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Blockchain

So here’s what we know about BlockChain

Understanding how blockchain creates business value is essential for companies to identify the right use cases and move beyond small pilots to widespread adoption.

Blockchain has a lot of potential applications, in areas as diverse as supply-chain management, trade finance, insurance, and even cybersecurity. But there are a lot of misconceptions and often good reasons why a blockchain may not be the right tool for the job.

What is blockchain?

When you think about blockchain, is really to think of it as a database. And it’s a database which is shared across a number of participants. We think about a network of participants. Each has a computer. The idea is that at any moment in time, simultaneously, each member of that network holds an identical copy of the blockchain database on their computer. That’s the essential principle. Information is potentially available to all participants at a moment in time.

When you think about that definition as a database, think of it in three parts. The first is that this is a cryptographically secure database or distributed ledger. That means that when data is read or written from the database, you need the correct cryptographic keys to do that: a public key, which is a basically the address and the database where information is stored, and a private key, which is your personal key, truly the security which prevents other people from updating the information unless they have that correct key. It’s secure data.

Second, it’s a digital log or digital database of transactions. Digital’s important because, in many industries, we’re still going through the process of digitization, and that’s an important first step before you can even think about using blockchain.

Finally, this is a database that’s shared across either a public or a private network. The most famous public network is probably the Bitcoin blockchain. That is something which has been around for many years. And you can join that network. You can become a node on the network with a computer, without any expressed permissions. And you can leave again. So no one really knows who’s joining and leaving.

Conversely, you can have a private blockchain, a private network, which in an application like banking is probably much more culturally acceptable, in which you know who’s participating, who’s got access to data, who’s holding a copy of that database.

But we already have big databases. And we already have the cloud, where you can share big databases and manage permissions. So just double click for us, why is blockchain potentially a better mousetrap?

There are four areas of innovation in why blockchain should be used.

One certainly revolves around the cryptographic keys. The cryptographic security we’re using today that was originated in the Bitcoin blockchain truly comes from 20-plus years of cryptographic research. This wasn’t just invented overnight. The way of securing data in a distributed database through these keys is pretty unique and certainly uses cutting-edge securities. That’s number one.

Second, the idea that this is a distributed, a decentralized, database means that you don’t have some of these issues around a database breaking the single point of failure. What you’ve actually got is a system which is very robust. If one database fails, one copy fails, you’ve got that important redundancy across multiple nodes.

Third, the essence of blockchain is a chain of blocks of information together. When you have those blocks chained together, you’re creating a perfect audit history. You can go back through time and see a former state of the database. If you’re recording things like property titles, you can see a previous owner of the property and the current owner. You’ve got this perfect audit trail.

But perhaps the most important aspect here, and this is what’s getting people excited, is this idea of process integrity. And that is the database can only be updated when two things happen. One, the correct credentials are being applied, the private and public key together. But most importantly, those credentials are being verified by a majority of participants in the network.

You can only update the database when the majority of independent computers check and verify those credentials that allow you to write to the database. You’re securing this against the idea of a single point of failure and somebody working nefariously to try and corrupt the database. You have this democratization of the process of dating the database.

Then, is blockchain Bitcoin? No, as we were just saying, Bitcoin is an implementation of and leverages a blockchain in order to deliver a virtual currency. We often hear, “Is it better than traditional databases?” No, it’s not necessarily better than traditional databases. But blockchain is very effective in an environment where you need to have a decentralized way of working or you’re looking to take out a centralized entity—so in things like in trade finances.

That said, blockchain isn’t as efficient as traditional databases. It’s much hungrier in terms of energy use and in many cases has higher storage costs. By definition, it’s much more for specific use cases. Is it immutable or tamper-proof? It is only as immutable and tamper-proof as the implementation itself. And, frankly, if you’re able to take over half the nodes in a blockchain network, it’s very difficult. But if you are, you can tamper with it because then you will be able to affect the consensus algorithm.

As far as it being a truth machine, well, the blockchain’s only as good as the information you put in it. So if you have a blockchain, and in the blockchain, you’re keeping people’s driver’s license information or voting history, and you put in incorrect data, the data itself isn’t checked in any particular way. All that the blockchain itself does is ensure the integrity of the individuals making the transaction, ensuring that you have the right combination of a public and private key.

This article is from McKinsey&Company Podcast.

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What CPAs Need to Know on Blockchain

By strict definition, blockchain is a global digital ledger of economic transactions that is transparent, continually updated by countless users, and considered by many as almost impossible to corrupt or hack.

But in the broader sense, blockchain is also a lightning rod for highly charged opinion, confusion, and even fear. Some argue that blockchain will completely transform finance, accounting, and auditing. Others are decidedly more circumspect regarding its impact. And a certain segment is nervous, not knowing whether blockchain will make portions of the accounting profession obsolete—perhaps large ones, specifically as it relates to the current audit and tax practices focusing on compliance.

“I don’t think it is going to cut our profession out,” L. Gary Boomer, CPA/CITP, CGMA, former CEO of Boomer Consulting, and now the company’s strategist and visionary, said in an interview. “But one of the things we have in our profession is the Rube Goldberg machine: A lot of processes that maybe don’t add value. If you’re not adding value, you’d better figure out how you’re going to provide value in the future.”

Boomer, covered a topic that might seem intimidating given that blockchain is not only new—less than 10 years old—but also enigmatic even for the most intelligent finance professionals. “There’s much of it that is different, complex, and hard to understand with current mindsets,” Boomer acknowledged.

There’s also the misconception that blockchain will smack the financial world with an immediate, tsunami-like force. “This is more of a transformation, and we are in the early stages of it,” Boomer noted. “So we need to know the right questions to ask: Where is this going to have the greatest impact on the accounting profession, and what is the timeline of that?”

As to the timeline part, blockchain’s ascent continues to accelerate. “No one was talking about it before 2008,” Boomer said. “Then in 2013 we started to see the rise of bitcoin, a blockchain consortium in 2015, and proof of concept in 2016.” He expects that blockchain may begin to replace legacy accounting systems around 2023, “and by 2025 it will be widely accepted.”

And insofar as the impact it will have, much depends on how finance professionals educate and position themselves during the run-up. Boomer stressed that once CPAs understand the basics of blockchain, they can move toward learning how to harness it. “It’s going to provide opportunities if we have the right mindsets, skill sets, and tool sets,” he said.

To that end, Boomer highlighted a number of crucial concepts that help explain blockchain and give insight into its value propositions for the accounting profession.

1. Blockchain is secure and immutable

“While everyone thinks of the internet as public, blockchain protects transactions and increases the security and privacy,” Boomer said. In theory it cannot be hacked because that would require overpowering all the computers that contribute to and update the ledger network—a feat akin to hijacking the entire internet.

2. Think of blockchain as the ‘internet of value’

As opposed to focusing on the exchange and transmission of information, the internet of value centers on transactions. That concept also gives a clue to where blockchain’s impact on accounting will be felt first.

Boomer related that “the big questions I always hear and that most practical CPAs have is, ‘What’s the killer app, and what’s going to happen first?’” He believes that the first movers will be in accounts payable and receivable, with either intercompany transactions or client-customer transactions. “It will verify the payment, the dates, and there will be no question that the buyer sent the payment. Buyer and seller have to collaborate, so as a result there’s no confusion. Blockchain is built on trust, and we need more trust in transactions.”

3. Blockchain data will create new business opportunities

Boomer noted that because the speed of transactions on blockchain is increased significantly, “this has value for the audit, which is typically performed months after the fact. It will be faster and cheaper, but I don’t think auditors should throw in the towel.”

Instead, they will need to develop a more datacentric approach. “They have to be more involved with the data and use it with a forward rather than historic perspective,” Boomer said. “The result is a higher-valued service.

4. Studying up on blockchain will pay off

Boomer contended that finance professionals must make time now to learn all they can about blockchain. He recommended Don and Alex Tapscott’s book Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World. Don Tapscott has also given a popular TED talk on the subject, now seen more than 1.6 million times. The Big Four accounting firms, he added, have also released white papers and studies on blockchain that are worth seeking out.

Accountants who get a grip on blockchain today will be the ones who successfully pivot their services tomorrow. “Banks are an incumbent that could lose business to blockchain, so they’re looking for ways to reduce the cost of their transactions and protect their turf,” Boomer said. “Accountants need to do the same—to not only protect the brand and its reputation, but look for ways to offer new services.”

In the meantime, take heart that many of your peers are still trying to fully wrap their heads around blockchain—including Boomer. “I’ve spent a ton of time studying blockchain the last three years, and it’s about getting connected to the right resources,” Boomer said. “We’re all learning. When you couple the blockchain with a cryptocurrency, artificial intelligence, the internet of things, smart contracts, and robotics (automated processes), the possibilities increase exponentially.”

This article is originally posted and written by Lou Carlozo on Journal Accountancy.

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