Blockchain: the future of record keeping

Blockchain is to financial transactions what the internet is to email – a platform that allows for so much more.

When blockchain represents a perfect record of ownership and a near-frictionless method of value transfer, what role does the accountant play?

By Chris Sheedy

One of the greatest perceived issues for accountants in a technological landscape reshaped by the forces of blockchain is just that – a perceived issue.

The perception stems from the fact that blockchain is often referred to as a distributed ledger system.

If the ledger is to be distributed instead of centralised, then doesn’t that make certain accounting roles redundant?

The answer is mostly no. A proper comprehension of the situation must begin with the fact that the term, “ledger”, in this case, does not strictly refer to a record of financial transactions as it does in the accounting world, says Dr Paul Sin, partner, consulting with Deloitte China.

“People are confused by the term ‘ledger’,” says Sin, Deloitte’s Asia-Pacific blockchain lab leader.

“Distributed ledger is a distributed database with real-time synchronisation. It has nothing to do with accounting.”

Why accountants and auditors need to understand blockchain

Alternatively, however, it might have everything to do with accounting. Sin’s point is that blockchain is about much more than finance.

Blockchain is to financial transactions what the internet is to email – a platform that allows for so much more.

If an accountant or particularly an auditor is concerned about how blockchain will affect their role, it is “like asking whether auditors will be affected if there is a new ERP or database product,” Sin says. “Auditors are always needed when there is a handshake among different parties or between the physical and digital worlds.”

Organisations have been working for several years with bodies such as Deloitte’s Blockchain Lab and CSIRO’s Data61 to test and fine-tune blockchain technology.

Many have said that 2018 will be the year that blockchain goes mainstream. Those close to the action believe that if not this year, it will be very soon after that.

Blockchain goes mainstream

“It’s still early in the year, so we’ll have to see how that turns out,” says Dr Mark Staples, group leader for software systems at Data61.

“There’s a lot to do. A lot of proof-of-concepts and pilot projects have been done. We’re developing a good understanding about the strengths and limitations of the technology.

Outside of cryptocurrency, we’ll likely see it used broadly in large enterprise where data is shared across multiple divisions. Anywhere there is a flow of money or other assets could be a good fit for blockchain.”

How is blockchain defined? The US Securities and Exchange Commission points to a paper called A Brief Introduction to Blockchain, which says blockchain is a technology that permits transactions to be gathered into blocks and recorded, which allows the resulting ledger to be accessed by different servers and which cryptographically chains blocks in chronological order.

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Public and private blockchains

Its strength is that it removes the need for a central “golden record” of all transactions, such as that held by a bank. Instead it puts records into blocks of data, connected in chronological chains, onto numerous computers and servers, or nodes.

Blockchain networks can be public, as are the ones behind most cryptocurrencies, or privately utilised within an organisation’s firewalls.

All nodes keep a true-state, up-to-the-minute record of the ledger, making the system more secure than a single, central repository that is potentially open to manipulation, damage or attack.

At the same time, Staples says, while information kept in such a chain is inherently more secure, organisations utilising blockchain networks will have to work around issues of confidentiality.

It’s a fact, our experts agree, that all accountants are going to have to come to terms with the new technology as it will become a part of their (and their clients’) daily workflow.

Some accountants will be gatekeepers, setting up systems to ensure data entered into the chain is of a high quality. Others will utilise the real-time view into the data flow to set up useful reporting mechanisms for various business purposes.

How will blockchain be regulated?

In a paper written for Financial News London, Adena Friedman, president and CEO of Nasdaq, Inc, says, “Let’s be clear from the outset, blockchain … will create disruption. It has the potential to improve efficiency across financial services, enable regulators to trace suspicious transactions in near real-time and ultimately ensure that compliance and transparency are hard-wired into the very fabric of the market.”

Creating the legal framework, the regulatory ecosystem to support blockchain’s application, she says, “will be far more challenging”.

“Regulators could be given access to relevant ledgers and cryptographic keys to observe transactions in near real-time and determine patterns of money moving between financial institutions,” Friedman suggests.

“There would (be) none of today’s time lag to hamper regulators trying to identify and act on suspicious transactions. That could translate into lower compliance costs, and with smart contracts, compliance could become a permanent market fixture.”

Researchers at Data61 have been re-imagining regulation as an open platform. In a digital landscape that will cross borders and potentially fall outside the scope of AASB (Australian Accounting Standards Board) and perhaps even IFRS (International Financial Reporting Standards), a sophisticated and modern regulatory system based on digital logic and on an open platform could be the way forward. The researchers say it could enable anyone to leverage the regulation data, allowing them to develop tools and services to simplify interactions with regulation and reduce costs, time and complexity.

The future is fast arriving and blockchain is driving many of its changes. Staying abreast of these changes, and the opportunities they offer to improve business records and reporting, will be central to the accountant’s role.

Read next: Blockchain: how does it work?

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