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November 8, 2018

Defining Blockchain

James Cha, CPA, CTRS Cool Tech Tools, Newsletter

Blockchain is a term that has been bantered about quite a bit when referring to the future of accounting technology. While its impacts are primarily long term in nature, let’s take a brief look to see what everyone is talking about.

Blockchain is a technology that can store transactions. Some people have referred to it as a digital ledger. Unlike your current accounting books, transactions recorded using blockchain technology are public. This digital spreadsheet of transactions or records is copied across thousands of servers so that there is no single point of failure. It’s a decentralized, distributed, and public digital ledger.

The blockchain ledgers are updated constantly as new records are added. They are also reconciled constantly. Once added, the records cannot be altered retroactively.  This feature has many implications for auditing in that many records won’t need to be validated the old-fashioned way because blockchain is self-auditing.  Auditors will still need to validate the non-digital components of a transaction such as physical inventory counts.

Prior to 2016, blockchain was originally referred to as block chain, where the blocks are the list of records or transactions.  While the records are public, they are protected through cryptography.  Each block includes cryptographic code from the previous block that keeps the entire chain of data safe and verified.

Blockchain is then a way for two parties to safely record their transaction permanently and with verification.  While bitcoin is the most common current use of blockchain technology, many developers are working on new applications. Development started heavily in 2017, so it remains to be seen which applications will take off and which will die.

Blockchain’s uses in the future will be many:

  • Banking is the most obvious application, and right now the focus is on international transfers.
  • Stock trading.
  • Smart contracts. This concept is a huge part of what blockchain could be used for. Smart contracts are economic actions using blockchain that can be recorded without human interaction. They could initiate bill payments after goods have been received and after checking that there are funds available.
  • Elections.
  • Legal transactions, such as land titles.
  • Medical records, so that there is no more filling out of forms in each doctor’s office.

Blockchain in the future may eliminate the double-entry bookkeeping system that we have now.  Instead of each person keeping their own set of records, companies will write their transactions into a public blockchain ledger. This will reduce the cost of bookkeeping in the long term. But for this to happen, much development must be done to standardize and optimize the financial system. Many accounting professionals are working today toward that goal, which is many years away.  

For now, the biggest implication to realize for a blockchain future is that personal reputation will become incredibly important.  Blockchain systems eliminate the intermediary so that you are doing business with other people in a peer-to-peer environment. Identity protection as well as reputation will become essential.  Blockchain is also likely to take off first in countries where there is a lot of corruption and/or corporations are not trusted.

Blockchain may not impact your life today, but it’s definitely something to watch on the horizon.

Your Perfect Work Day Being Grateful

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