How can blockchain technology transform accountancy?

How can blockchain technology transform accountancy? 

Thought Leadership

The recent bankruptcy of cryptocurrency exchange FTX has left many people feeling uneasy and questioning the security of the crypto market as a whole, which was already plagued by plummeting digital asset prices. However, the failure of a single exchange should not be taken as a reflection of the integrity of blockchain technology. In fact, it serves as a reminder of the need for regulation in the crypto space in order to protect users and foster the growth of this innovative technology, particularly for the accountancy profession.

While blockchains are mostly used to record cryptocurrency transactions, fundamentally it is an accounting technology with the potential to transform the work of finance teams and change the accountancy profession for the better.  

Unlike typical databases, which structure data into tables, a blockchain stores information in sets of blocks that are linked together via cryptography and, importantly, can be distributed but not edited. This guarantees the fidelity and security of a data record without the need for verification by a trusted third-party source.

Since decentralised blockchains are immutable, they have the potential to increase the efficiency of the process of accounting for transactions and assets, operating as a system of universal entry bookkeeping. The technology also has the potential to reduce the costs of maintaining and reconciling ledgers and provide absolute certainty over the ownership and history of assets.

In this way, blockchain promotes transparency and trust with participants being able to have relatively unfettered access to their records, reducing time and effort. It also removes the need for intermediaries with it being a true peer-to-peer system, which can aid in the reduction of costs and access delays.

Blockchain technology uses smart contracts, which include all the data relating to the transaction, and acts as a point of verification once the terms have been met. With these records being kept on multiple computers, data security is enhanced, meaning data losses from theft, fires, and natural disasters are greatly reduced. It is also virtually impossible to delete or tamper with the contracts once they have been implemented and triggered, reducing the chances of fraud.

However, it also requires due diligence, even though the system is designed to remove human interaction from the process. Anyone using blockchain technology who is not in a position to do their own due diligence has to trust that the software will do what it is supposed to do.

While there has never been a successful hack of the Bitcoin blockchain, there have been high-profile hacks of some of the most reputable blockchains, most recently Solana. This comes back to trusting the people behind the software. A distinction should be made between bespoke, permissioned blockchain solutions and open-source blockchains. For businesses to use blockchain technology in the most optimal way, there needs to be transparency.

In the case of bespoke blockchain solutions, companies can ultimately hold the developers of these solutions accountable should things go wrong. However, in open-source cases, such as Bitcoin, users who lack technical expertise must simply trust that the software works. In this area, regulation will have to fill the gap left by a blind trust.

What does this mean for the future of accounting?

Since smart contracts automatically trigger once the agreed terms are met, they allow the automation of transactions and controls. This can be used for payments after the delivery of goods, payroll, transactional taxes such as VAT, or cross-border transactions and transfer pricing with trade agreements built into the chain. Smart contracts can settle tax liabilities in real-time.

Alongside other automation trends such as machine learning, blockchain will lead to more and more transactional-level accounting being done – but not by accountants. Instead, successful accountants will be those that work on assessing the real economic interpretation of blockchain records, marrying the record to economic reality and valuation. For example, blockchain might make the existence of a debtor certain, but its recoverable value and economic worth are still debatable, and an asset’s ownership might be verifiable by blockchain records, but its condition, location, and true worth will still need to be assured.

By eliminating reconciliations and providing certainty over transaction history, blockchain could also allow for increases in the scope of accounting, bringing more areas into consideration that are presently deemed too difficult or unreliable to measure, such as the value of the data that a company holds.

Blockchain is a replacement for bookkeeping and reconciliation work. This could threaten the work of accountants in those areas, while adding strength to those focused on providing value elsewhere. For example, in due diligence in mergers and acquisitions, distributed consensus over key figures allows more time to be spent on judgemental areas and advice, and an overall faster process.

Because there is a lot of apprehension around the technology, it’s not being widely adopted by businesses just yet. What doesn’t help is that blockchains require broad adoption to work effectively, and an entire system overhaul. It will be difficult for businesses to successfully embrace it if there are gaps in accessibility, trust, or knowledge around the technology. Once these issues are patched, blockchain will do to corporate reporting and financial transactions, what the internet did for knowledge – and it’s only a matter of time.

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