Innovation Series: What is Blockchain?

I was having Sunday lunch with my mother when she turned to me and asked: “Beta (son) what is a blockchain?”  I was dumbfounded.  It seems everyone is taking about Blockchain or it’s most famous incarnation Bitcoin.  I know that when my mother (bless her heart, but is so not a techy) is asking me about Blockchain – it’s an idea that is becoming part of our common lexicon.

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So… What is Blockchain?

At it’s most simple form, a Blockchain is a list of records (or blocks).  Each block has an associated link to the previous block, a transaction date, and a trusted time stamp.  The blocks are linked and secured using very sophisticated cryptographic technology.  The Blockchain cannot be changed or modified – so each block is permanent.  Still confused? Here’s a helpful video.

Essentially, it’s a trusted, non-modifiable, distributed ledger.  Each transaction can be recorded and verified without the need of a central trusted authority.

Think a monetary exchange between parties: in the world of Blockchain, you don’t need a financial institution to facilitate and verify the transaction.  This example is why Blockchain is so attractive to be used for cryptocurrencies – eg. Bitcoin.

How will Blockchain impact Accounting and Finance?

Blockchain is a fast, reliable ledger system.  It captures and verifies transactions between parties.  This gives all transactions a trusted and traceable digital audit trail.  With Blockchain the integrity of each financial transaction is guaranteed.  You can start to see how the technology might revolutionize the world of accounting.  The biggest initial impact can be on the Audit process itself.

The core purpose of the Audit is to externally validate and testify that all of a business’s transactions are in fact authentic.  By virtue of what Blockchains are and can provide, the Audit itself becomes a redundant exercise.  In today’s world, an auditor must review actual invoices, customer orders, legal contracts, etc. to validate if a transaction actually took place and confirm the accuracy of the associated data being accounted.  In the world of Blockchain, all of the data associated with a transaction is recorded, simple to obtain and non-modifiable.  This means it will greatly reduce the risk of incorrect classification, error, and financial statement fraud.

The adoption of Blockchain in transaction systems will ultimately have a profound impact on the world of accounting.  The example above illustrates the change on the Audit – whose impact will be felt in the number of CPAs being trained and produced, which will have a ripple effect on the industry.  Does this spell the end of Accounting?  No.  Will Blockchain change how we work?  Yes.

The advent of Blockchain is yet another theme in technology that is fueling the need to change the way the Office of Finance prepares for the future.  We are pivoting away from a backward-looking and towards forward-looking.

What I am really interested in exploring is what happens when you mix Blockchain with Artificial Intelligence?

More on that in my future posts.  For now, it’s back to Sunday lunch with my mom.

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