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:
- New information propagates to all users, such that they all converge on a single, identical version of the truth;
- Any edit or deletion is obvious to all, making changes permanent and unable to be disguised;
- 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.