Blockchain: What it is, and why it matters to CPAs
By L. Gary boomer
Blockchain technology may be more important to the accounting profession and its clients than artificial intelligence, robotics, networks and sensors, drones and nanobots. In their recent book, The Blockchain Revolution, Don and Alex Tapscott refer to the blockchain as the transformation of the Internet of Information to the Internet of Value.
If this sounds like it might apply to accountants and businesses, it does. The majority of accountants either have not heard about blockchain or don’t understand how it can impact the accounting profession.
This article is a primer on blockchain and the potential it has to greatly impact the profession and its clients. New mindsets, skillsets and toolsets are required to transform a profession.
Let’s start with the basics. The blockchain is a distributed ledger built upon the protocol of trust (peer-to-peer). Some refer to this as a triple-entry system. Both the assets and the computing power are distributed. Unlike today’s systems that are centralized, primarily by banks or governmental agencies, the blocks are reconciled (transactions authenticated) every 10 minutes by miners who control the distributed computing power. The miners are paid a small fee in a competitive environment, less than the centralized banks are currently charging to take weeks to clear and reconcile transactions.
While blockchain may seem complex, it is just another ledger (type of database) for recording transactions where the database is copied to all of the computers in a participating network. Data is stored in fixed structures called “blocks.” The important parts of a block are:
Header. This stores the metadata, such as the unique block reference number, and the time the block was created and linked back to the previous block
Content. This is a validated list of digital assets and instructions (contracts, terms, etc.).
The biggest difference between the Internet of Information and the Internet of Value is the fact that information can be copied and distributed with the Internet of Information.
When assets (currency, real estate titles and music) are involved, it is important that the asset is only transferred once, and this involves reconciliation and authentication.
The fact that miners reconcile blocks every 10 minutes and connect the block to the chain (thus the name blockchain) means the transactions (which are encrypted) cannot be altered or changed without altering all related transactions in previous blocks. This increases security and privacy. This certainly has potential implications for the value of an audit as it is currently performed. It also provides additional service opportunities as the trusted business advisor.
Bitcoin is the best known cryptocurrency built upon the blockchain, but there are many others, like Ethereum. The blockchain is capable of more than currency in that it can handle smart contracts (e.g., real estate and music), stock market transactions and even political promises of candidates. The blockchain has the potential to transform how taxes are assessed and collected at the local, state, national and global levels.
One reference in the book to what has been going on in the banking profession and governmental entities was a comparison to a Rube Goldberg machine where many steps and procedures create little or no value. If you are not aware of a Rube Goldberg machine, take the time to conduct a brief search. It will make you smile, if not laugh.
Most will admit that both tax and audit processes may have some Rube Goldberg processes where little or no value is added. Pareto’s principle may apply in that 80 percent of the problems are solved through improved processes and 20 percent come from the disruptive technology that reduces the non-value-added steps to the process.
Another area where the blockchain is currently impacting how transactions are handled is in international remittances. This is a huge business and the costs have been reduced from approximately 10 percent to 2 percent of the remittance and now take minutes rather than days/weeks to complete. The security and authenticity of the transaction are also significantly enhanced.
What is driving the blockchain other than efficiency, speed and reduced fees? From some of the above transactions, you might quickly conclude that the global economy is at play and you are correct. In addition, the anti-money laundering and “Know your customer” regulations are driving banks to look for quicker ways to reconcile. The desire for accurate real-time data is also driving the new technology.
The obstacles to blockchain are also regulatory in that regulations tend to trail technology, and bitcoin and other cryptocurrencies bypass some of the regulations.
Cost may also be in play as the proof-of-work approach, rather than trusting participants in the network, can increase the cost of implementation and maintenance. The cost of electricity is also a factor for operating the hardware required for mining and storage of the data.
The convergence of technologies is already addressing some of these challenges (e.g., solar energy and cooling capabilities). Hopefully, these costs will be offset with reduced fraud and increased trust. The cost of doing business decreases as the level of trust increases.
Finally, one of the biggest obstacles is simply the resistance to change. Most transactions today are taken for granted when they work. When they don’t work, you learn about the inefficiencies in processes (the Rube Goldberg effect) and the potential loss and litigation costs.
Other than banking, what are the first industries to be impacted? Some of the potential industries are insurance, the public sector, the medical field and media. Some firms are developing specialty teams or labs to assist clients who want to disrupt and deliver positive results.
Bill Gates sums it up well, stating, “We tend to overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. Don’t let yourself be lulled into inaction.”