Blockchain Breakdown

Herbold Josh sitting 2014

Josh Herbold 

Written by, Josh Herbold, MSCPA Past President

The number one question I seem to be getting asked a lot lately is, “What the heck is blockchain, and do I need to go and learn a bunch about it?” It’s a fair question, as the distributed ledger technology seems to be showing up in all kinds of places. If you’ve found yourself asking this question, this blog is for you.

If you’re starting your blockchain journey from scratch, a great first step would be to take six minutes and watch this: https://youtu.be/SSo_EIwHSd4. This is the best “basic” explanation of blockchain and distributed ledgers that I’ve found, and is well worth the time. I’ll wait right here.

The main ideas with blockchain are (1) everyone within the network has a copy of the ledger, and (2) the block that records each transaction also contains elements of previous transactions. Say, for example, I buy inventory from a supplier. The “block” in my ledger to represent that transaction will be mirrored by a block in the supplier’s ledger, and the blockchain software verifies the match. Now say I sell that inventory to you; again, each of our ledgers will have a “block” that represents the transaction. But the code within that block will also contain references to the transaction where I originally bought the inventory, which means that we should be able to trace ownership of that inventory all the way up the supply chain to its creation.

A lot of folks point to the “distributed” part of the “distributed ledger system” as the source of increased information security (because in order to create a fraudulent transaction or change a transaction, you’d have to do so within everyone’s version of the ledger), but the “chain” part of blockchain (the fact that each block contains elements of previous blocks) adds a high degree of security too. Not only would you have to change everyone’s ledger, but you would also have to go back in time and change all of the previous blocks!

I think the best analogy that I’ve heard to explain blockchain is to think about our system for tracking real estate ownership. If you own your house, that ownership is recorded in county records and evidenced by a deed. Those county records trace the deed of ownership all the way back to whenever the first deed was granted. It would be very difficult for someone to “steal” your house and claim ownership, because the official records track such ownership. One of the biggest benefits of Bitcoin (which of course uses blockchain in the background) is that you can trace the ownership of each individual bitcoin all the way back to when it was created.

There’s a great discussion about blockchain’s impact on accounting in the middle of the page here: https://www.journalofaccountancy.com/issues/2017/jul/technology-roundtable-artificial-intelligence-blockchain.html, under the question, “What is your view of blockchain technology and its potential impact, especially on the accounting profession?” (The rest of the discussion is interesting, but not about blockchain specifically.) As those commenters point out, XML and XBRL had the potential to revolutionize recording and reporting of financial information, but those technologies never went as far as they could have. The same thing could happen to blockchain.

The power of blockchain right now seems to be in limited, private groups called “blockchain consortiums” or “blockchain alliances”. These are small groups of companies that share blockchain ledgers. The ledgers are “public” in the sense that everyone within the group shares ledgers, but not “public” in the sense that anyone in the world has access. A large corporation could set up a blockchain consortium with its suppliers, for example. This is where “smart contracting” is happening. A supply contract could be written that states that payment for goods will be made as soon as the goods physically arrive at the buyer’s location (or as soon as the goods cross state lines, or fifteen days after arrival, or whatever you want to put in the contract…). Goods are scanned upon arrival (or tracking chips in the containers track the location of the goods), and that scan triggers the payment, without having to wait for a human to input anything or hit any buttons. All of these transactions are automatically recorded in the blockchain ledger, and all parties have copies of the parts of the ledger that record their transactions.

My opinion is that blockchain will come to small and medium businesses more as a packaged solution than as something that you will have to program. Some company is going to figure out how to ease transactional frictions (like time to pay/collect, credit risk/trust in the other company, supply chain tracking, etc.) using blockchain, and then sell that to you as a solution. But blockchain is also starting to have an impact on things like the year-end closing process (e.g., https://goingconcern.com/controllers-ai-blockchain-sox-compliance-inchan-sponcon/). I would say that it’s something you should probably start to educate yourself on, but not something that you need to immediately devote a week-long crash course to becoming an expert in (though that’s just my two cents, and it might only be worth that much…). I agree with the panel discussion in the article above that this is likely to be an illustration of Bill Gates’s point that we overestimate the change that will occur in the next two years, and underestimate the change that will occur in the next ten years. Blockchain probably won’t change much of your day-to-day work in the next two years, but it could have a significant impact in the next ten.

Some good articles about blockchain within accounting are:

For information about blockchain in general (and the potential uses of blockchain beyond what we’re seeing today), I’d recommend:

  • https://youtu.be/hYip_Vuv8J0. Fun concept—a blockchain expert discusses blockchain with five different people who have different levels of understanding of blockchain, starting with a child and ending with a history professor who studies blockchain)
  • https://www.wired.com/story/guide-blockchain/. WIRED magazine’s new guide to blockchain. The intro article itself is great, and then you can spend as much time as you want going down the blockchain rabbit-hole.

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