Block to the future: Accountants can’t sleep on blockchain

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ICAEW’s IT Faculty recently released a new thought leadership paper, Blockchain and the future of accountancy. But what is blockchain all about, and why is it something for accountants to have on their horizons? The paper’s author David Lyford-Smith explains how it works and what it means for the profession.

Blockchain in a nutshell

Blockchain was invented by the same mysterious creator behind bitcoin, as a system for tracking the internet-based currency. Blockchain solved several outstanding problems because it allows a network of parties to share a single version of the truth without the need for a central controller and without having to expend effort reconciling different versions.

In the paper, we describe the key features of the technology as:

  1. New information propagates to all users, such that they all converge on a single, identical version of the truth;
  2. Any edit or deletion is obvious to all, making changes permanent and unable to be disguised;
  3. Many blockchains can also store instructions for future transactions, making them programmable

These three Ps sum up what makes a blockchain, a blockchain.

What it means for accountancy

Blockchain is a new way of storing and sharing information, which removes the need for a central gateway by using a complex process to build a universal consensus. If accounting data is stored on a blockchain – for example, intercompany information for a large multinational – then the need for reconciliations and consolidations decreases accordingly. For auditors, there is a shift in the requirements. A digital asset held on a blockchain does not need to be considered in terms of existence or accuracy.

But don’t let these changes fool you into believing that blockchain is the solution to accountants. While powerful, there are still limitations to what can be achieved with a blockchain.

For example, if supply chain information is shared on a blockchain, an auditor would not need to circularise debtors to know that the balance in their clients’ books agrees with the customer’s. But there is still a need to assess the valuation and recoverability of that balance – after all, the blockchain doesn’t reflect information about the financial health of the customer.

The hurdles to overcome

Blockchain is not that new as technology goes – it was invented nine years ago – but real, reliable, everyday solutions with it are still relatively rare. There are issues with reaching the technical standards needed – the current consensus process algorithms are intensive, slow, and only permit a limited number of transactions per second.

There are also issues with governance – cryptocurrencies such as bitcoin have struggled to maintain integrity without a central decision-making process. And there are also legal barriers – to help improve the efficiency of different markets, blockchains will need to be created with clear ownership rights, and legislation will be needed that makes blockchain ownership enforceable in the real world.

In sum, blockchain is a potent technology, but it’s one that’s currently mostly “in the lab” – you would be hard-pressed to find many applications that aren’t start-ups, proofs of concept, or pilot studies. But it’s a system designed to create trust without trusted authorities, and to reconcile differing ledgers – so it competes directly with some core accounting skills. Accountants can’t sleep on the technology.

 

Read the full report here for more information and a description of how blockchain works.

About David Lyford-Smith

David Lyford Smith

David Lyford-Smith is the technical manager for ICAEW, where he works in the IT Faculty and manages and blogs for the Excel Community.

 

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30th Nov 2017 11:50

I would think HMRC would add this to MTD.

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30th Nov 2017 14:37

It's the biggest load of codswallop I've ever read. Did anybody understand a single word of it?

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to anthonystorey
30th Nov 2017 15:52

I understood quite a few of the words but they seemed to lose meaning when strung together into what looked like sentences.

I particularly liked "they all converge on a single, identical version of the truth". Presumably they could also all converge on a single identical lie.

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to anthonystorey
01st Dec 2017 12:06

If you really don't understand the article you ought to devote a little time to reading other articles which better suit your ability to understand the concept of blockchain which is going to have the same effect on transaction record keeping as email has had on postal services and Amazon has had on my local bookshop (now closed).

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30th Nov 2017 16:02

Great article - very informative!

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By D_Smith
30th Nov 2017 16:55

Hi,

I'm sure this is the second article I've read recently on AW about the impact for accountants of using blockchain technology?

As an amateur Bitcoin user with very limited understanding of Blockchain Technology, perhaps I can put in my tuppenceworth to maybe help make the article a little more easily understood?

The way I understand how bitcoin works is as follows:

You are say, in Japan and I want to buy a widget from you that will cost me £100. I have to pay you in your currency, Yen.

I would have to go through various things such as through my bank, make an international payment, pay currency exchange fees and wait up to 3 days before the Yen hit your account.

If you agreed to sell your widget to me for 1 Bitcoin (btc) and I had 1 btc in my digital wallet, then the whole transaction could be completed in about 15 minutes.

You would send me your wallet address and I would send 1 btc to your wallet. From the moment I press 'send' that's where the blockchain technlogy kicks in.

My 1 bitcoin would have a mathematical algorithm put in front of it, called a Hash.

The blockchain network will have assigned this hash and for you to receive the 1 btc, this algorithm will have to been solved by 'miners' who use computing power to solve it. I think, but I am not entirely sure, that 6 miners have to solve the algorithm to create a consensus that the transaction is 'true'. After that consensus has been reached, then the 1 btc will be in your wallet and cannot be recalled.

The miners will charge me a small fee for their work, but they also get rewarded with new bitcoins.

This transaction and all its details are publicly searchable on a public ledger known as the Blockchain. You can see one of my transactions at this link:

https://blockchain.info/address/1GLeesZmZTUQRJPX26GwJDopWiPxRPL4aD

This transaction is on the public blockchain forever and can be used as proof of payment.

The bitcoin blockchain makes senders and recipients anonymous, which is why I guess it has had a bad reputation for money laundering.

But banks are looking at using blockchain code to make private networks and I guess that they wouldn't be anonymous?

Blockchain technology can also be used to make what is known as 'Smart Contracts' where I think it goes something like this:

I will pay 1 btc into your wallet so long as condition A & B are true. When the blockchain has a consensus that condition A & B are both true, then the 1 btc is paid and 'ownership' of an asset is transferred and the proof is forever available on the blockchain ledger.

I'm not entirely clear how a blockchain distributed ledger will change or eliminate certain work that accountants do - as it is a network and they are already in use, but my understanding is limited !

But I hope I've been able to help a little.

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to D_Smith
01st Dec 2017 11:12

I'm a great fan of the bitcoin. However the only failing I see is everybody really has to use it or it could become worthless. So you end up with a widget and everyone else in the "chain" get nothing. Yet the transaction is sound.

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By Helennw
to D_Smith
03rd Dec 2017 09:10

Thank you D Smith for your explannation.
so far i did not get clear understanding of Bitcoin despite all the coverage but now through your example i get it.

in your example about buying the widget for £100, could you please tell me how the receiver will get the value from the 1 bitcoin in the wallet he or she will receive?

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By D_Smith
to Helennw
06th Dec 2017 17:10

Hi Helen,

My bitcoin wallet offers me the option to type in the value of GBP (or most other currency) that I want to send.

So I can type in £100 to my wallet and it will contact an exchange to get the exchange rate and tell me how many bitcoins constitute £100.

As it happens, 1 bitcoin is up at around £8,000 right now, so my wallet will tell me how many milli-bitcoins (mBTC) £100 is at that point in time.

If you wanted to request £100 from me, you would type £100 into your wallet and it would automatically tell you how many mBTC to request from my wallet.

Hope this helps

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By chatman
01st Dec 2017 09:42

How would it work when, for example, you send me an invoice, and record it in your accounting records, but I do not include it in mine because I dispute it? In this case, there are two versions of the truth.

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02nd Dec 2017 11:27

Blockchain ?
I usually leave that to my plumber.

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