle: a bank accepted customer money, issued equivalent stablecoin tokens on blockchain, transferred tokens to another party, and finally converted them back to Australian dollars. The entire process occurred under bank oversight with real deposit backing — creating a regulated stablecoin transaction rather than crypto-space stablecoins.
Technically, ANZ's smart contract managed both issuance (minting) and redemption (burning) of A$DC. The process transferred $30 million between parties within approximately 10 minutes — traditionally requiring a day or more for such large amounts. Using stablecoins reduced settlement risk and time: value remained in escrow-like smart contracts until finalization rather than interbank transfer limbo.
This bank-issued stablecoin resembles JPMorgan's JPM Coin as a tokenized deposit. Notably, ANZ conducted an external client transaction rather than internal transfers. It addressed a real use case where a corporate client needed blockchain functionality to purchase digital assets (reportedly tokenized carbon credits), requiring a fiat currency bridge. ANZ provided this through A$DC smart contracts, enabling payment in digital Australian dollars.
The Reserve Bank of Australia observed these developments while considering digital money's future. ANZ's success demonstrated commercial banks can safely issue and manage digital cash equivalents. By pioneering this approach regionally, ANZ established a path other Australian banks might follow. The bank has subsequently explored additional A$DC applications, including pilot programs tracking government pension payments.
One immediate application for bank stablecoins involves digital asset exchange settlement. Companies trading tokenized assets benefit from bank-backed stablecoins for rapid investment entry and exit without waiting for traditional transfers. This effectively provides "on-chain bank account balances."
ANZ's case significantly bridges regulated banking with largely unregulated token environments. The bank maintained full compliance (KYC/AML procedures, transaction recording) while leveraging public blockchain benefits. Smart contracts guaranteed that 30 million A$DC created maintained proper reserves backing, preserving trust in Australian dollar parity.
6. Société Générale's DeFi Experiment with MakerDAO
One of France's largest banks, Société Générale (SocGen), made headlines by directly experimenting with borrowing from a DeFi protocol using real-world assets — a remarkable convergence of traditional banking and decentralized finance.
In late 2021, SocGen (through blockchain-focused subsidiary SocGen-FORGE) proposed to MakerDAO, a major DeFi lending platform, borrowing up to $20 million in stablecoins using tokenized bonds as collateral. The arrangement would package bonds (covered bonds backed by mortgages previously issued as security tokens on Ethereum) represented as collateral in MakerDAO through smart contracts. In return, MakerDAO would lend DAI stablecoin to SocGen, providing the bank decentralized funding.
This represented what observers described as likely the largest step toward institutional DeFi adoption, marking a historic first — a regulated commercial bank seeking funding from a protocol without traditional intermediaries.
The plan required substantial legal engineering satisfying both parties. SocGen's proposal outlined complex legal structures involving a special-purpose vehicle in France plus legal opinions, addressing complications from MakerDAO's status as a decentralized community rather than a company.
Essentially, the bank attempted treating MakerDAO as a creditor. They proposed smart contracts holding bond tokens would enforce loan terms: if SocGen failed to repay the DAI loan, MakerDAO's contract could seize tokenized bonds for liquidation.
The high-quality bonds (rated AAA) carried 0% coupon (issued 2020, maturing 2025), structured specifically for collateral use. SocGen described the project as a "pilot use case" to "help shape and promote an experiment under the French legal framework," focusing on legal and regulatory viability alongside technology.
While implementation took time for MakerDAO community evaluation, the attempt showcased a novel smart contract application: a bank coding to interact with a DeFi lending pool. By early 2022, discussions continued between MakerDAO and SocGen, progressing gradually but steadily.
The attempt carried significant implications. First, it proved banks view DeFi platforms as potential liquidity sources — a remarkable development considering DeFi's original disintermediation aims. The bank sought to become a DeFi user, essentially intermediating itself. The attraction likely involved potentially low-rate DAI borrowing and funding source diversification.
For MakerDAO, onboarding a reputable European bank as borrower would validate its real-world asset backing model beyond crypto assets. MakerDAO's community eventually approved structures allowing such real-world collateral, laying groundwork for SocGen or others to access Maker liquidity by mid-2022.
7. Community Bank Taps DeFi: Huntingdon Valley's $100M MakerDAO Loan
In an even more striking real-world DeFi crossover, a small community bank secured a loan facility from a decentralized protocol. Huntingdon Valley Bank (HVB), a Pennsylvania-based institution established in the 19th century, became the first U.S. bank partnering with MakerDAO for stablecoin loans.
In July 2022, MakerDAO's governance approved opening a credit line up to $100 million in DAI (Maker's dollar-pegged stablecoin) for HVB. This participation facility allows HVB to borrow DAI from MakerDAO's smart contracts, convert it to USD, and deploy funds for normal business activities like mortgage and commercial loan origination.
In return, HVB provides collateral through its loan pool and pays interest to MakerDAO. The arrangement was heralded as "the first commercial loan participation between a U.S. Regulated Financial Institution and a decentralized digital currency."
Mechanically, HVB established a special entity (trust) interfacing with Maker's smart contract. When drawing DAI, the trust requests it from Maker's vault (a smart contract lending facility) up to agreed limits. HVB then exchanges DAI for U.S. dollars (likely via cryptocurrency exchanges or OTC desks) for banking operations deployment.
Loans generated with these funds serve as collateral — if HVB defaulted on Maker obligations, the trust would theoretically liquidate the loan portfolio for DAI repayment. HVB periodically pays interest (in DAI) to the smart contract like any borrower.
From MakerDAO's perspective, this earns yield from a real-world creditworthy counterparty, diversifying beyond cryptocurrency borrowers. HVB gains access to substantial capital ($100M) outside traditional deposit-taking or interbank markets, potentially at competitive rates. This represents a new wholesale funding source that's fast and blockchain-based.
Following approval, MakerDAO funded an initial $50 million DAI tranche as the facility's first phase.
This partnership breaks new ground on multiple levels. It demonstrates DeFi liquidity directly supporting real economy lending through banks. MakerDAO's smart contracts, typically handling cryptocurrency collateral, adapted for U.S. bank loan participations through legal structuring but ultimately code enforcement.
Technologically, HVB leveraged Maker's existing smart contract system rather than building new infrastructure. MakerDAO's vault smart contracts automated lending logic: tracking DAI draws, maintaining collateral ratios, and collecting interest payments. HVB interacts at endpoints (converting between DAI and dollars) while code and surrounding structures handle trust mechanisms.
This exemplifies smart contracts intermediating between traditional banks and global cryptocurrency investor pools without central facilitators, directly bridging DeFi and TradFi through capital flowing from crypto sources into community bank loan portfolios.
At scale, this model could eventually have banks routinely raising funding through decentralized platforms — essentially creating another securitization form operating in real-time on open markets. Huntingdon Valley Bank's innovation suggests smaller banks can leverage blockchain smart contracts for capital access and service innovation while providing DeFi communities stable, asset-backed returns — a previously impossible arrangement before these technologies emerged.
8. Global Trade Finance on Blockchain: Contour's Digital Letters of Credit
Trade finance — international commerce's lifeblood — has long been identified as prime for blockchain and smart contract transformation. Contour exemplifies this by digitizing centuries-old Letter of Credit (LC) processes.
Launched in 2020 with backing from major trade finance banks (including HSBC, Standard Chartered, Citi, BNP Paribas, ING and others), Contour uses R3's Corda blockchain to coordinate LC transactions through smart contracts.
Letters of credit essentially guarantee payment from importer banks to exporters upon shipment proof. Traditionally this involves paper documents couriered and reconciled among multiple parties — typically taking 5-10 days per transaction. With Contour, all participants (buyers, sellers, and their banks) share a single digital workflow.
The LC issues as a digital blockchain record; when exporters upload shipping documents (often electronic) to the platform, smart contracts verify requirement fulfillment before triggering advisement and payment authorization.
Pilots demonstrated dramatic efficiency gains. Average LC processing time reduced from approximately 10 days to under 24 hours (some as little as 14 hours). This acceleration occurs because instead of courier waits and manual data entry, smart contracts instantly notify issuing banks when documents arrive, allowing real-time approval or query on the shared platform.
Document reconciliation becomes unnecessary when all parties view identical immutable ledger data. An early live transaction involved HSBC facilitating an LC on Contour for electronics shipment from Hong Kong to Bangladesh, reportedly completing in 24 hours versus typical 5-10 days.
The smart contract enforces agreed workflows: it recognizes requirements (like bill of lading and certificate of origin uploads) and enables LC honoring once those elements appear with digital signatures.
Contour formally entered production in October 2020 after numerous pilot transactions. Seven founding banks (HSBC, Standard Chartered, Bangkok Bank, ING, SEB, CTBC, and BNP Paribas) were joined by others including Citi and DBS. Today, Contour operates as a live network where companies apply for LCs through banks digitally, with issuance and document negotiation occurring through smart contract systems.
Each transaction's key steps (LC issuance, document presentation, discrepancy handling, acceptance, financing) record with relevant party validation digitally. Essentially, Contour's smart contracts function as automated escrow and compliance agents for trade transactions, ensuring funds move only when conditions meet with prior participant agreement.
This case demonstrates how bank consortia collectively build shared smart contract platforms addressing industry challenges. No single bank controls Contour; it operates as a network utility under joint governance, facilitating competitor collaboration. LC legal foundations remain intact — maintaining UCP 600 rules while dramatically improving execution.
Contour's success (reportedly processing over $1 billion in LCs during its first operational year) has sparked interest in similar models for other trade instruments like guarantees or open account trade. It proves smart contracts can digitize complex, multi-party banking processes involving trust and verification, delivering tangible speed and cost benefits.
9. Bahrain's Bank ABC Pilots JPM Coin for Cross-Border Payments
Even regional banks in smaller markets leverage major bank blockchain innovations. In 2021, Bank ABC — a Bahrain-based institution — partnered with J.P. Morgan and Bahrain's central bank to pilot JPMorgan's JPM Coin (a permissioned blockchain token for interbank payments) for cross-border transfers.
The pilot streamlined USD settlements from Bahrain, using stable-value tokens representing U.S. dollars within payment flows. During testing, Bank ABC used JPM Coin to send USD funds from Bahrain to counterparties (including Aluminium Bahrain, a major corporate) abroad, with transactions orchestrated on JPMorgan's Onyx network under Bahraini central bank supervision.
This arrangement enabled faster supplier payments while allowing buyers to initiate just-in-time transfers without pre-funding destination country accounts. Traditional cross-border USD payments from Bahrain would typically involve correspondent banks and possibly nostro account prefunding in New York. JPM Coin changed this dynamic.
Payment from Bank ABC to supplier banks (through JPM's network) executed via smart contracts instantly transferring USD tokens representing payment amounts. Because JPM Coin transactions settle near-instantly on the Onyx ledger, funds moved quickly with settlement finality guaranteed by JPMorgan's network.
Bahrain's central bank highlighted that this approach dramatically shortens payment times while eliminating local currency intermediaries and advance funding requirements. Effectively, Bahraini importers could send dollars to U.S. exporters through this network without waiting for wire cutoffs or maintaining dollar reserves in U.S. accounts days beforehand.
For Bank ABC, pilot participation offered multiple advantages. It tested cutting-edge financial technology alongside a global bank, potentially gaining competitive regional advantages in innovative payment solutions. The project also provided the central bank with practical case studies of regulated digital currencies (bank-issued tokens) functioning in cross-border scenarios.
Smart contracts on the JPM Coin platform likely incorporated compliance checks and messaging (JPMorgan's network operates as closed and permissioned, with all participants verified). Once triggered, contracts transferred tokens between institutional wallets while simultaneously releasing fiat USD or crediting accounts accordingly, producing faster, more transparent remittances.
The central bank noted this could eventually improve global trade finance efficiency. This pilot exemplifies how smart contracts might interlink banking systems worldwide. Rather than building proprietary coins, smaller banks could join larger institutions' networks (like JPMorgan's) to access trusted stablecoins for settlements.
While JPM Coin provided the technology, the principle applies to other major bank coins or potentially central bank digital currencies. The key innovation involves automation and speed: replacing manual payment messaging with blockchain tokens makes value transfer immediate. All participants (both banks and the observing central bank) maintained synchronized transaction ledger views, enhancing transparency.
For aspiring fintech hub Bahrain, early capability demonstration represents strategic positioning. The successful 2021 test announcement placed Bank ABC among the Middle East's first institutions transacting on such blockchain payment networks.
10. Italian Banking Association's Spunta: Smart Contracts for Interbank Reconciliation
Not all banking smart contract applications involve customer-facing products; some improve financial system internal operations. "Spunta" exemplifies this as a blockchain-based system adopted by the Italian Banking Association for automating interbank reconciliation.
Launched in 2020, Spunta addresses the essential but mundane process of reconciling mutual accounts between banks — ensuring Bank A's ledger of obligations to and from Bank B matches Bank B's records. Traditionally, this involved monthly (or less frequent) bilateral account reconciliation, often requiring manual adjustments, phone calls, and emails resolving discrepancies through siloed processes.
With Spunta, approximately 100 Italian banks now share a distributed ledger technology platform automatically comparing and reconciling daily transactions. Spunta uses R3 Corda and smart contract logic to flag and resolve mismatches in interbank transactions.
Each participating bank's node uploads relevant transaction data to the ledger daily. The Spunta smart contract then cross-checks records: if Bank A recorded a payment to Bank B that Bank B hasn't recorded as received, the system identifies this as an exception. The platform provides standardized workflows for banks to communicate and resolve such exceptions digitally on the shared ledger.
According to the Italian Banking Association, 32 banks were already operating on the system by late 2020, with more joining in waves until most of the country's banks connected. This transition shifted banks from fragmented, delayed processes to near real-time, automated reconciliation running continuously.
The smart contract ensures all parties view identical data and results, eliminating issues of each bank working from isolated records before manual comparison. A major improvement involves transparency and auditability. All participating banks can view relevant transactions and matching status on the platform. Communications previously occurring through bilateral channels (often without formal logging) now take place through the platform with automatic recording.
Spunta increases system trust by establishing a single truth source for interbank positions. The system detects anomalies much faster, potentially identifying errors or fraud attempts that previously might have remained unnoticed much longer.
An executive from SIA (the technology firm implementing Spunta) noted this created blockchain infrastructure for the entire Italian banking sector that could support additional collaborative projects. Essentially, the framework now exists for implementing other interbank processes on smart contracts, with every bank maintaining a node and understanding the concept.
The Spunta case may lack digital coin or DeFi glamour, but represents perhaps the clearest example of banks using smart contracts to modernize archaic internal processes. It solved an industry-wide coordination problem by creating a shared, trusted ledger governed by universally accepted smart contract rules.
Conclusion: Bridging DeFi and Banking – Are We There Yet?
The diverse cases above demonstrate that smart contracts are steadily carving out roles in traditional finance, but the bridge between DeFi and banking builds one careful span at a time.
Tangible successes have emerged: banks have achieved faster settlement cycles, automated complex processes like trade finance and reconciliation, and even accessed DeFi liquidity — all through smart contract automation. These implementations prove technical feasibility.
A payment once requiring days now settles in seconds on shared ledgers; bond issuances traditionally needing multiple intermediaries can execute with code ensuring instant delivery-versus-payment settlement.
Yet the journey to fully bridge decentralized and centralized finance remains incomplete. Scalability concerns persist. Many projects operate on private blockchains specifically to control throughput and security. Public blockchains offer greater openness but still face challenges handling global financial transaction volumes, despite improving technologies.