Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Blockchain Bibliography |
Technology Related Main
Although many people are skeptical about cryptocurrency and the underlying technology, the blockchain is a powerful and stable technology that can be used by accounting and finance professionals to improve business operations and organization efficiencies. This article is an adaptation of IMA's C-suite report on Blockchain, Cryptocurrency, and Management Accounting: Adopting the Technology while Mitigating Ethical and Governance Risks.
Immutable Distributed Ledger
The authors define the term blockchain in the following way. "Blockchain is a shared, immutable ledger for recording transactions, tracking assets, and sharing information." This technology is particularly well-suited for accounting applications and could become the basis for global recordkeeping systems. Blockchain can be used to increasingly monitor financial performance, provide insights in real time, and an opportunity for accountants to lead their organizations' blockchain related strategies.
Origins of Blockchain
In 1991 Stuart Haber and W. Scott Stornetta sought to develop a computationally practical solution to time-stamp digital documents so that they could not be tampered with. This lead to a data structure that involved a chain of blocks developed by Satoshi Nakamoto in 2008. The most well-known blockchain is the public blockchain behind the cryptocurrency bitcoin. Although the application of blockchain to crytocurrency brought a lot of attention to blockchain, there are dozens of other useful applications. Some examples include: online voting, insurance policies, property and real estate records, forecasting, medical records, cloud storage, private transportation and ride sharing, copyrights and licenses, and supply chain tracking.
How Blockchain Works
There are four steps to a blockchain transaction:
1. Record the transaction - This shows the movement of physical or digital assets from one party to another in the blockchain network including: Who was involved in the transaction, what happened during the transaction, when it occurred, where it occurred, why it occurred, how much of the asset was exchanged, and how many preconditions were met during the transaction.
2. Gain consensus - To validate the proposed transaction. Usually a majority of participants on the blockchain must agree that the recorded transaction is valid. Rules of agreement can vary.
3. Link the blocks - Transactions are written into blocks equivalent to the pages of a ledger book. A cryptographic hash (unique identifier) is appended to the new block. The hash can't be reverse-engineered to reveal the information in the block, but it references the previous block so the hash acts as a chain that links the blocks together. If the contents of the block are changed the hash value changes providing a way to detect tampering with the data.
4. Share the ledger - The system distributes the latest version of the ledger to all participants. It is a system of shared accounting.
The Growth of Blockchain Adoption
Leading companies are incorporating blockchain technology in various ways. Energy companies are using blockchain technology to create peer-to-peer energy trading platforms. Homeowners with solar panels use an energy trading platform to sell excess solar energy. Banks and stock exchanges use blockchain to manage online payments, accounts, and market trading. The European Union announced a multi-euro plan to invest in blockchain research and innovation. There are many benefits of blockchain technology, but there are some trade-offs.
Blockchain Pros and Cons
The following graphic is an adaptation of Pope and Black's Table 2 illustrating the pros and cons of blockchain.
Public and Private Blockchains
Public blockchains are permissionless allowing anyone to participate in the network. Cryptocurrency (e.g., bitcoin, Ethereum) is a payment system on a public blockchain (the platform) that requires cryptocurrency as the value being transferred. There is no need for a third party (government or bank) to verify transactions.
Private blockchains are closed networks and are similar to traditional systems of accounting. The governance is centralized and this undermines the advantage provided by public systems being decentralized.
Blockchain and Management Accountants
Blockchain is a foundational technology for recording data. Blockchain technology can be used by management accountants in various areas such as: accessing performance data in real time, facilitating continuous financial monitoring, advising on operations costs such as data transmission, leveraging the ability to better track error information, implementing more efficient accounting practices, and improving corporate compliance and internal controls.
Managing Ethical and Governance Risks
Management accountants can assist in analyzing and overcoming ethical and government risks associated with blockchain technology. For example, they can help determine potential uses of blockchain technology for their organizations, the necessary internal controls to maintain security, the tools needed to monitor the governance and health of each blockchain platform, and the personnel and skills needed to maintain appropriate blockchain applications on an ongoing basis.
Blockchain governance can raise significant ethical, reputational, legal and financial problems for an organization. Therefore, management accountants need to understand the governance structure of a particular blockchain including how potential issues will be resolved.
Assess Future Impacts
Although public blockchains and cryptocurrency are an important part of the blockchain ecosystem, blockchain adoption is growing for a wide range of other applications. Blockchain technology has improved efficiencies within organizations and potential ethical and governance risks associated with blockchain adoption can be mitigated. Gaining expertise in this emerging technology is important for forward-looking finance professionals.
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Related summaries:
Gregg, A. 2017. Start-ups embrace cryptocurrency to raise needed capital: 'Initial coin offerings' let companies raise money without ceding control. The Washington Post (December 4): A13. (Note).
McKenzie, B. and J. Silverman. 2023. Easy Money. Abrams Press. A 2023 review from the Journal of Forensic & Investigative Accounting 15(3). (Note).
