In the early days of the internet there were still many things people couldn’t do online because their identity and the validity of their transactions couldn’t be verified. People were reluctant to pay for things using credit cards over the internet, for example, because they had to divulge data to a faceless entity and they weren’t sure they could trust the process.
As security improved, transaction fees remained high. Then Satoshi Nakamoto created Bitcoin, a digital currency not controlled by a country. The protocols surrounding Bitcoin let people exchange data without going through a trusted third party. It relies on mass collaboration to create a distributed trust network.
This process gave rise to blockchain technology, which is now set to disrupt organisations of all sizes and in all industries as well almost every facet of business, from payments and transactions to contracts and identity verification.
Referring to a chain of digital transactions (using Bitcoin or another cryptocurrency) that are listed in a distributed ledger, a blockchain is the overall record of all digital transactions. A group of verified transactions is known as a ‘block’. A chain is created as additional transactions are verified and added to previous blocks.
First developed to facilitate online payments utilising cryptocurrency, blockchain technology can also be used to manage the way information is stored and transactions occur. Importantly, blockchains are permanent and cannot be erased. Each transaction can be seen on the distributed ledger, which is updated in real time. Due to all participants being able to see the ledger simultaneously, each one can contribute to the ledger without requiring a principal authority.
Blockchain technology has eliminated the need for a trusted third party in transactions; instead, people can safely and securely send money to unknown parties directly. There are three key characteristics that distinguish blockchain technology:
1. Each blockchain is distributed, running on computers located anywhere in the world. This means there is no central database to hack.
2. The blockchain is public, so anyone can see it but it can’t be modified, so it’s impossible to steal Bitcoins, for example.
3. The blockchain is heavily encrypted, so it’s more secure than most corporations.
Blockchain technology can record information such as births, deaths, and marriages, supply chain activities, proof of ownership, and much, much more.
Consequently, blockchain technology is hugely disruptive and will fundamentally change how transactions are processed, impacting businesses in seven key areas:
1. Tax: By automating processes such as PAYG withholding, blockchain streamlines tax administration and makes substantiating claims straightforward. However, blockchain also affords opportunities for tax evasion due to users’ ability to remain anonymous. Therefore, it becomes a logistical conundrum to regulate the dissimilar activities and organisations.
2. Insolvency risk: The risk of defaulting is reduced as the automation enabled by blockchain technology allows for faster settlement, with transactions settling in close to real time.
3. Payment transactions: Cryptocurrencies such as Bitcoin are currently unregulated as they are not accepted as financial products by the Reserve Bank of Australia. Organisations considering offering cryptocurrencies as a payment option may need licensing.
4. Fraud: Suspicious transactions and trace funds may be not as difficult to identify and criminal activity may be detected sooner due to the permanent, real-time, and detailed information contained in the blockchain.
5. Errors: The automation of distributed ledgers made possible by blockchain decreases the opportunity for mistakes to be made and essentially removes manual intervention, saving time and money.
6. Privacy: Organisations must discover a way to assure customer privacy due to the pervasive and transparent nature of blockchain technology.
7. Governance: Governance must be negotiated and it continues to be essential to repair faults in the technical code, audit compliance, enforce legal and regulatory obligations, and more. Control of the blockchain may become a source of power.
Opportunities for the accounting industry
As a heavily-regulated industry, accounting has much to gain by adopting blockchain technology. The industry currently relies on various checks and balances and requires numerous manual, labour-intensive tasks. Blockchain technology can dramatically simplify compliance and make fraud so difficult as to be practically impossible.
As a result, auditing, for example, would be streamlined because the blockchain would have already verified the most important information automatically. Using blockchain technology, entire business processes become easily traceable and, therefore, auditable.
Similarly, blockchain technology can streamline tax administration using automatic data-capture and possible automated reporting and tax remittance. For example, automated PAYG withholding, remittance and reporting of payroll data may be completed via a blockchain algorithm.
Blockchain’s ability to streamline and automate so much of the previously-manual and time-intensive accounting and auditing process is likely to change the way accounting firms work altogether. Firms may need to look at offering different, value-added services to avoid becoming obsolete in the face of blockchain and machine learning, both of which will make general accounting simple and automated.
Accounting firms can’t afford to ignore blockchain; it is about to drive a significant evolution in both accounting practices and general business processes.
Blockchain will offer strong benefits as well as some challenges. It is important for accounting firms to understand exactly how blockchain’s capabilities will affect their service offerings, then plan to meet the disruption head-on. Far from being some futuristic model, blockchain is changing how business is done right now, so accounting firms must educate themselves and prepare accordingly.