By Jim Marasco, CPA, Partner

Many people still haven’t heard of blockchain. However, it’s likely you’ll come in contact with it in the very near future or be helped by its capabilities. Many experts in the field of finance and accounting are starting to preach about how this technology will serve to safeguard the systems we all rely on and in some cases, displace scores of current jobs and professions.

What is Blockchain?  

Blockchain is a public decentralized ledger. Those who are familiar with it probably recognize it through its involvement with bitcoin. Blockchain is the security behind the trading of bitcoin and other cryptocurrencies, which has yet to be hacked. Essentially, it’s a secure accounting system. It decentralizes system management and authorization to a network of computers. Therefore, to verify a financial transaction, a network of computers will verify and validate it. There is no single point of control. Because of this setup, blockchain can prevent an outside party from overriding controls or altering the financial records of a transaction. This allows a company to reduce their risk of cyber fraud.

The main characteristics of blockchain are as follows:

• Decentralized – everyone in the blockchain network can access the entire list of transactions, and they jointly operate and control the whole system.
• Strongly authenticated – the identity of each participant in blockchain transactions can be verified.
• Tamper-resistant – once a transaction is posted on the blockchain, it becomes unchangeable and irreversible.[1]

How it works

According to a March 1, 2017 article published in the Harvard Business Review (“How blockchain is changing finance” – Tapscott and Tapscott), there are five basic principles underlying the technology:

1. Distributed Database – Each party on a blockchain has access to the entire database and its complete history. No single party controls the data or the information. Every party can verify the records of its transaction partners directly, without an intermediary.
2. Peer-to-Peer Transmission – Communication occurs directly between peers instead of through a central node. Each node stores and forwards information to all other nodes.
3. Transparency with Pseudonymity – Every transaction and its associated value are visible to anyone with access to the system. Each node, or user, on a blockchain has a unique 30-plus character alphanumeric address that identifies it. Users can choose to remain anonymous or provide proof of their identity to others. Transactions occur between blockchain addresses.
4. Irreversibility of Records – once a transaction is entered in the database and the accounts are updated, the records cannot be altered, because they’re linked to every transaction record that came before them (hence the term “chain”). Various computational algorithms and approaches are deployed to ensure that the recording on the database is permanent, chronologically ordered, and available to all others on the network.
5. Computational Logic – the digital nature of the ledger means that blockchain transactions can be tied to computational logic and in essence programmed. So users can set up algorithms and rules that automatically trigger transactions between nodes.

Blockchain’s potential applications

A white paper produced by DXC.technology mentions emerging blockchain uses as including:

• Digital currency – examples such as bitcoin
• Proof of existence – takes any document and stores its cryptographic digest, including a timestamp, onto the blockchain to prove that the document existed at the given time. A cryptographic hash function takes digital content, such as an electronic version of a mortgage document, and transforms it into a unique, fixed-sized string called the digest. The digest is public and can only be generated by its original source or document.
• Smart property – proves ownership of physical and nonphysical assets, such as software, money note, or cryptocurrency. Proof of ownership of any given smart property removes friction. It also creates new business opportunities by enabling trust-based trades between unknown entities.
• Smart contracts –essentially, a smart contract program code is based on “if-then” conditions. If an event in direct relation to its contract occurs, then a set action is triggered. Participants in a smart contract communicate directly via the blockchain, which removes the need for an intermediary and minimizes contractual-related transaction costs. For example, a person’s will can be setup to involve distribution of assets upon an event occurring (death) without the need for probate or attorneys to get involved.
• Decentralized autonomous organizations – using blockchain technology, an organization could exist completely virtual. Its behavior would be governed by rules embedded in the corporation’s smart contacts.

Industries that could be most affected

Brokerage Firms – although stock transactions are executed electronically in seconds, closing a transaction could take up to three days to clear and are usually restricted to the brokerage firm and clearing house directly handling the trade. Blockchain’s open platform would be instantaneous and could publish the transaction for any and all parties to view. Potential stock manipulation and fraudulent trades would become easier to detect and monitor by employing full transparency.

Banks – blockchain will allow for the immediate verification of checks presented for deposit across all banks simultaneously. Banks could have open and virtual access to a company’s books and records and make credit decisions simply by verifying their financial health without having to request anything from the organization.

Accounting and auditing – public accounting firms employ thousands of staff to audit transactions of companies to verify the existence and validity of financial transactions and balances. An open source platform like blockchain will allow for transactions to be electronically audited and safeguarded from manipulation. The auditing profession will likely be replaced by automated technology.

Embracing change

Over the past ten years, huge strides in technology have made major disruptions in the economy. Uber/Lyft have severely impacted taxi cabs; PayPal, Venmo and others change the way we transact currency with each other; Airbnb to the hospitality industry and Twitter with how we communicate news. As cyber security has emerged as a major threat to most of us, blockchain has the potential to not only secure technology but to transform various industries in the process. Banks, brokerage firms and major accounting firms are pouring millions of dollars into systems that adopt blockchain technology or work within it. Ignoring its existence could prove costly for many organizations.

[1] “Why Blockchain has the potential to serve as a secure accounting information system”, The CPA Journal, September 20, 2017.

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