Blockchain came to mainstream attention in 2017, despite having existed for almost a decade prior. The author explains how this new technology, perhaps best known for its role in enabling cryptocurrencies, works. In his view, blockchain has the potential to change the way the world does business, and its impact is being vastly underestimated by the accounting profession and society at large.
1. Cryptocurrency- World of Block-Chain
In Brief
Blockchain came to mainstream attention in 2017, despite having existed for almost a decade prior. The
author explains how this new technology, perhaps best known for its role in enabling cryptocurrencies,
works. In his view, blockchain has the potential to change the way the world does business, and its impact
is being vastly underestimated by the accounting profession and society at large.
Cryptocurrencies have become a prevailing topic of conversation, even among the most novice investors.
While Bitcoin and Ethereum are the most well-known, few people realize that there are currently more
than 1,600 different cryptocurrencies. Even fewer realize that their underlying technology—blockchain—
may be a far more meaningful disruptor in the financial sector than cryptocurrencies themselves.
Importance of Blockchain
Blockchain, a form of distributed ledger technology (DLT), is essentially a decentralized, trustless, openly
auditable ledger that can be shared and viewed by all users. The genesis of the technology is still being
debated, but most would say that blockchain coalesced in the midst of the 2008 global financial crisis.
Many cryptography enthusiasts in the San Francisco Bay area had become tired of the centralized nature
of the banking system and started discussing over online forums ways to shift trust from the centralized
authorities. In November 2008, a person or persons writing as “Satoshi Nakamoto” published a now-
famous white paper focusing on a peer-to-peer electronic cash payment system.
Traditional banking and Business
2. Traditional banking and business is centralized, meaning the ledger indicating who owns what or who
owes whom is kept on a private database and relies on the overseeing body of the database to keep the
records safe and accurate. Therefore, the system depends upon people’s trust that the bank or business is
keeping proper track of the ins and outs of users’ money and information. Any failures with this single
source of authority could mean trouble, especially since many people are unaware of actual banking laws
and what the banks do with money once users deposit into their accounts. Prior to the 2008 crisis, few
thought that banks were being reckless or questioned the risky lending choices they made with users’
money. People also didn’t think that the banks would need a $7.7 trillion taxpayer bailout—more than
half the value of everything produced that year. These breaches of financial trust, as well as the notable
hacks in recent years that have gained access to millions of users’ sensitive personal information, have
brought much-needed scrutiny to the inner workings of the financial system.
Blockchain Use Cases
Detailed below are some issues that new emerging blockchain technologies are trying to solve. This
listing is in no way exhaustive, nor are any of the native tokens associated with the blockchains promoted
or endorsed in the given examples. This listing is meant to illustrate the application of the above concepts
as they pertain to the real world.
• Cross-Border payments
Moving money from one country to another is currently done on archaic payment rails, supported by the
Society for Worldwide Interbank Financial Telecommunications (Swift). These payment rails require
users to pay extremely high fees and wait three to five (or more) days for the transfer of funds to be
completed. With information moving so freely, the general population expects its money to move freely
as well.
3. Ripple, a blockchain company in San Francisco, is utilizing DLT to create what it calls the Internet of
value (IOV). With this technology, users can send any amount of money anywhere in the world at a
fraction of a cent in fees. This company has partnered with over 100 banks, and the technology is
currently being used by a handful of financial institutions like Santander Banco, Moneygram, and
Western Union, with many more in the pilot phase. This company also offers another product that utilizes
its native cryptocurrency to source liquidity from exchanges when moving money from one country to
another.
Using existing technology, when a person wants to send money across borders, domestic banks must
source their own liquidity at the foreign bank; that is, the bank sending money to a foreign bank must
maintain dormant capital at the correspondent bank in a Nostro account. These accounts are denominated
in the foreign currency as a way to hedge exchange fluctuations and facilitate the settlement of foreign
exchange and trade transactions; they hold trillions of dollars that sit dormant, require banks to pay fees,
and are subject to regular compliance testing. With DLT and the native cryptocurrencies, these Nostro
accounts would be obsolete, and the dormant capital could be freed up for other, more productive uses.
Assume that Bob wants to send $100 to his sister Jane in Japan. Using DLT, Bob can initiate the transfer
to Jane, who will receive a notification of the amount of USD being sent in real time and the equivalent
amount of Yen using current exchange rates. Once the transaction is confirmed, the 100 USD is
immediately converted into the native cryptocurrency at a U.S. exchange and then converted into Yen at a
local Japanese exchange, then delivered to Jane.
• Accounting
As a CPA, this author has seen firsthand the issues companies run into when closing books at month- or
year-end. Issues often arise with reconciling items or properly reflecting GAAP standards. This can be
very time consuming and require overemployment of accounting personnel to service this need. In
addition, auditing techniques still require either written confirmation of year-end accounts receivables or
physical inspection of invoices or subsequent payments to ensure that balances exist. With blockchain
technology, the need to examine physical documents will be replaced by downloading the transaction
history from the blockchain.
As addressed above, transactions on the blockchain are immutable and can never be changed once
validated. To prove that company A owes company B, an auditor can simply look on the blockchain and
have full comfort in knowing that the amount owed to company B is proper and complete.
4. Request Network, a blockchain company in London, is implementing blockchain technology that allows
users to request payment when buying items online. An entry is made to the blockchain that records what
is owed by and to whom, essentially creating an accounts receivable and accounts payable entry to the
distributed ledger. It is apparent this would be of great benefit to auditors and accountants alike.
Moreover, this company is also building a user interface for auditors that would allow for what it calls
“smart audits.” These smart audits would eliminate the need for traditional auditing techniques and allow
audits to be done more efficiently, thus reducing audit times and allowing the auditor to focus more on
advising clients. The company has recently partnered with PricewaterhouseCoopers of France and plans
more partnerships as the technology emerges.
By putting the supply chain on the blockchain, records will never be altered, communication will be open,
and tracking will be transparent.
• Governmental Records
The U.S. government, the gatekeeper for voter registration, identities, and even ownership of property, is
one of the world’s largest central authorities; citizens must use government resources and deal with
bureaucratic red tape to initiate, maintain, and obtain specified records. Several companies, however, are
now vying to put voter registration, deeds, and identities on the blockchain, which would allow users to
carry all their personal records with them at any time. Users could log in with facial or thumbprint
recognition on their smart-phones and have access to personal documents.
Conclusion
Imagine a world where value flows like information over the Internet, or where neighbors trade energy
generated from solar panels among themselves without a centralized authority setting the price.
Blockchain is creating this world, and while the change is massively disruptive, this author believes it will
ultimately be for the better. Just as the Internet changed the way the world viewed information,
blockchain will change the way people view trust.
