Blockchain technology is establishing itself as the next digital disruptor in transaction recording. By 2022, a blockchain-based business will be worth $10 billion! It is expected that blockchain-based systems will be used across many industries for reducing transaction costs, eliminating manual validation and streamlining business processes. - Gartner

CFOs must prepare to recognize prospects, evaluate the challenges and strategize their move to tap potential blockchain possibilities.

Blockchain: Promises beyond cryptocurrency technology

Recently, a new Japanese law effective April 1st, 2017 categorized Bitcoin, a cryptocurrency, as a legal payment option within the country. Other countries are also not far behind, assessing and exploring ways to leverage this new currency system.

While the full potential and long term value of cryptocurrencies has yet to realize, many think the underlying technology, blockchain, is more important than the currency itself. Blockchain technology certainly has greater business-impacting potential. While many of its use cases are still in their infancy, the use of blockchain in accounting is quite promising. From enhancing bookkeeping to simplifying compliance with regulatory requirements, there are possibilities everywhere.

Blockchain: From double-to triple-entry accounting

In simple terms, blockchain is the underlying technical infrastructure powering Bitcoin and other cryptocurrencies. Currently, most people use a trusted middleman such as a bank or clearinghouse when making financial transactions. But blockchain allows consumers and suppliers to connect directly, removing the need for a third party. A blockchain is an online public ledger that uses data structures to simplify the way people or organizations transact. It enables the users to manage the transaction ledger of all bitcoin transactions that have ever been executed securely and without the help of a third party. This ledger keeps the details of the new bitcoin and previous bitcoin ownership.

In a conventional system, such a ledger is centralized. This is not the case with bitcoins, as the transaction happens on internet and everyone has a copy of the ledger. This also means that everyone can see the balance of all accounts in real time, making the data almost tamper-proof.

Additionally, these transactions are conducted over a decentralized peer-to-peer network. The decentralized or distributed nature of the blockchain ensures that there is no single controllership of the transaction data. The blockchain data is accessible to all the participants in the network. Every 10 minutes, all transactions are recorded in a virtual block, and a new block is created, linked to all the previous blocks in the chain. The blocks are visible to both parties involved in the transaction.

To use modern banking as an analogy, the blockchain is like a full history of banking transactions. Blocks, meanwhile, are like individual bank statements.

In conventional B2B trades, transactions between parties require raising PO, settling through banks and working out VAT. Utilizing blockchain methodology, the need for every party to create transactions in their own accounting systems would be eliminated. The blockchain network would validate an order in real time and upon receipt, everyone connected would be settled as per their standard terms. Accounting entries could be pre-reconciled and auto-posted.

This can also lead to a triple entry accounting practice, the premise on which blockchain is based. With blockchain, there are three parties to any digital transaction: payer, receiver and blockchain middle intermediator. Each holds a copy of the same transaction receipt. This transaction receipt within the blockchain network becomes vitally resilient because it is cryptographically authorized by the payer and cryptographically signed off by the mediator. It characterizes such robust evidence that the facts on record become practically undisputable.

Blockchain can potentially maintain and prove the integrity of digital accounting reports for companies. It can also simplify and speed up work for independent public auditors by providing a common verification platform for the accounting manager, government regulatory agencies or other parties.

The CFO’s dream: One version of the truth

For CFOs, the key advantage of blockchain is that every entry is authenticated and confirmed by the network and can never be altered. The distributed and transparent nature of blockchain makes financial data owned by various teams open for everyone in the network to view and verify. This can speed up and reduce complexity for checking and approving transactions. CFOs can have access to a single source of truth.

The real-time nature of blockchain provides CFOs with the ability to review transactions between parties as they happen. Digital dashboards powered by strong analytical tools can provide both micro- and macro-visualizations of a company’s finances. Centralizing this information has the potential to reduce costs and speed up settlement times, which can improve liquidity and improve operational efficiency for expense or revenue forecasts, identifying transaction irregularities or other tasks.

Blockchain: Growing prospects for CFOs

Accounting, auditing and compliance create significant expenses for businesses. For instance, fines alone have cost the banking industry more than $200 billion since 2008. Blockchain-based accounting could help prevent these fines.

Blockchain can help minimize any conflicts of interest during an audit. Usually, the interest of the auditor can depend on the dynamics of whether they are hired by the CFO or another party. Blockchain offers an independent, automated and standardized way of auditing that minimizes and mitigates the chances of any biases affecting the audit’s outcome.

Conventional manual auditing comes with a number of accounting issues, redundancies and complexities. Integrating and aligning blockchain technology with the internal mechanism of a business would help speed up the pace of these operations. Also, gradually reducing the need for manual auditing would result in a significant amount of cost cutting in the accounting function. As the cost of audits were found to rise every year between 2012-2015 by between 3.8% to 5.5% , reducing the need for these increasingly expensive audits would save companies money over time.

As blockchain technology provides real-time access to transaction cash flows, its distributed data also authenticates and confirms every entry by default. CFOs would have the power to track every penny in their system on a second-to-second basis. This can help them understand and address spending or payment challenges, which would eventually help further streamline the processes. Since blockchain provides a secure, decentralized ledger immune to tampering and hacking, employee theft and fraud would be minimized because no one can alter the distributed ledger without cryptographic security permissions. Greater transparency and a decentralized agreement ledger allow discrepancies to be identified immediately and the source of fraud traced to the micro level. More broadly, embedding blockchain technology would enable CFOs to tighten accounting processes, generate better data insights, improve policymaking and enhance treasury management.

Blockchain: Challenges before the big takeoff

A transparent, secure, and completely digital ledger promising an almost flawless audit trail can address many challenges of the CFO, but adopting this technology currently poses some difficulties.

One quick search on the internet and you can find a wide variety of players offering blockchain solutions that are either in the proof of concept stage or somewhat more evolved that can be commercially rolled out in coming future.

Despite the tremendous potential blockchain technology holds, governments and regulators still need to put in a framework that lays down the ground rules. Until these regulations provide companies with a sense of security regarding their use, expecting all businesses and financial institutions to adopt blockchain in its current form and join a true distributed network is a distant dream.

In the public sector, this would require both cultural and process changes. Moving away from the current centralized approach to a decentralized environment is a marked shift in the status quo that will take some getting used to. IT, cyber security and finance teams must collaborate on better understanding the blockchain framework and how it could fit into current finance processes. Even though there are some players already in the market with promised offerings around blockchain, it would most likely take a significant investment of time and resources to implement, manage and stabilize customized blockchain technology solutions across the finance sector.

The way forward

Although it is early for many businesses to think about the practical implications of blockchain on their day-to-day business operations, this technology will be exploited for commercial gains in the future.

As with all disruptive technologies, a first-move advantage is useful only if coupled with a realistic approach. CFOs should take it upon themselves to understand the implications for their business. This includes seeking advice or establishing a cross-functional team that includes IT, audit, compliance, accounts and other key parties to brainstorm and identify blockchain opportunities.

While the widespread adoption of blockchain may still be a few years away, its use is well on its way to becoming a reality.

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