Blockchain- the next big disruptor to accounting systems?

5th September 2016

Imagine a country that links all its citizens’ data using cryptographic signatures eliminating multiple data sources? Seems farfetched? Not so in Estonia. They have started to use Distributable Ledger Technologies (DLT) for tax returns and business registrations. As part of the digital 5 nations alongside UK, South Korea, New Zealand and Israel, governments are beginning to invest in this technology.  FSN Writer, Darryl Bannon, looks at the prospects for Blockchain in the world of financial systems.

So are DLT’s ‘Blockchain’? Time to bust a myth. The answer is no. Blockchain is only one of a collection of DLT’s solutions, but to add confusion, the term ‘Shared Ledgers’ is also used to cover these technologies. So irrespective of terms, underpinning all these technologies is the follow principle. 

 

 

Definition

DLT’s are databases shared over a network, of multiple sites. Participants own identical copies of this ‘ledger’ which will update simultaneously across the network within seconds, utilising cryptographic keys. As the network of ledgers have to equal each other, any breaches would be detected and protocols would kick in to protect and repair the network. Are these databases more risky? 

Well, traditional database only have one central record. Therefore are more susceptible to cyber-attack. By having multiple copies, any attacker would have to simultaneously attack each participant’s system to get at their copy of the ledger. This is a tall task to achieve, especially as any attack to the eco-system should trigger protocols.

Why is Blockchain different?    

Blockchain evolved to support Bitcoin. It works by grouping a list of Bitcoin transaction for a set period into a ‘block’. This block is then picked up by a ‘data miner’ who enters these transactions into a ledger and verifies the block by assigning a unique crypto-identification number or ‘Hash’. Each confirmed block becomes part of a larger list of blocks and hence we have the ‘blockchain’. What set Blockchain apart, is that it allows anyone to join the network?     

On the other hand Distributable Ledgers contain a continuous list of transactions and often have restricted access levels, so only authorised members can actually enter a verified transaction or be a member.   

So unfortunately the term Blockchain has been used so interchangeably, we often forget we actually have a form of VHS v Betamax battle on our hands. Do we go for a closed system or the altruistic open Blockchain system? Or a hybrid? 

End of double entry accounting?

At present when you enter into a trade with another party - B2B, you raise purchase orders, settle through banks and work out VAT. Utilising a closed system DLT, the need for every party to create transactions in their own accounting systems would be eliminated.

The network would validate an order real time and upon receipt, everyone connected would be settled as per their standard terms as the rules would be built in. Imagine your accounting entries pre-reconciled and auto-posted?

Conclusion

Those who support Bitcoin and Blockchain have an admirable faith in the ‘chains’ ability to self-regulate. However, issues with Silk Road and other ‘dark web’ activity, would indicate more time is required and perhaps only with a compromise on governance, could we see Blockchain lead the charge.    

Therefore, what appears to be the more palatable option, is to start integrating how we can use DLT’s to reduce duplications in transactional processing, speed up credit checks, verify transaction etc. Not to replace ERP systems in the near future, but see how these technologies can be applied to the supply chain for example.  

We could be at the beginning of a paradigm shift in how businesses and governments work together, but are we ready to let go and trust?

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