WHAT IS A DISTRIBUTED LEDGER IN THE WORLD OF BLOCKCHAIN? By ALBERT TRAVERSO, CPA
SAX LLP
It is quite clear that blockchain will greatly impact the accounting profession. The financial services industry will be significantly altered by this new technology as current business models for processing transactions will change with the use of blockchain. Just how significant and how soon CPAs will begin feeling the impact remains to be seen. 4
MARCH/APRIL 2019 | NEW JERSEY CPA
Blockchain is a network that provides for the recording of transactions using complex algorithms and encryption that results in transactions being secure, irrevocable and available to everyone who would want or need to know about the transaction. Blockchain has the potential to impact audit engagements by rendering traditional audit tests redundant and unnecessary. Inherent self-checking safeguards that are built into blockchain address several assertions at the account balance and transaction level that traditional audit techniques would otherwise address in an audit engagement (existence, occurrence, and rights and obligation to name a few). However, it will also open new opportunities where accountants and firms can find value. BLOCKCHAIN V. BITCOIN In 2009, the digital cryptocurrency Bitcoin was launched. While Bitcoin and blockchain are often mentioned together, it is important to make a key distinction between the two. Bitcoin is not synonymous with blockchain. Bitcoin is a currency, and blockchain is the technology that supports the bitcoin network. It may help to think of blockchain as an operating system like Microsoft Windows and Bitcoin as an application that runs within the operating system environment. Bitcoin is just one of the first applications that uses the blockchain technology. Since blockchain facilitates the process of recording financial transactions and tracking financial assets, virtually anything of value that is tangible (real estate, a car or cash) or intangible (intellectual property, patents or copyrights)
can be tracked and traded on a blockchain network. Bitcoin is just one example of how assets with value are exchanged. Blockchain enables companies to create an environment (a blockchain network), where transactions are recorded, stored and can be viewed by everyone with access to the network. On a blockchain network, transactional information is shared and/or distributed across the entire network to all users. Instead of each party to a transaction maintaining their own database of transactions, blockchain network users share the same data. Each network user has an identical copy of the transaction, which eliminates the need for reconciliation between parties that transact with each other. Since blockchain deals primarily with the transfer of ownership of assets and maintains a ledger of accurate financial information, it will indeed be leveraged by the accounting profession when it comes to the measurement, communication and analysis of financial information. With that, blockchain will lead to more and more transactional-level accounting being done by technology and not physical accountants, but there is still much for accountants to do. For instance, an asset’s ownership might be verifiable by blockchain records, but its condition, location and true worth will still need to be assured. WHAT IS A DISTRIBUTED LEDGER? This sharing of data is where the term “distributed ledger” comes from. A distributed ledger is a blockchain-enabled network. For each transaction posted to a blockchain network, all participants’ records are updated