By Hitendra Patil
Accountaneur: The Entrepreneurial Accountant
Can you eat a digital pizza?
You can order and pay digitally, but you can eat only a physical pizza.
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Blockchain, with its immutable trust technology, is one of the greatest innovations of recent times capable of creating an unfathomable disruption across several industries. But its technological fabric itself has created a hurdle that it, by itself, may not be able to jump over easily.
It is the intersection of the physical world and the digital world.
Blockchain in a nutshell: Blockchain is the technology that enables maintaining and updating distributed ledgers across a peer-to-peer network of participating nodes. Each node in the network has a copy of the transaction ledger. And transactions are validated and executed without the need for any central administrators like banks. Thus, blockchains perform a trusted transfer of value between two counterparties without intermediaries like banks.
Blockchain is totally digital. But the records in blockchain can and will represent value of underlying physical goods.
Till such time humans no longer need physical goods – food, medicines, clothes, shelter, whatever physical goods you exchange money for – the world cannot be 100 percent digital. And therein lies the new opportunity for accountants.
How does value transfer between physical and digital worlds?
I worked in a very exciting time period for the Indian stock markets. Visionary regulators triggered the birth of “securities depositories.” I was the first employee of one of the only two depositories in India. Depositories transformed the Indian capital markets.
The initial task on hand was to convert physical share certificates – hundreds of millions of them, representing billions of dollars – into digitized records of ownership stored onto the computers of the depositories. The process of turning physical shareholding records into digital book balances was called dematerialization (or, demat). Demat turned tangible physical shares into fungible digital records, speeding up transfer of ownerships from over a month in paper-based settlements to just two days after transaction on stock exchanges via book-entry settlements.
The onus of authenticating the ownership of physical shares into digital records was onto the issuers (companies issuing the shares). The process was arduous, time-consuming, costly and fraught with potential fraud.
What happened in the “private networks” – the government regulated, audit-required world of depositories – is now happening in unregulated, public-permissioned networks, the auto-audited world of blockchain technologies.
Blockchain will turn the record of ownership and transferability of ownership of physical goods from tangible into fungible. In the blockchain world, that process of turning the tangible into fungible is called “tokenization.”
Value is transferred more easily, but what about physical goods?
Once tokenized, blockchain technology can transfer ownership and value much faster, irreversibly and – most importantly – without the need for intermediaries such as stock exchanges, banks, etc. But who guarantees, and how, that the physical goods that are/will be tokenized actually exist? How does “tokenization” ensure the exact same digitized value corresponding to that of the underlying physical goods?
Irrespective of the talks of “disintermediation,” someone trustworthy needs to ensure that the value tokenized indeed exists, in the form, shape, size and several other properties associated with those physical goods.
Therein lies huge opportunity for accountants. Immigration between the physical and digital worlds needs you, accountants. What if the person claiming to have x amount of physical goods actually does not have it and yet gets away with tokenization?
Blockchain is also called the trust machine. At the “immigration control” border between the tangible and the fungible, the trust machine can break down because of such malicious entities. Even human errors can create value in fungible form when there were no underlying tangible physical goods.
Accountants – armed with intense knowledge and experience of numbers, processes, integrity, compliance expertise and the sheer magnitude of technology they use on a daily basis – are ideally poised for this “border control” job.
It is not a one-time exercise. As long as physical goods are produced in the world, “tokenization” will need “border control” in the blockchain world.
What will you be in the blockchain world?
This article could turn into a series of five books if we took each industry and described the tokenization processes and accountants’ role therein. But, here is some key understanding of accountants’ role in the blockchain world. An accountant will:
- Not be a gatekeeper, but the protector of trust exchange between physical and digital worlds
- Not be just an auditor of transactions but the trusted authenticator of value transfer from physical world into digital world, and vice versa
- Not be just the authenticator but also be a certifying agent – issuing blockchain-based, verifiable certificates of authentication – giving rise to a new qualification: Certified Blockchain Accountant, or CBA
- Not be just a fraud/forensic examiner but almost like the law enforcer who prevents fraud from happening at the digital/physical intersection
I am sure you can now visualize the opportunities that will be unveiled in the blockchain world.