Blockchain

Ami BeersDirector – Assurance and Advisory InnovationAssociation of International Certified Professional Accountants

July 11, 2017

“We always overestimate the change that will occur in the next two years and underestimate the change that will

occur in the next ten.”

Bill Gates

Peak of Inflated Expectations: Early publicity produces a number of success stories — often accompanied by scores of failures. Some companies take action; many do not.

Blockchain’s Position on the Gartner Hype Cycle

Expected Adoption

Theories“Over the next 12 to 24 months, I expect we will see significant, if still limited, moves to blockchain-based platforms in areas like cross-border payments or trade finance. But financial services as a whole is much broader than just these isolated use cases. I therefore expect widespread blockchain implementation in

other industries first — for example supply chain management, healthcare, real estate, or e-governance.” –Oliver Bussman (Former CIO of UBS) October 2016

A 2016 IBM survey found that 15% of banks and 14% of financial market institutions interviewed by IBM intend to implement full-scale, commercial blockchain solutions in 2017. Mass adoption isn’t that far behind with roughly 65% of banks expecting to have blockchain solutions in production in the next three years.” -

IBM

Accenture’s adoption timeline

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Exploration and Investment Early Adoption Growth Maturity

AICPA Survey

72%14%

0%14%

What are you/your organization doing about blockchain?

Never heard of the termTalking about it, no actionExploration and training in progressActively using or providing blockchain solutions to clients December 2016

What is blockchain?

What is Blockchain?Blockchain is a shared distributed ledger system on which information about all virtual currency transactions, contracts or assets are recorded and made publicly available.

A transaction between nodes

(participants) in the network is made

Miners in the network work to

solve algorithms in order to verify the

transaction

Miners reach consensus on the

validity of the transaction and it is

added to the blockchain

Each node in the network has access

to the verified, immutable

distributed ledger that is the blockchain

1 2 3 4

Note: Mining is the process by which transactions are verified and added to a blockchain. This process of solving cryptographic problems using computing hardware triggers the release of transactions which are added to the blockchain. Miners are the computers who do this task.

How Does the Blockchain Work?

Blockchain = Blocks on the Chain

BenefitsDisintermediation & trustless exchangeExchanges can be made without the oversight or intermediation of a third party, strongly reducing or even eliminating counterparty risk.

Empowered usersUsers (network participants) are in control of all their information and transactions.

High quality dataBlockchain data is complete, consistent, timely, accurate, and widely available.

Durability, reliability, and longevityDue to the decentralized networks, blockchain does not have a central point of failure and is better able to withstand malicious attacks.

Process integrityUsers can trust that transactions will be executed exactly as the protocol commands removing the need for a trusted third party.

Transparency and immutabilityChanges to public blockchains are publicly viewable by all parties creating transparency, and all transactions are immutable, meaning they cannot be altered or deleted.

Ecosystem simplificationWith all transactions being added to a single public ledger, it reduces the clutter and complications of multiple ledgers.

Faster transactionsInterbank transactions can potentially take days for clearing and final settlement, especially outside of working hours. Blockchain transactions can reduce transaction times to minutes and are processed 24/7.

Lower transaction costsBy eliminating third party intermediaries and overhead costs for exchanging assets, blockchains have the potential to greatly reduce transaction fees. It is estimated that blockchain based applications could bring the cost of a cross-border transaction from $25 to $1-2.

Source: Deloitte

Public or Private Private Blockchain

• Restricted to few users

• Access permissions are controlled

• Maintains partial guarantees of authenticity and decentralization

Public Private

Users Access Anonymous Vetted

Know as Permissionless Permissioned

Administrator Not Required Required

Crypto-currency Yes No

Transaction Speed

Slow Fast

Nascent technologyResolving challenges such as transaction speed, the verification process, and data limits will be crucial in making blockchain widely applicable.

Uncertain regulatory statusBecause modern currencies have always been created and regulated by national governments, blockchain and Bitcoin face a hurdle in widespread adoption by pre-existing financial institutions if its government regulation status remains unsettled.

Large energy consumptionThe Bitcoin blockchain network’s miners are attempting 450 thousand trillion solutions per second in efforts to validate transactions, using substantial amounts of computer power.

Control, security, and privacyWhile solutions exist, including private or permissioned blockchains and strong encryption, there are still cyber security concerns that need to be addressed before the general public will entrust their personal data to a blockchain solution.

Integration concernsBlockchain applications offer solutions that require significant changes to, or complete replacement of, existing systems. In order to make the switch, companies must strategize the transition.

Cultural adoptionBlockchain represents a complete shift to a decentralized network which requires the buy-in of its users and operators.

CostBlockchain offers tremendous savings in transaction costs and time but the high initial capital costs could be a deterrent.

Source: Deloitte

Challenges

How is the technology used?

Smart Contract

Leverages Blockchain technology

Why Smart Contracts?

Defining the Contract Components

Digital Assets

Future of Smart Contracting

Digital Currencies Internet of Things

Blockchain technology is being experimented with in many industries.

Financial Services

Healthcare Real Estate

Government

Art and Antiques

Retail

Key facts• Most blockchain investments and advances to date have been made in financial services. $1B in

investments in 2016• Other industries see promise in blockchain’s ability to create cost savings, data security and reduce

fraud through uses like payment processing, information management, document verification and tracking and supply chain tracking

• A majority of the technologies are still in the testing and experimental phases.

What are the implications for the profession?

Implications for the Profession

• As the technology evolves, more and more businesses may prefer to transact via the blockchain to transfer assets.

• This data would then be contained in the blockchain’sledger.

• This raises obvious implications for accounting, the financial statement audit, and tax…

Audit/Accounting Implications of Blockchain Opportunities:

• Enhanced trust/confidence

• Enhanced efficiency

• Improved access to transactional data

Challenges:

• Need for new accounting and auditing standards for digital currencies and assets

• Need for new regulations

• Need to evolve professional services and related value proposition

• Need additional knowledge and new skills

Automatic validations

Real time verification

No middle man

Current Tasks/Expectations Impact of blockchain technology Future Tasks/Expectations

Examines statements to ensure accuracy The blockchain inherently ensures accuracy of the ledger through the validation process by miners

• Examine accuracy of blockchain inputs to ensure blockchain data is being based on accurate information

• Review blockchain outputs for accuracy to ensure data has not been tampered with

Documents financial transactions by entering account information

Blockchain captures transactions on the distributed ledger

• Focus on analyzing transactions rather than entering them

Oversees budget and financial management Blockchain tracks transactions which can be easily viewed for analysis Organizations can set rules in blockchain smart contracts to ensure money is spent on what it has been allocated for

• Monitor and provide real time financial recommendations based on the blockchain data

• Recommend rules to govern the blockchain in order to keep the organization on budget

• Partner with business units to provide insights and data interpretation

Summarizes current financial status by collecting information; preparing balance sheet, profit and loss statement, and other reports

Blockchain holds financial information in one location so it is easily collected and prepared into reports

• Use data from blockchain to generate reports and financial statements

• Focus on analysis of reports as the blockchain creates efficiencies in report generation

Maintains accounting controls by preparing and recommending policies and procedures

Blockchains can help enforce controls through network rules and required validation

• Increased emphasis on providing recommendations and policies over monitoring

Maintains professional and technical knowledge by attending educational workshops; reviewing professional publications; establishing personal networks; participating in professional societies.

The new technologies will create a need for professionals to be trained in understanding the platforms and how to use the outputs

• Attend educational workshops, webinars, conferences etc. related to blockchain technology and its uses in the accounting profession in addition to other CPE topics

• Use training to help organizations transition to blockchain technology

Future role of accountant

Questions?

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