Technology has the power to transform the way we work, live, and behave as a society. Often the full consequences of these changes will be imperceptible to those experiencing them, and will only be revealed in the pages of history.
An example of this could be seen in the rise of Double Entry Bookkeeping (DEB) in the 14th century, which has been argued by some scholars to be an essential precursor to the rise of capitalism. According to some, we are on the eve of another type of revolution when it comes to blockchain.
Most of you will have some awareness of this technology after the skyrocketing, and crash, in the price of cryptocurrencies such as bitcoin at the end of last year. Blockchain is the underlying technology which makes such transactions possible – and it is more than bitcoin.
There is a lot of value in making something both digital, and unique. This is being increasingly recognised with governments and major businesses both investing billions into the technology, and for good reason.
This is because blockchain can be used for much more than cryptocurrencies – with a wide variety of uses currently being explored. From land registries, to the distribution of aid, there are many interesting projects happening right now.
Blockchain promises to be far more efficient, secure and resilient than many of our current systems of exchange, yet at its heart blockchain simply brings together three technologies.
A decentralised peer-to-peer ledger, where the ledger is replicated in a large number of identical databases, each hosted and maintained by an interested party called a ‘node’. When changes are entered in one copy, all the other copies are updated at the same time.
Cryptography with both hashing and digital signatures to verify transactions. Hashing takes whatever you’re putting in, and transforms it into a unique set of numbers of fixed length. As the hash cannot be reverse engineered, this ensures the security of the system.
And network or consensus protocols, which are the rules for what conditions must be in place for a transaction to occur. In the distributed network where the nodes work by consensus, these protocols are how the network ‘agrees’ a transaction is legitimate.
The reason it is called a blockchain is because each transaction is considered to be a ‘block’, and the record of each block together forms the ‘chain’. So a blockchain then is a record of all transactions, each permanent and unalterable, shared across the decentralised network.
This has a number of advantages. It can remove the need for a central agency to verify transactions, speeding them up. It can make it extremely difficult to falsify records. It also can allow an immediate and simultaneous update of the record for every party who forms a node in the blockchain.
So transactions are happening faster, they cost less, and since the blockchain cannot be tampered with, it reduces the chances of fraud or data mismanagement. One other key advantage is that it can also remove the need for and associated cost which organisations face in keeping their own records.
Just consider the centralised registers your business uses. They are a vulnerable and costly asset, with cybercrime estimated by experts to be costing the global economy US$600bn a year. The Equifax data breach alone has been projected to cost up to US$600m.
By eliminating the need to keep centralised records you remove a key risk and cost faced by organisations today. However, to be fully used the technology will mean a rethink in how many of our systems work, and it may be many years before we really understand its impact.
Equally it’s important not to get caught in the hype, as many thousands of investors did in the recent rise and crash of bitcoin. But combined with the rise in automation, and artificial intelligence, we will likely begin to see more of an impact on the accounting profession from this technology.
Research undertaken by CIPFA on behalf of the Colloquium of Finance Ministries has suggested strategic thinking and ICT skillsets will be among the most important attributes for accountants of the future, so it is worth being aware of the development. We must be agile.
While there remain roadblocks to widespread adoption, such as scalability, blockchain now may be seen as similar to the early internet. But from the days of dial up came immense changes to our way of life, and giants of commerce such as Amazon and Alibaba. Keep an eye on this space.
This article first appeared in The Accountant.