How will blockchain change accounting?
Here's what you need to know.
Why it deserves the attention it gets
It would be easy to dismiss the current excitement about blockchain as hype.
But that might be unwise: the scale of its potential impact on our working lives is so great that management accountants and other business leaders must be alert to its potential and take it seriously.
Regulators across the world, such as the UK’s Financial Conduct Authority (FCA), are taking a close and growing interest in blockchain. But why?
A crypto-controversial technology …
Blockchain is the distributed ledger technology that underpins bitcoin, the best known of the world’s cryptocurrencies.
“Why are regulators across the world taking such a close and growing interest in blockchain?”
Cryptocurrencies are stateless and unregulated. They can be used to trade in contraband or illegal goods on the dark web, as well as for fraud, money laundering or tax evasion. Speculative investment in cryptocurrencies could also result in big losses for ill-informed investors.
However, special features of the technology behind cryptocurrencies such as bitcoin provide reassurance: while investors and regulators may worry about a holding’s value, they should have no concerns about its validity.
These special features of blockchain are what give it such significant potential as a defining technology of tomorrow.
Do you understand blockchain well enough to engage with business colleagues on the topic?
Setting a transaction’s history in stone
A blockchain is a distributed ledger that digitally records the full history of a transaction. It stores this information in ‘blocks’ of data that are linked — or ‘chained’ — together.
At its simplest, a blockchain is a database — one that’s shared or distributed among participants so that all can confirm, maintain and see the same record
of events in close to real time.
Encryption, digital signatures and protocols provide security. Each new data block or transaction record added to a chain is unique, date stamped
A blockchain is a type of database that takes a number of records and puts them in a block (rather like collating them on to a single sheet of paper). Each block is then ‘chained’ to the next block, using a cryptographic signature. This allows blockchains to be used like a ledger, which can be shared and corroborated by anyone with the appropriate permissions.
Distributed Ledger Technology:
UK Government Office for Science, 2016
Contracts and consensus
All the participants’ computers act as nodes to authenticate and confirm the validity of each new transaction (or ‘block’) as it is added to
This consensus-based verification makes
entries almost impossible to change — in fact, historic records are unalterable unless a
pre-agreed protocol (such as a majority decision) allows amendments.
You can also create smart contracts by embedding program code in a block of the chain to define a contractual term and carry out a
pre-agreed instruction. This might authorise an automatic payment once a contractual condition has been met, following the delivery of goods or the completion of a service.
With great power comes
All these factors provide blockchain technology with great potential that is yet to be realised:
Visibility and transparency:
The distributed ledger database maintains records in ‘blocks’ that can be seen by all blockchain systems’ users in near real time.
Supported by cryptography and digital signatures — because all nodes validate a transaction and contribute to consensus-based assurance, all participants can trust the data on the blockchain.
No individual owner is responsible for a record’s integrity, meaning resilience is assured.
Entries cannot ordinarily be altered or edited, sustaining a permanent, indelible record.
It’s easy to automate processes through smart contracts.
Ease of reconciliation:
All participants work off the same data set.
These are powerful benefits that cannot be ignored — and have major potential implications for the future of accountancy.
“Entries cannot ordinarily be altered or edited, sustaining a permanent, indelible record …”
Innovating in vertical markets
It’s been more than a decade since Satoshi Nakamoto published a white paper in November 2008, describing a peer-to-peer electronic payment system using a ‘chain’ of ‘blocks’ secured by encryption.
(Satoshi Nakamoto means ‘Central Intelligence’ in Japanese. Whoever he, she or they might have been, what is for certain is that they went on to establish Bitcoin.)
All these factors provide blockchain technology with great potential that has yet to be realised:
Assuring the provenance of organic crops.
Payment systems, meeting ‘know your customer’ requirements, funding trade debtors and tracking progress along a supply chain.
Of groups of people such as refugees.
As a unique cryptographer to act as identifiers in clinical trials.
Land registry applications.
Tracking the whereabouts of shipping containers.
Embedding an instruction to pay in a block.
Proving concepts at the cutting edge
Beyond proof-of-concept projects
However, blockchain usage to date remains stubbornly isolated and rare.
This is largely due to cost and complexity. It’s one thing to prove that blockchain can fulfil a particular purpose. But it remains a big, complicated and expensive solution. New fintech solutions may emerge to compete with blockchain, providing more elegant, simple alternatives. And simplicity is almost
Questions to ask if you’re considering blockchain
Blockchain projects often are more technically complicated than their ‘traditional’ IT equivalents. This can be further compounded by their
In addition, blockchain may not yet have the robustness and scalability needed for some of the scenarios where it has potential.
Before committing to a blockchain solution, ask:
- Do we want to sign up to a shared venture?
- Are we happy to devolve control to a
- Who will design the system, who will maintain it and how will costs be shared?
- How will we ensure the integrity of information recorded on the chain?
- Should we be looking for simpler solutions that might be more fit for purpose?
But, make no mistake. We are in the early days
of blockchain, and its potential for irreversibly changing the world in which we live and work
Can you see practical applications of blockchain technology in your business?
- Not really
mainstream — the SWIFT way
SWIFT — The finance community co-operative that provides payment systems for banks — has developed a plan for what needs to happen before blockchain can fulfil its potential.
In 2016, it suggested that all the following issues would have to be addressed before blockchain could be sufficiently robust for widespread use across the financial services sector.
Click to enlarge
Once these factors are resolved, blockchain will be poised to enter the mainstream.
The blockchain effect
The promise for accounting and finance
Blockchain is a technology with the power to utterly transform accounting:
There are no different versions. There is a single version of the truth.
All parties have the same record.
Ledgers are recorded at the same time, in multiple locations, on
Data is shared across public or peer-to-peer networks.
So, once blockchain rules, there will be no need for double entry to balance and confirm, as all parties share the records of all transactions. In addition,
self-balancing and continuous checking will eliminate the need for reconciliation.
Like, love or wow — the response of the big players
The Big Four are all excited by the potential in blockchain, working with clients to share best practice, to experiment and to build solutions.
IBM, Microsoft and other big players can provide blockchain-as-a-service over cloud platforms. This means any business can now deploy a private or public blockchain, using established protocols without having to incur
Nevertheless, even in the case of TradeLens, the global trading platform developed by IBM and Maersk, which was launched in January 2018 with a critical mass of major participants, take up by more of the potential participants to a blockchain can still be slow.
However, the infrastructure is increasingly in place and increasingly robust.
“The use of blockchain for global shipping isn’t just a new solution — it is a wholesale reimagining of the industry. For it to be successful in the long run, the network must continue to grow, the technology must continue to improve, and more value must be created for all participants.”
– TradeLens: How IBM and Maersk are sharing blockchain to build a global trade platform, IBM.com, 2018
How engaged should finance be in blockchain?
- Providing leadership
- In a supporting role
- Not finance’s territory
- Don’t know
What’s next for blockchain?
The volume of bitcoin transactions still is relatively low. Despite the rapid growth in computing capacity, blockchain technology may not yet be able to support the high levels of transactions required in more mainstream applications.
Transferring data continuously among multiple users makes databases exponentially slower. It also requires a lot of energy consumption. Right now, it looks as though it will be a few years before blockchain is sufficiently quick, cheap, efficient, secure, trusted and regulated to become established in global financial systems.
Driving fundamental change
However, this is a radically new technology that could fundamentally change how transactions are processed and recorded.
Such transformational shifts in technology
are not regular occurrences. They don’t
But, given time, blockchain could change everything.
Management accountants need to be alert to the vast potential of this new technology, both for the benefit of the business as a whole and its potentially transformative impact on all accounting processes.
In October 2017 the Association announced a new collaboration with the Wall Street Blockchain Alliance (WSBA). Together, this partnership will explore and define the impact of blockchain technology for the accounting profession.
- CGMA, Changing technology and finance
Explore more Blockchain resources
Explore more blockchain resources here
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Peter Simons, BBS, MBA, FCMA, CGMA
Associate Technical Director of Research –
Head of Future of Finance Research
Association of International Certified
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