In some countries, there is no automated system of casting and counting votes during political elections. After casting votes, how do we make sure that the person we voted for get the vote? People are always insecure after casting a vote and so many times, there is recounting of votes. But what is the use if the recounting is done under the same governance. So, Blockchain would be helpful in this case. Now this question arises what is this Blockchain?
“The technology at the heart of bitcoin and other virtual currencies, blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.”
— Marco Iansiti and Karim R. Lakhani
“A blockchain is the structure of data that represents a financial ledger entry, or a record of a transaction. Each transaction is digitally signed to ensure its authenticity and that no one tampers with it, so the ledger itself and the existing transactions within it are assumed to be of high integrity.”[i]
Blockchain is an online record of data or transactions as we can think of recording data in a spreadsheet and storing that in a specific file or folder. When we make any changes to that data we cannot access the previous version of data being edited.
But Blockchain works differently as we can think it as a set of several thousand of blocks in which data or transactions are recorded and if anyone changes the information in the blocks then a new block is inserted to set of blocks with the information being edited. But what happens to the original information? Here is the point which is interesting as the block containing the original information also stays in the database as original information so duplicate information is created and thus these blocks become part of a blockchain. It is considered as a secure way of record keeping as the transactions are not recognized until they enter blockchain through a process that ensure that only valid transactions are being recorded. Let’s see an example assuming that Mr. One sends money to Mr. Two.
Relationship between Blockchain and Cryptocurrency
Cryptocurrency is a kind of digital coin that works on blockchain technology. As we know that blockchain is form of database that creates a network that enables various transactions and transfer of value and information. And, Cryptocurrencies serves various functions such as resource function and even used to digitize the values of transactions and helps in sending value and paying for transactions in the blockchain network. Overall, we can say that Blockchain is an ecosystem and cryptocurrencies are a part in that system. Blockchain is required to record and transfer transactions and cryptocurrency need to do transactions on this chain of blocks. So, they both go hand in hand and there will be no other way to account for crypto transactions without blockchain.
Blockchain vs Traditional Database
Traditional database use network based on client- server. In these databases Client has authority of modifying the data. The security of the database is with a designated authority which give access to client to modify data and thus if the authority’s security got compromised then there are chances of data being modified or deleted. Once the data is changed there is o way to backup the original data.
Whereas Blockchain technology works on the concept of decentralization. It consists of decentralized nodes and majority of these nodes should reach consensus (guarantees security of network) in order to make addition to the database. There are several factors in which Blockchain technology is advantageous over traditional database.
- Transparency and Integrity: Users of the data are certain that the data they are using is true and uncorrupted and they could verify how it is appended overtime.
- CRUD VS Read and Write: Traditional database follows CRUD function which is Create, Read, Update and Delete so once data is updated the original data is deleted. Whereas in Blockchain technology, the new data is added to new blocks and the block containing original data are never deleted. Thus, it is easy to figure out what the original data is.
- Decentralization: Blockchain is based on decentralized control which reduces the risks of destroying or corrupting the data.
Consumers: Blockchain is beneficial to consumers over the traditional database system.
– Product Authentication: Blockchain helps in recording detailed data about the products such as product history, purchase, sale, etc. that provides authenticity and thus helps in increasing consumer’s knowledge and trust.
– Transparency: It provides consumers complete information about goods and services and their production cycle which helps consumers while making purchase decisions.
– Supply Chain Visibility:Consumers are nowadays more concerned about Brand transparency and make their decisions based on social, environmental and ethical responsibilities fulfilled by company. Blockchain provides us an insight into the supply chain network and help producers ass well as consumers in making decisions.
– Accounting: Blockchain helps in recording transactions without any error and the data is verified every time it enters the blockchain network and thus reducing the human errors and decreasing the workload of the accountants and auditors.
– Smart Contracts: Smart contracts is a feature of blockchain that helps in contractual agreements, signing and validating the agreements which saves time while also reduces cost and need of mediators. This function is more helpful for Banks and other financial institutions.
– Stock Exchange: Blockchain is considered helpful in securities and trading world. Stock exchanges are considering the adoption of blockchain technology.
Disadvantages of Blockchain Technology
Blockchain is emerging as the most useful and secure technology in today’s world. But there are always some drawbacks of technology as these are created by humans.
- Cost: Even if Blockchain is offering benefits of saving money and time in recording the transactions but there is huge amount of initial cost associated with the implementation of Blockchain technology.
- Integration Concerns: Blockchain technology is completely different from Traditional database system that requires complete shift from existing system that arises integration concerns and also take more time for this replacement.
- Not 100% Secure: Blockchain offers high level of security as the data is uncorrupted and permanent. But the level of security depends on the environment in which it is implemented, if there are flaws in the software on which it works, the data could be easily hacked or misused.
- Performance: Blockchain technology is highly transparent and secure but it takes more time in processing the transactions than the traditional centralized database system due to the burdens of Signature verification, Consensus mechanism and redundancy.
Preparations for Adoption of New Technology
Blockchain is a new and growing technology but it is showing its potential in various fields such as Accounting, Auditing, IT, HR, Medical, etc. Organizations need to do some preparations before the adoption of Blockchain Technology in their organizations.
- Understanding Blockchain: The first and the foremost steps to understand what Blockchain is as most organizations have heard of this technology but are unaware of its actual meaning and what it can offer to their business.
- Identify opportunities: Organizations usually perform SWOT analysis to identify their Strengths, Weaknesses, Opportunities and Threats. But the business should also perform an analysis to identify the opportunities that the blockchain should offer to different departments in a business.
- Continued Learning: Blockchain is still growing so the organizations should keep an eye on the changes in the technology and also understand how to incorporate this technology in the business processes so that it is profitable to them.
- Identify customers demand: Customer is an important part of every business, so organizations always direct their actions towards meeting the needs of customers. In the same way, business should also analyze how adoption of blockchain would help them increasing customers trust and fulfilling their demands.
- Engage with others in industry: As there is a huge amount of initial cost involved in implementation of blockchain technology, so a business should also think out of box and should focus on other connected corporations, suppliers and attend conferences on how blockchain would affect their processes. They should see what others in same industry are doing and consider imitating them and do analysis of flaws in other businesses.
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- Specialized Vendors: Blockchain is a complex technology and when implementing this, a business should see outside their business and find specialized vendors. They would help them in implementation processes and add value to their business processes rather than wasting a lot of money and time without any supervision or expertise. Blockchain would be useless if the environment it is operating is not suitable.
Future of Blockchain
There is some interesting argument made regarding the future of Blockchain technology. “Metelin from developer relations says that it is very difficult to predict the future of the technology. He said that Blockchain technology is already being implemented by different industries. Therefore, over the course of five years the technology will supposedly penetrate industries like insurance, medical services, banking which will impact our daily lives.”[ii]
“Wyatt from engineering talked about the trust concept of Blockchain. He said that blindly trusting monolithic institutions like church or a governmental institution will be a thing in the past. People can garner trust from the systems, consensus and the blockchain community once the technology is implemented.”[iii]
As per my research, I believe that blockchain technology will impact all the spheres whether it is business or individual. Eventually it will help in reducing costs by removing the intermediaries from various different positions. This will impact people differently as they will lose their jobs in near future but will also create new job opportunities relating to IT sector as technology needs t be managed properly. It would be just a shift in the roles and responsibilities of people rather than creating unemployment.
Impact of Blockchain on Accounting and Auditing
With the Blockchain coming into play, I think there will be new opportunities as well as challenges in the accounting field. Some of the functions that blockchain can perform are:
- Bookkeeping: Blockchain technology has the potential of record keeping of various transactions.
- Tax preparation: It would also perform activities such as tax preparation and financial reporting.
- Auditing: It would also impact Auditing procedures as most of functions would be performed by blockchain.
As I was going through some of the publications and also Discussion forum on Brightspace, some believe that Blockchain would result in end of Audit. In my opinion, it is undeniable that blockchain will help in automating the bookkeeping and auditing processes. But it doesn’t mean that this will mean end of audit. Auditing is testing the transactions authenticity by looking at source evidence. As we know that many transactions in accounting are based on Management’s estimates, auditor need to test the reasonability of those estimates even if those are recorded on Blockchain. Also, working of Blockchain depends on the environment in which it is operating. If there are deficiencies in the software with which it is operating. So, it become essential for an auditor to test internal IT controls and steps taken by the firm to mitigate related risks. Control testing would still be essential even with the use of Blockchain. This might reduce the work burden of auditors as with automated process, they would not require performing all the procedures. But there are always two sides of a coin, Blockchain will surely end up reducing workload but will increase a new workload, as there will be creation of new position that will be required to manage the technology. It’s just a change of roles and responsibilities and require a new mindset and skill set which could be achieved by changing the education material.
I would like to conclude that blockchain is a game changer and there is still more to come.
“I am a big believer in the ability of blockchain technology to effect fundamental change in the infrastructure of the financial services industry. Clearing houses are a wonderful invention, but if you have a public ledger that is trusted, you can evolve back to a bilateral (trading) world but proceed with instantaneous settlement. We currently settle at T+3. Why not settle in 5-10 minutes?”
- Bob Greifeld (Former Nasdaq CEO)
[i] (Hassell 2016)
[ii] (Priyanka 2017)
Hassell, Jonathan. 2016. “What is blockchain and how does it work?” CIO . https://www.cio.com/article/3055847/what-is-blockchain-and-how-does-it-work.html.
Priyanka. 2017. Blockchain Technology in five years. 6 27. https://bcfocus.com/news/tron-trx-price-prediction-tron-news-today-tron-price-today/17251/.
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