In the aftermath of the recent ‘Bitcoin bubble’ bursting, you’d be forgiven for thinking that the blockchain is something to be forgotten – the latest in a long line of business fads. In truth, the blockchain technology that Bitcoin is built on has some surprisingly robust use cases outside of currency speculation. Let’s look at what accountants need to know about blockchain.
What is a Blockchain
Blockchains are essentially decentralised databases maintained by a group of users which can be used to store, share and verify information. A blockchain essentially involves creating a digital ledger – each time users want to make a change to that ledger, the change must be approved by the other users.
Divorcing Blockchain and Bitcoin
Although the initial implementation of blockchain was in Bitcoin’s open source code, blockchain and bitcoin are not one and the same. Bitcoin, and the litany of cryptocurrencies that followed it, are digital currencies that are based on decentralised transaction ledgers. Advanced cryptography requires that each transaction is verified and entered onto the ledger, maintaining the integrity of the system.
Although a raft of businesses have adopted cryptocurrencies as a payment platform, these traditional implementations of blockchain were not ideally suited for business purposes. IBM considers that three main characteristics are definitive of blockchain implementations used in business:
- A focus on real-world assets rather than on cryptocurrency (such as to track ownership of real world goods or to guarantee the provenance of organic or fair trade items)
- A shift towards verifying identity rather than supporting anonymity
- More appropriate mechanisms to verify transactions
What Accountants Need to Know
Firstly, blockchain is slated to make it easier to monitor financial performance in real time. Some commentators claim that because blockchain is digital and decentralised, it will be simpler and faster for businesses to keep track of what’s coming in and going out. Although blockchain is likely to change the practice of accounting, a healthy degree of skepticism is worthwhile here – accountants already have access to high quality tools to keep track of financial information in real time.
Although the impact of blockchain may be overstated in terms of everyday accounting, the potential impact on audit and tax accounting should not be overlooked. To gain the trust of the investing public, independent auditors generally audit large companies’ financial statements. Audits are generally expensive and time consuming. Blockchain has the potential to create much more secure records of transactions. A central aspect of Bitcoin is the cryptographically secured ledger – every transaction that is conducted or captured using a blockchain implementation is recorded and permanently stored in this ledger. Consensus is required from all stakeholders to vary records. If used appropriately, blockchain could change the way accountants work. Auditing is expected to be particularly affected as blockchain could reduce the need for random sampling by audit teams and could make it easier to identify fraudulent behaviour.
Although blockchain is unlikely to replace double entry bookkeeping and accounting software any time soon, it’s important for accountants not to be complacent. The future of accounting is likely to rely on blockchain’s ability to traceably record and verify information.