If you don’t know what blockchain is, you should because it is going to change the way all businesses transact financial information in the future.
Blockchain is widely known as the technology that underpins bitcoin, but it is a lot more than just bitcoin. Blockchain is the technology that backs distributed ledger technology, which is a trusted way to track the ownership of assets without the need for a central authority. As a result, it could speed up transactions and cut costs while lowering the chance of fraud, according to an article in CIO Journal.
Per Business Insider, blockchains are basically ledgers that accept inputs from a host of different parties. The ledgers can only be changed if all parties consent. These ledgers can be shared publicly. They are housed on servers, or nodes, which maintain the entries (known as blocks) and every node sees the transaction data stored in the blocks when created. Since these blocks are publicly shared, there is no central authority to approve the transactions. The ledgers and underlying databases are immutable and irreversible. The date can’t be revised or tampered with even by database operators. The distributed nature of the network requires that the computer servers reach a consensus, which allows for transactions to occur between unknown parties. The software behind blockchain is written so that no conflicting or double transactions can be written in the data set and thus, transactions can occur automatically.
So what does all of this mean? In basic terms, let’s take a personal transaction and break it down. Let’s say that you have a child in daycare and every week, you have to pay the daycare for the services they provide. You write a check and update your checkbook ledger, or do you? The daycare provider deposits the check and updates their checkbook ledger. But things could go wrong. Although you wrote the check, you just picked your child up and they are excited to see you and tell you about their day. So you go off to hear about their day, but wait, you forgot to update your check register for that check you just wrote. And your bank doesn’t know immediately upon you writing that check if you have enough funds in the account to cover that check.
With blockchain, instead of two separate checkbook registers with debits and credits, both you and the daycare would both be looking at the same ledger of transactions. It’s private (encrypted) and decentralized, so neither one of you control the ledger. Since the ledger is decentralized, you both can look at the ledger and each transaction is put into a “block.” Then if you and the daycare provider validate that block of information, it’s added to a chain. That chain is then protected by a sophisticated cryptography, and no one can change the chain after it is created. In this way, you know how much is left in your bank account and your bank immediately knows if there are funds in your account to cover the check. The transaction is instantaneous and there is no more “float.” Also, because of these chains, there is no longer any additional work on the daycare provider’s part on having to issue year-end statements for taxes because you would now have the availability to look at the chain to see your annual payments. Do you think this would assist in year-end tax planning?
Although blockchain is in its infancy, it is quickly gathering speed among financial institutions, trading companies and the health care industry. There are still challenges to overcome such as regulation, cost and security issues. However, financial institutions are big proponents of moving this forward as they see this as a huge cost cutting method by removing back office staff that have to approve trades and transfers.
As this system develops, clients are going to be utilizing these blockchains, and CPAs must keep up-to-date on this technology in order to audit the system. However, based on the premise of this technology, our audit procedures could be reduced or eliminated because there really would no longer be a reason to confirm A/R, contracts or bank accounts. That would all be within the chain of transactions validated by each party.
How do you think your clients could benefit from this technology?