Don’t feel bad if you don’t know your Bitcoin from your blockchain. You’re not alone. The news has been moving at warp speed reporting on the value of Bitcoin. It can be hard to pull out any fundamental knowledge, other than the feeling that you might be very wealthy today if you had understood (or even heard of) Bitcoin two years ago.
CPA firms, accounting professionals, and small businesses should know one thing about Bitcoin: Bitcoin is not the same as blockchain. Blockchain is the underlying digital ledger system that supports the Bitcoin cryptocurrency. The promise for both blockchain and Bitcoin is great. But those that first start researching and following this space tend to conflate Bitcoin and blockchain, and that would be overlooking the potential that blockchain has for accounting, and for business, as we know it today.
What You Should Know about Bitcoin
Bitcoin is a digital store of value. Think of it like digital dollars. Bitcoin is the most well-known cryptocurrency but it’s not alone. Others like Litecoin, Ethereum, and Zcash exist. They’re all similar in that, unlike traditional currency, they’re not backed by any physical asset or the promise of any government. Which at least partially explains the extreme volatility of their value.
Bitcoin can be purchased in online currency exchanges. Coinbase, the largest of the exchanges, has more than 10 million users. These platforms provide “wallets” to store your cryptocurrencies, much like a bank account. Bitcoin is rooted in blockchain technology. When a Bitcoin changes hands, the transaction is recorded in a ledger. That ledger is spread across many systems – known as “nodes.” Every 10 minutes, people who own the nodes help to verify the transaction. These people (and their systems) are called “miners.” Miners make sure everything looks ok with a transaction by solving complex math problems. Once the block checks out, it’s added to the shared ledger, forming a chain of blocks. As a reward/incentive to do more mining, the miner gets compensated in Bitcoin.
Forget Everything You Know About Bitcoin
That is, of course, a simplification of Bitcoin and the mining process. There are many great resources out there if you’re interested in learning more about Bitcoin, blockchain and other cryptocurrencies. But Bitcoin’s impact on the accounting field isn’t quite as correlated or reflective of the same potential as it’s backing technology – blockchain. Digital currency would disrupt accounting and every other sector with it. But blockchain technology has the potential to truly change the way accounting is done and the way accounting professionals do their jobs, and potentially on a faster timeline than cryptocurrency. So if you’re a CPA firm or accounting professional, you’d be well suited to study blockchain rather than get swept up in the (albeit interesting) swell of Bitcoin speculation.
Blockchain and Accounting
If you’re wondering what blockchain can do for an industry, ask yourself about the possibilities that would come about from a set of records that couldn’t be altered and weren’t impacted by time. What might first come to mind, from an accounting perspective, is audit. Hywel Ball, UK head of audit at EY points out in this article that in, essence, auditing comes down to having multiple ledgers that need to reconcile against each other. Since each participant in a blockchain has access to the ledger and can see it simultaneously, there’s no need for a central authority. That could lead to far less complex transaction analysis, less complicated record checks, and little or no cooperation needed from anyone outside the organization. Also, the data is stored in ledgers that are continually updated, so external auditors could have access to real-time reporting.
Though audit is a natural fit for blockchain, it likely won’t end there. “We’ll see a shift to ‘smart’ contracts,” said Amanda Wilkie. “Publishing contracts on a blockchain means that participants in the chain can see when terms and conditions are met or when outside conditions trigger something in that contract. As an accountant, if those contracts need to be audited – like rental agreements or property records – we have a high level of insight into them.” Wilkie, an operations and technology consultant that has held positions in multiple accounting firms ranging from the Top 50 to the Top 10, has been speaking to accounting professionals about blockchain and cryptocurrency for about four years. The first time she presented on the topic, the room was practically empty. Today, her sessions are wall-to-wall crowded. Clearly, people are starting to pay attention to blockchain.
Wilkie’s prediction on immediate cryptocurrency and blockchain impact to accounting professionals is unfolding now. “There are CPA firm clients that are looking to accept Bitcoin,” said Wilkie. “We need to be able to report cryptocurrencies on tax returns and have them on financial statements. How do we do that type of reporting?” She points out that reporting tools are starting to emerge to solve that problem. Verady, a cryptocurrency accounting and audit technology company, along with a CPA-led advisory firm, announced the launch of a reporting platform to help that firm with auditing one of the world’s largest cryptocurrency payment processing companies.
Preparing for Blockchain
What will blockchain mean for you? Probably a lot. But that will depend on your industry and how quickly blockchain can clear any perceived or real regulatory hurdles and acceptance within organizations. Blockchain implementation has to be done willingly between the parties involved, at least initially. If, for example, a major retailer adopts a blockchain network, they could dictate that any of their third-party suppliers need to participate in the blockchain in order to continue business with that retailer.
Wilkie also pointed to proof of concepts that are underway with supply chain logistics and blockchain. One shipping company tried securely sharing shipping data on a blockchain. The results were promising – goods were in transit for far less time and the potential for label tampering while cargo was on the move was mitigated.
In banking, blockchain promises to end delays in transaction verification, settlement periods, and money transfers. Industries that need strong anticounterfeiting measures are starting to rely on blockchain to prove authenticity and origins – like diamonds and wine. There is also great potential in identity management and medical records that we’re likely just beginning to uncover.
One thing that’s for certain, like AI, blockchain is coming. As an accounting professional, it’s up to your creativity and appetite for change to decide how deeply you want to get involved in this early stage. But a great first step would be to disassociate Bitcoin and blockchain in your mind. That alone, puts you slightly ahead of the learning curve.
This post is the fourth in a series where we’ve explored emerging technology in the accounting field and hear from industry experts on potential future impacts. Read the first here.
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