Already across the basics of bitcoin and blockchains?
Has a technology term been met with more blank-faced stares than blockchain? Even now, eight years after its launch (with the bitcoin currency) and more than 25 years after it was first conceived, confusion reigns over what, exactly, is blockchain.
While Bitcoin has suffered the slings and arrows of its association with dodgy functions such as the darknet’s Silk Road and associated drug and weapons purchases etc., its underlying technology – blockchain – has risen dramatically in the estimations of technologists worldwide.
Let’s unpack these two terms – bitcoin and blockchain - so that we can separate their meanings and focus more closely on what blockchains can achieve, and how they might affect accountants and bookkeepers in the future.
What is bitcoin?
First things first – there’s bitcoin and then there’s Bitcoin. The
lowercase bitcoin generally refers to the currency; the uppercase
Bitcoin refers to the concept of peer-to-peer distributed ledger
technology, and the ecosystem it has (and will) beget.
"A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution."
Satoshi Nakamoto, Creator of BitcoinBitcoin: A Peer-to-Peer Electronic Cash System - 2008
Let’s talk about bitcoin the currency.
Bitcoin is a cryptocurrency that enables transactions to be conducted online without the need for a trusted third party such as banks or credit card companies.
Immediately, that changes everything. Did you ever imagine a currency that could operate without banks in the chain of exchange? No? And yet here we are. No more centralised gatekeeper or decision maker. Now, everyone’s a banker.
Digital currency or cryptocurrency?
Did you know?
Miners are people with powerful computer set-ups that compete to create the blocks in the blockchain by solving complex puzzles. The first to solve the puzzle and add the block to the blockchain earns bitcoins.
Did you know?
Nodes are computers in the blockchain network.
As with any currency or unit of exchange, bitcoin depends on trust and belief. Bitcoin users believe in the security of the ledger (for that is all a bitcoin is – an entry in a ledger) just as most people believe in the value of a banknote, when that banknote possesses no true inherent value.
And believe in it we do, with Japan officially recognising bitcoin as a legal means of payment in May 2017.
So, why's it so good?
- You can transfer bitcoin a LOT quicker than you can transfer money, to anywhere in the world
- There are no legal hoops to jump through to authorise a payment (nor maximum transfer rates)
- It costs a tiny fraction to transfer (and it doesn’t matter how much you’re transferring – it’s generally the same flat fee)
- If something goes wrong in the network (a catastrophic power outage affecting all of NZ, for example), the system keeps going without problem (whereas if a bank decides to do work on its servers, all users are blocked out of internet banking for that period)
So, why's it so bad?
- Security is an ever-present problem with all digital currency. Most bitcoin enthusiasts say that they welcome cyber-attacks and hacks as it makes the system stronger. In truth, major hacks have occurred.
- Adoption. Bitcoin is suffering from ‘sharing the road’ with traditional currencies, which makes it seem difficult to use and ‘gimmicky’. If, as expected, widespread adoption occurs over the next decade, who knows - we may see internet banking as a quaint relic from an earlier, less fiscally-sophisticated time.
What can you do with bitcoin? At this stage, a bit – with a lot more
Buying with bitcoin
Investing in bitcoin
It’s not just bitcoin
"A short description of Blockchain: Blockchain is to bitcoin, what the internet is to email. A big electronic system, on top of which you can build applications. Currency is just one."
Sally Davies, FT Technology Reporter@daviesally
Did you know?
There is NO bitcoin ‘coin’. There is no physical bitcoin whatsoever. Those stock images you seek a gold coin – they’re not real. The only coins you’ll get are when you cash out your virtual wallet into AU or NZ currency.
Blockchain, a dumb network
Did you know?
There’s more than one blockchain. Bitcoin is the best known, while many new cryptocurrencies are built upon the Ethereum blockchain. Companies are building their own private and public blockchains, too.
Building applications for the blockchain
proposes the hypertext
protocol, leading to the
releases the first
Ways blockchain is used
While we tend to think of a blockchain as the basis for a
cryptocurrency, its uses extend far beyond that scope. Here are six
use cases outside of finance.
Walmart is piloting a blockchain for supply chain management. Their goal is to remove the hold-ups they experience in paperwork mismanagement when stock travels around the world from port to port.
UK artist Imogen Heap is a champion of using blockchain technology to
"Blockchains could enable artists to release their tracks themselves and gain greater control over the terms of the release and the profits received. They could use smart contracts to dictate who gets what share of the money generated and, on the consumer side, they could even implement a tiered pricing structure depending on who is purchasing the track and for what purpose."
Perhaps the biggest breakthrough for blockchain will come when a universally accepted identity solution is developed. Imagine doing away with scanning passports and driver’s licences, uploading recent utility bills, providing proof of residence; imagine doing away with passwords; these are possibilities with a crypto-secured application that’s accepted worldwide.
No more polling booths; no more doubts about the validity of vote counting. Again, this could be the real-world application that takes blockchain from obscure to essential.
Lazooz is a decentralised ride sharing app currently in beta
disrupting the recently disrupted Uber/taxi space.
Paid in Bitcoin is a Launceston company that, as the name
suggests, converts a percentage (or all) of your pay packet into
Blockchain in accounting
And so to the possible impact of blockchains and cryptocurrencies on the accounting industry moving forward.
One could be forgiven for thinking that the logical champions of a universally shared, indisputable, unbreakable ledger would be accountants and bookkeepers. And yet there’s little heard in the mainstream about its use and adoption. Over time we think this will change. Already there’s activity among the big four, with Deloitte in particular taking a large interest in the technology and its future uses.
There are two specific areas that blockchain may affect the accounting and bookkeeping industry.
Triple entry accounting
By now you may have had a lightbulb moment about the effect the blockchain could have for double entry accounting. Triple entry accounting using digitally signed receipts was first proposed by Ian Grigg in his 2005 paper ‘Triple Entry Accounting’ – an often-referenced work that paved the way for bitcoin and blockchain.
Instead of ledgers being kept separately by two businesses, they’re securely shared with a third entry – the blockchain register – officially, securely, immutably recording the transaction.
The main resistance to this concept is usually around the inflexibility of the technology when considering the way in which a business’s accounts are managed. With blockchain (and by extension triple entry accounting), a transaction has taken place or it hasn’t. Either the ledger has been adjusted and cryptographically confirmed or it hasn’t. In accounting, ledgers can be more philosophically managed, with transactions sometimes viewed as liabilities and sometimes as something else.
Still, this hasn’t stopped developers like Balanc3 from working on accounting solutions using this technology.
With its intrinsic and near unbreakable cryptographic record keeping, it’s reasonable to assume that the early deployment of blockchain technology for accounting may come in the field of auditing. Commentators – among them Matthew Spoke of Deloitte Canada – see a future where auditing is drastically changed through the removal of many time-demanding processes.
A decentralised ledger - available to all users, exactly the same for all users, unalterable by all users, in which all parties agree that transactions have taken place - has the potential to eliminate key tasks of the modern-day auditor.
Does that mean the end for the auditor? It’s doubtful. While the blockchain records the transactions, it doesn’t describe them (at this stage). An auditor would still need to confirm the classification of those transactions.
The tendency with observations like these is that one is inclined to imagine that outcome, but not the process and journey leading to that outcome. In all likelihood, auditors will still be required – perhaps to audit the blockchain itself in real time.
We all dismissed the internet as a futile fad 30 years ago. None of us could see the potential of it because it didn’t fit our known world view of magazines, TV and newspapers. It would be risky to do the same again today with an equally disruptive technology.
Change may not become apparent this year or next; perhaps not for five years. Then again, with so many developers working exclusively in the blockchain space, it’s likely that innovation will accelerate exponentially from here.