Blockchain and the future of Accountancy

With bitcoin seemingly always in the news
there’s much interest around the blockchain
concept. David Lyford-Smith explains what it is
and how it works

It’s hard to avoid hearing about blockchain these days

– mostly in the context of the rampant interest in cryptocurrencies
such as bitcoin. Blockchain is the recording
system that underpins bitcoin and effectively all cryptocurrencies

– a distributed system that keeps everyone’s records
in agreement, all without using a central database or organiser.
Blockchain is a whole new method of record-keeping that
has some fascinating possibilities for both the wider business
community, and specifi cally for accountants. It’s also a diffi cult
subject to get in to, as it’s very complicated and quite unlike
anything else. But although the details behind how blockchain
works are complex, it can be understood in terms of what
impact it makes.

That’s the goal of a new white paper from ICAEW’s IT Faculty,
entitled ‘Blockchain and the future of accountancy’. I’ll be taking
you through a few of the key lessons of the paper here; you can

read the full paper at

The key qualities of blockchain
The three key features of blockchain according the paper are the
three ‘Ps’:

1 Propagation of new information from origin to a group of
collaborators, without a central control or ‘master copy’.

2 Permanence of transactions is assured, as everyone has
their own copy and can identify and reject attempts to change
the record.

3 Programmability can be added to blockchains, allowing self-executing
contracts to be contained alongside transactions.
The most important quality of a blockchain is that they
can be decentralised – that is, there is no need for owner,
controller, gatekeeper, master copy, or authenticator. While
some blockchains might choose to have more centralization,
none is necessary and a blockchain can work as a network
without a leader.

In accounting terms, what we have is a ledger of
transactions that is shared among many people. Anyone
can add to it, and we know that additions are permanent
and uneditable. What’s more, we don’t have to expend effort
reconciling different ledgers, as the blockchain process
automatically creates consensus between all the parties.
So we could theoretically cut down on the work currently
expended in performing consolidations and reconciliations. 

We could also use a blockchain-like system to add certainty and
effi ciency to unsure or slow markets, such as land registry.
Blockchains are particularly useful where we have a large
number of different parties involved in one business process.
Maersk, for example, are investigating the use of blockchain
in shipping, where a single crate might pass through over
100 transactions involving 40 or more parties. There are
substantial technical, legal, regulatory, and governance issues
to resolve before a solution like this can truly be put into place
– but it could be a powerful application for this new method of

The paper outlines how blockchain could affect the
accountancy profession. In a blockchain environment, there
is little need to check that one participant’s records agree
with another’s; this makes some transactional-level assurance
obsolete, such as existence and accuracy. However, more
complicated and judgmental areas, such as valuation and
completeness, are if anything more important. There is also a
greater need to test the controls of how new entries get onto
the blockchain, and to what extent physical assets correlate
with its content
All this likely means that accountants as a whole will
shift to more high-value and judgment-driven work in a
blockchain-driven environment. Technological understanding
of blockchain might be a useful differentiator, but for the most
part knowledge of its key strengths and weaknesses will be
suffi cient. But there may well be some contraction of services
around bookkeeping, reconciliation, and other transactional
work that may affect specifi c accountants if they aren’t
Blockchain isn’t the right solution for everything – it
currently is very costly and complex to run, and isn’t an
improvement over a central database in all cases. But it is a
potent new option to explore where there’s a need to keep a
group of actors on the same page but where a central
trusted party is unavailable or unaffordable.

- David Lyford-Smith, ICAEW Technical Manager,
IT and the Profession

Is it something to do
with bitcoin?

Yes – blockchain was originally
created alongside bitcoin, and
it’s the system that bitcoin uses
to track ownership of the digital
currency. But blockchain can be
used for other things, and could be
an asset registry or ledger instead
of a currency.

How does it work?

The full answer is very complicated
but, in essence, new transactions
are bundled into blocks before
being posted. Blocks are then
verified by anyone that has the
computing power free, which is
a complex process. Blocks are
then broadcast and added to each
participant’s ledger. Blocks also
refer back to the preceding block
to avoid deletion or ambiguity.

Does this mean anyone can see
my data?

It depends. The bitcoin blockchain
is totally open, but many other
variants allow encrypted data or
limit access to known and trusted

-Source article pqmagzine

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