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It can be said that these days, it's rare to witness the birth of great innovation, but blockchain is just that1. Born as the background framework which makes bitcoin2 work, blockchain may well dwarf the notorious cryptocurrency in scale and importance3. But what is it, how does it work and why do accountants need to know about it?
What is bitcoin and cryptocurrency?
Bitcoin is a currency which is not controlled by any government or central bank. This would put it in the same bracket as a fiat currency - legal tender without any intrinsic value - but it's more complex than that. Bitcoin is a decentralised currency which is managed by a database spread across multiple computers (called nodes). The shared database is an ever-increasing chain of information with new blocks of data constantly being added to it. Whenever a transaction occurs, a new entry is added to the end of the chain and it's there for good. There's no way to pay someone twice with the same coin.
Once the transaction shows up in six copies of the database, it's considered permanent. The transaction doesn't depend upon trust or any institution. There is no fee for the transaction because there is no middleman to pay. Absolute mathematics decide whether a transaction is valid. While fraud and cybercrime is still possible, blockchain could significantly reduce its likelihood4.
As bitcoin is not a regulated commodity nor traded on traditional market places, its value has been somewhat erratic. In the early days, it was a novelty. Publicity-seeking companies allowed purchases of things like pizza using bitcoin. Others bought bitcoin, forgot about it and disposed of the hard drives5 with the codes still contained on them - throwing away millions of dollars.
Other cryptocurrencies have come into existence based on the same principal including Dogecoin6 and Unikoin7. There's also an updated version of bitcoin, called Bitcoin Cash8 which aims to address bitcoin's limit of less than ten transactions per second9 - something that was originally designed as a security feature but now acts as a bottleneck for high transaction volumes. However, while these cryptocurrencies lie somewhere between nascent and thriving, the real potential lies with the underlying technology - blockchain.
Listen to a podcast on the future of money:
What is blockchain?
With its ability to record transactions without interference from governments, central banks, corporations and criminals, decentralised blockchain ledgers based on absolute mathematics and encryption are grabbing the attention of financial organisations which require bookkeeping, payments and verification. This provides great potential for innovation, start-ups and, of course, accountants10.
A report for Chartered Accountants ANZ11 describes how the World Economic Forum condenses the fundamental benefits into the primary factors:
- Veracity ("Multiple copies of the complete historical record of ledger entries are each verified by consensus")
- Transparency ("It is a public record that can be seen by all market participants")
- Disintermediation (a flowery way of saying that it is based upon peer-to-peer networking instead of a central institution)
What can blockchain do?
The following blockchain-based industries are already making waves:
One of the most well-known blockchain platforms is Ethereum12, which was founded on the ideal of building a "decentralized[sic], more globally accessible, more free and more trustworthy internet" 13. There are already many apps using the technology14 which, it proclaims, 'enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middle man or counterparty risk'.
How music publishers pay royalties to artists while managing copyright online is a legendary witches' brew. Blockchain offers many potential solutions to the industry which can address licensing and contract issues at all levels. Revelator15 and Ujo Music16 are two of the systems. The Harvard Business Review17 describes others.
If ever there was a system that needed transparency, security and trust, it's voting. Whether as part of a general election or a casual poll, blockchain's potential offers solutions which are already being examined by the likes of Horizon State18 and MiVote19.
These days it's normal to store all kinds of private information and files in cloud services such as Gmail, Facebook, iCloud and countless other lesser-providers. However, following recent high-profile security compromises among services like these20, 21, even their staunchest fans have questions about trust. Storage start-ups like Sia22 and Storj23 are using blockchain technologies to store your information in a decentralised manner that, according to Bitcoin.org, makes access to it practically impossible24 to anyone without your own personal key.
Recently 3000 bitcoin ATMs25 were planned to launch across Australia. As the ITNews article puts it: "This will solve a pain point for bitcoin enthusiasts, who generally need to wait days using existing digital currency exchanges to cash out."
Renting and sharing
Slock.it26 is an example of an Ethereum-based company which uses Blockchain to rent out things like infrequently-used cars, industrial tools and apartments.
Smart electricity grid
With more and more people using renewable technology27 like solar power to generate their own electricity, it shouldn't be a surprise that groups of like-minded people are collaborating to share energy and distribute it more efficiently. Once again, blockchain is at the centre of this power management, with companies like PowerLedger28 running smart grid operations in Australia29 already.
The future and potential of blockchain accounting
Bitcoin got off to a bumpy start in Australia with onerous regulation and double taxation. Fortunately, the Federal Budget of 2017-18 addressed these initial, decisions (more information is available in the Thomson Reuters Federal Budget Tax Bulletin 2017 - 201830) and it's now back to being officially regarded as a currency again.
As for blockchain, being a framework means that it can be understood as an enabler for new ways of working with money, rather than a fundamentally new economic paradigm. Could an innovator make our banks irrelevant? It would be extraordinary, but not inconceivable.
However drastic the disruption, at the centre of all such revolutions lie the people who manage, reconcile and keep track of the numbers. Gaining expertise in blockchain - at a time when there are few officially-recognised blockchain qualifications31 - could be a great idea for budding accountants. Blockchain might just represent the biggest change in accounting since double entry bookkeeping32.
2017 Audit Technology Competition
We are pleased to announce that the winner of our 2017 Audit Technology Competition is Fawwad Bin Naseer. Congratulations!