Blockchain: Reality or Fiction?
Over the past few years, a lot of attention has been placed on Bitcoin and, more specifically, blockchain as the next major disruption in computing. But what does it mean for accountants, and how does it work?
A blockchain promises to decentralize technology and to create a more reliable, secure, distributed, and transparent public ledger across a wide variety of industries. And for the accounting profession, blockchains will soon transform double-entry accounting to triple-entry accounting.
But is this just hype or a future reality? And how else might it impact our industry?
What Do Blockchains Really Do?
The best explanation of the benefits of blockchain technology can be found in a recent Forbes article, which highlights four key advantages:
- Reliability: Blockchains record and validate each and every transaction made in a public ledger system, with each block containing a hashed history of all prior transactions.
- Security: Transactions are immutable and always available because they can only be authorized and accessed from authorized “miners” (computers).
- Value preservation: Third-party middlemen, or a central authority figure for peer-to-peer transactions, are eliminated, lowering transaction costs.
- Decentralization: The technology is decentralized across the network, eliminating system failures or security issues.
Do Blockchains Exist Today?
Research says well over $1 billion is currently invested in companies that are introducing blockchains. Bitcoin, the first digital decentralized cryptocurrency, is the most notable example, but there are also many other cases, with the leading applications in currency exchange; trading platforms; P2P transfer; smart contracts; and digital content, storage, and delivery. Much of the momentum is from those in the fintech industry, including big players like Citi, UBS, and USAA. Even Big Four accounting firms are involved.
Here are a few more interesting examples of what these companies are trying to solve, including one example within the accounting industry:
- Current issue: Predicting outcomes or probability of outcomes on real-world events is currently based on the wisdom of a few. Typically, markets function better in collecting collective wisdom and providing more accurate predictions on what the future holds.
- Concept to solve: Augur is a prediction market platform that rewards users for correctly predicting future real-world events. It brings the “wisdom of the crowd” together by bringing real-world analysis from experts combined with opinions by a large group of individuals (from a market vantage point) to create more accurate forecasts. For experts, they report frequently and receive half the fees collected from the system, while individuals can buy and sell shares on the outcomes to create an equilibrium of what the probabilities of the end outcomes should be.
2. Gift cards
- Current issue: Many small businesses don’t participate in the gift card industry because a) their point-of-sale systems often don’t accept them, b) the adoption of a gift card program is expensive, and c) they are unlikely to see immediate benefits.
- Concept to solve: Gyft Block is an online platform for gift cards that allows merchants to issue cards virtually at about $0.01 (vs. $1.50 for plastic cards). They reduce fraud through transparent ownership and private consumer keys and make them easy to redeem, similar to Apple Pay or Google Wallet.
- Current issue: Online music sharing today is unbalanced – artists have to work through online music services and their record companies to distribute and get paid for the music they create. It lacks transparency and fairness, and rewards the record labels with the underlying profitability.
- Concept to solve: Several companies, including Ujo Music, up-end the model through blockchain-enabled contracts, which let artists sell directly to fans via a streaming music service. By not using a traditional record label and distributor model, they remove the middleman and ensure artists are paid appropriately for the music they provide.
4. Ride sharing
- Current issue: Companies like Uber and Lyft are a centralized authority and collect a transaction fee from drivers and riders, but they are subject to regulation and risk shutdown by local governments, authorities, or traditional existing taxi systems.
- Concept to solve: Ride-sharing companies like La’Zooz provide a decentralized system that allows drivers with spare seats in their car to connect with potential riders to have “fairer” fares and a better driver/rider pairing. Drivers can obtain value from their available resource as they drive to their destination of choice.
5. Triple-entry accounting
- Current issue: With double-entry accounting, when two parties transact, each party reflects in their own books the appropriate debits and credits. If someone wants to defraud the government, it can be difficult to detect as these transactions aren’t linked and the full transaction can’t be verified.
- Concept to solve: Triple-entry accounting, as defined by Balanc3, links multiparty transactions together using simple, digital-confirmed counterparty contracts, and then leverages blockchain to track and openly distribute full transactional details.
While triple-entry accounting is still a bit away from reality, the beginnings of the overall blockchain movement have already emerged, with other industries leading the way. But don’t discount how quickly triple-entry accounting might become a reality.
For governments, there is a high level of interest because they can potentially eliminate tax evasion and fraud while reducing tax filing to merely tax confirmation. Let us see when this fiction becomes reality.
Ian Vacin is vice president of product marketing at Karbon. He has 15 years of leadership experience in the accounting industry at Karbon, Xero, and Intuit, and is passionate about helping accounting professionals be as successful as possible.