There have been few stories from the financial realm in recent years as captivating as the soap opera surrounding cryptocurrency. But behind the crypto roller-coaster ride is a technology that’s both solidifying and emerging: blockchain technology.
The fact that crypto runs on the blockchain isn’t especially relevant to the technology itself except perhaps to demonstrate how powerful the blockchain can be. After all, the technology regularly handles hundreds of thousands of Bitcoin transactions per day, and sometimes close to a million. And it does it by transferring data from one individual to another without involvement from a third party.
Still, the blockchain remains something of a mystery for many people who aren’t actively involved in crypto trading. Along those same lines, accountants should know that the technology will affect their profession—eventually. How and when are still a bit unclear, but accounting professionals should know what the blockchain is and how they might be able to use it in the near future.
What is blockchain technology?
In the simplest possible terms, the blockchain is something like a distributed database without storage on a central server. Individual machines store data in ledgers contained in blocks and link with each other in digital chains. The data in each block is confirmable by all of the participants in the chain. It is possible to restrict access to a private blockchain, but universality is one of the hallmarks of the technology.
While the information in a block is confirmable, it is permanent and not editable. It’s possible to add data to a block ledger but not to alter it. The idea is to create a data structure that is both secure and trustworthy, with a sort of protection-by-crowd concept built into the system. There is no single vendor or entity watching over the blockchain. It basically watches over itself, as Stanford University’s website explains:
“The nature of this decentralized block database system keeps hackers from tampering or changing information on the blockchain as altering a single piece of code would be immediately recognizable against anyone else’s copy. Attempting to double spend, fraudulently duplicating the digital currency or asset, is difficult to do because of the distributed ledger transaction system. In this way, the distributed ledger is an immutable record that is consistent and chronologically organized.”
There’s a host of security measures built in, but the essential concept of blockchain technology is that, not unlike cryptocurrency itself, there is no central authority in control of the system.
How does the blockchain work?
While it’s important to remember that blockchain technology can have uses that go far beyond cryptocurrency, the best way to observe the blockchain in action is by looking at how it handles crypto. Investors can “purchase” Bitcoin, for instance, in online currency exchanges. These platforms provide “wallets” to store cryptocurrencies, much like a bank account.
When a Bitcoin changes hands, the transaction is recorded in a ledger. That ledger is spread across many systems, known as nodes. Every 10 minutes, people who own the nodes help to verify the transaction. The people who do the verifying are called miners, a term you’ve probably heard frequently in recent years. Miners make sure everything looks OK with a transaction by solving complex math problems.
Once the transaction checks out, it’s permanently added to the shared ledger in a block. The blocks form a chain from one user to another. Every user on the chain can see the transaction simultaneously. As a reward or incentive to do more mining, the miner gets compensated in Bitcoin.
How could blockchain technology affect accounting?
A growing number of firms accept compensation in the form of cryptocurrency, and many accountants now have to understand the ever-evolving tax implications and policies regarding crypto trading. But there’s more to what the blockchain can do for accounting than what’s on the surface. Blockchain technology will likely have an impact on accounting, particularly in a couple of areas:
Audit
What are the possibilities for a set of records that couldn’t be altered and aren’t impacted by time? The first field that comes to mind for many accountants is auditing. Basically, auditing comes down to having multiple ledgers that need to reconcile against each other.
Since each participant in a blockchain has access to the ledger and can see it simultaneously, there’s no need for a central authority. That could lead to far less complex transaction analysis, less complicated record checks, and little or no cooperation needed from anyone outside the organization. Also, the data is stored in ledgers that are continually updated so external auditors can have access to real-time reporting.
Smart contracts
The blockchain could help you get paid faster via a smart contract. An example of how it works comes from agriculture, of all places. When a farmer harvests a head of lettuce, a trucker picks it up and takes it to a cooling plant. With the agricultural blockchain, the farmer gets paid as soon as the trucker arrives at the farm. The trucker gets paid as soon as the truck arrives at the distribution center.
There’s no waiting for the end of the process—when the lettuce reaches a store—for everyone along the way to get paid. All parties receive money as soon as their jobs are done. What will that mean for accountants as blockchain technology evolves? With smart contracts, your firm would be able to receive payment immediately after completing work and satisfactory acceptance by clients. Smart contracts aren’t here yet, but they’re on the way.
The blockchain will be part of the future of accounting
Despite the promise of the blockchain, there are still some serious barriers to entry for the technology in accounting. The volume of transactions on the blockchain can slow the system. It has occasionally experienced lagging response times during times of heavy transactions.
There are also regulatory issues with the blockchain in general that spill over into the accounting profession. And incorporating blockchain technology into firms’ existing systems could prove to be a challenge. But wise firm leaders should follow the progress of blockchain in the profession. Those who understand its potential benefits will be able to enjoy them before others.
It’s good to keep in mind, too, that when the blockchain does come into play in accounting, firms running applications and storing data with a cloud partner will have an easier time incorporating new technology than those that are trying to manage IT in-house.
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