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Blockchain and the future of accountancy

With bitcoin seemingly always in the news there’s much interest around the blockchain concept. David Lyford-Smith explains what it is and how it works

April 2018

It’s hard to avoid hearing about blockchain these days – mostly in the context of the rampant interest in crypto-currencies such as bitcoin. Blockchain is the recording system that underpins bitcoin and effectively all crypto-currencies – a distributed system that keeps everyone’s records in agreement, all without using a central database or organiser.
Blockchain is a whole new method of record-keeping that has some fascinating possibilities for both the wider business community, and specifically for accountants. It’s also a difficult subject to get in to, as it’s very complicated and quite unlike anything else. But although the details behind how blockchain works are complex, it can be understood in terms of what impact it makes.
That’s the goal of a new white paper from ICAEW’s IT Faculty, entitled Blockchain and the future of accountancy. I’ll be taking you through a few of the key lessons of the paper here; you can read the full paper at www.icaew.com/blockchain.

Key qualities of blockchain:
The three key features of blockchain according the paper are the three ‘Ps’:
1. Propagation of new information from origin to a group of collaborators, without a central control or ‘master copy’.
2. Permanence of transactions is assured, as everyone has their own copy and can identify and reject attempts to change the record.
3. Programmability can be added to blockchains, allowing self-executing contracts to be contained alongside transactions.
The most important quality of a blockchain is that they can be decentralised – that is, there is no need for owner, controller, gatekeeper, master copy, or authenticator. While some blockchains might choose to have more centralisation, none is necessary and a blockchain can work as a network without a leader.
In accounting terms, what we have is a ledger of transactions that is shared among many people. Anyone can add to it, and we know that additions are permanent and uneditable. What’s more, we don’t have to expend effort reconciling different ledgers, as the blockchain process automatically creates consensus between all the parties.
So we could theoretically cut down on the work currently expended in performing consolidations and reconciliations. We could also use a blockchain-like system to add certainty and efficiency to unsure or slow markets, such as land registry.
Blockchains are particularly useful where we have a large number of different parties involved in one business process. Maersk, for example, are investigating the use of blockchain in shipping, where a single crate might pass through over 100 transactions involving 40 or more parties. There are substantial technical, legal, regulatory, and governance issues to resolve before a solution like this can truly be put into place – but it could be a powerful application for this new method of recordkeeping.
The paper outlines how blockchain could affect the accountancy profession. In a blockchain environment, there is little need to check that one participant’s records agree with another’s; this makes some transactional-level assurance obsolete, such as existence and accuracy. However, more complicated and judgmental areas, such as valuation and completeness, are if anything more important. There is also a greater need to test the controls of how new entries get onto the blockchain, and to what extent physical assets correlate with its content.
All this likely means that accountants as a whole will shift to more high-value and judgment-driven work in a blockchain-driven environment. Technological understanding of blockchain might be a useful differentiator, but for the most part knowledge of its key strengths and weaknesses will be sufficient. But there may well be some contraction of services around bookkeeping, reconciliation, and other transactional work that may affect specific accountants if they aren’t prepared.
Blockchain isn’t the right solution for everything – it currently is very costly and complex to run, and isn’t an improvement over a central database in all cases. But it is a potent new option to explore where there’s a need to keep a group of actors on the same page but where a central trusted party is unavailable or unaffordable.
• David Lyford-Smith, ICAEW Technical Manager, IT and the Profession

Blockchain FAQs:

• Is it something to do with bitcoin?
Yes – blockchain was originally created alongside bitcoin, and it’s the system that bitcoin uses to track ownership of the digital currency. But blockchain can be used for other things, and could be an asset registry or ledger instead of a currency.

• How does it work?
The full answer is very complicated but, in essence, new transactions are bundled into blocks before being posted. Blocks are then verified by anyone that has the computing power free, which is a complex process. Blocks are then broadcast and added to each participant’s ledger. Blocks also refer back to the preceding block to avoid deletion or ambiguity.

• Does this mean anyone can see my data?
It depends. The bitcoin blockchain is totally open, but many other variants allow encrypted data or limit access to known and trusted parties.

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