By Hitendra Patil
WARNING: This is NOT fiction. This is NOT sci-fi.
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When the best brains in the payments systems and regulatory organizations across the world sit and take serious note of the possible impact of blockchain on the entire financial sector, the accounting and tax profession cannot afford to ignore blockchain.
“Finance in Flux: The Technological Transformation of the Financial Sector.” That was the central theme of the Sixteenth Annual International Conference on Policy Challenges for the Financial Sector, cohosted by the World Bank Group, the International Monetary Fund, and the Board of Governors of the Federal Reserve System, which took place on June 1-3, 2016 in Washington, D.C. The representatives of the major central banks from across the world attended the conference.
One of the topics that generated the most keen interest at the conference was “Block Chain – The surge and potential transformational nature of distributed ledger technology.”
What is blockchain?
According to Wikipedia, "The blockchain is the main technical innovation of bitcoin, where it serves as the public ledger for bitcoin transactions. Every user is allowed to connect to the network, send new transactions to it, verify transactions and create new blocks, making it permissionless."
Hold on. This is NOT an article about bitcoin. It is about what is ALREADY happening in accounting, on the very same concepts that go into bitcoin blockchain, and what can happen when it takes complete root in the accounting profession.
How will blockchain work in accounting?
It is not whether or why will it impact accounting. It is about when and how.
A blockchain can be considered a digital, distributed, shared ledger of transactions that have already been completed. New transaction data will continuously get added through the completed “blocks of data” that are authorized to be shared among the computers on the network.
The blockchain network participants use cryptography to edit the shared ledger online without the involvement of a central clearing authority (like a central bank or a clearinghouse of a stock/commodity exchange etc.).
A simplistic explanation of blockchain in accounting is the “triple entry” system.
Now, imagine when millions of companies, banks, tax authorities etc. are creating “blocks” of their transactions. How will the picture look?
- Double entries in individual books of two companies that do business with each other create “private ledgers” at each of these two companies.
- Today, even on the cloud, these two private ledgers do not electronically “talk” with each other. Hence these private ledgers do not auto-reconcile.
- Hence the need to create those individual private ledgers and to audit them – which is what the traditional “work” in accounting is all about.
- Blockchain technology will automatically create a distributed shared ledger each time the two companies create a transaction in their private ledgers. Call it the “third entry into a common block shared by two companies” or the “triple entry.”
- These common transactions in the shared ledger form the so called blocks and millions of such blocks will form an interlinked chain, hence the blockchain.
- And because it is a shared ledger, each transaction will be irreversibly authorized and auto-reconciled, i.e. audited in real time as and when the transactions are taking place.
- This shared ledger can be public to those who have authorized access to it, e.g. bankers, lenders, tax authorities, government, courts, auditors and so on. In other words, the accounting ecosystem can and will participate in the blockchain, not just to consume information contained in the blocks but also to create their own blocks when needed.