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Financial
Mar 1, 2017

Open Source Ledgers Are Coming

Sponsored Content provided by Adam Shay - Managing Partner, Adam Shay CPA, PLLC

This Insights was contributed by Richard Pasquantonio, CPA/CFF, CFE, CDFA (NC License Number 33577), an associate at Adam Shay CPA, PLLC.

Many people are familiar with Bitcoin, a popular cryptocurrency, especially now that the Securities and Exchange Commission is considering approving a Bitcoin ETF.  
 
Created in 2008, Bitcoin is a decentralized digital currency. This contrasts with how we perceive our dollar-based currency, which is centralized and issued by the Federal Reserve in accordance with the U.S. Constitution. Cryptocurrencies, such as Bitcoin, do not depend on banks to facilitate transactions and instead rely on a technology called blockchains.
 
A blockchain is a distributed database that maintains a continuously growing list of ordered records, or blocks. The blocks are time-stamped and linked to preceding blocks to create a “chain” - a contiguous record of transactions. Once a block is recorded, the data contained within a block cannot be altered retroactively.  
 
The most recent issue of the Harvard Business Review contains an article titled, “The Truth About Blockchain.” Authors Marco Iansiti and Karim Lakhani state that, “Blockchains can act as a ledger that records transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically."
 
Why is this important to your business? Blockchains are in their infancy and the technology has wide-reaching potential.
 
Let’s consider email for a moment. Prior to the advent of the internet, a person needed to draft or dictate a letter, print it, fold it, place it in an envelope and apply postage. Then a letter carrier had to get in his or her truck, collect your mail and bring it to the post office. From there, it would go to a mail processing plant, where the letter was processed by machines and humans, and then forwarded to another letter carrier and finally sent on to its destination.  
 
That process is costly and takes a long time. Now, a person can dictate to his or her phone and press send. The message is then sent “peer-to-peer.” Blockchain has the potential to disrupt how individuals and businesses transact with one another in the same way that email has disrupted the way people communicate.
 
Currently, a typical online purchase requires a consumer to have secure access to a vendor’s server and authorize the transfer of funds. Next, the vendor’s merchant service provider must have secure access to a clearinghouse (ACH). The clearinghouse verifies the customer’s bank account information and confirms the account balance. The customer’s bank then credits the vendor’s bank account.  Finally, at the end of the month, the customer’s and the vendor’s bank send statements to memorialize the transaction.  
 
In contrast, a blockchain online purchases is peer-to-peer and the transaction is verified by posting it to the public ledger. The public ledger relies on the network of users to authenticate and add transaction records to the ledger. Once a transaction is accepted into the ledger, it cannot be altered because it is linked to all the transaction records that came before it.
 
Using this peer-to-peer network and the distributed timestamping server, a blockchain database is managed autonomously and at a much lower cost than its centralized counterpart while reducing the opportunity for fraud.
 
If you think this really cannot be happening, last year, each of the “Big Four” accounting firms began testing blockchain technologies in various formats. Ernst & Young has provided digital wallets to all employees in its office in Switzerland, and accepts bitcoin as payment for all its consulting services.
 
Marcel Stalder, CEO of Ernst & Young Switzerland, stated, "We don’t only want to talk about digitalization, but also actively drive this process together with our employees and our clients. It is important to us that everybody gets on board and prepares themselves for the revolution set to take place in the business world through blockchains, smart contracts and digital currencies."
 
In somewhat of a contrast to Ernst & Young, the remaining three of the Big Four - PWC, Deloitte, and KPMG - seem to have taken a different path and are focusing their resources on private blockchains. Remember, these Big Four accounting firms are preparing the taxes for Amazon, Walmart, Costco and probably wherever you bank!
 
Christine Lagarde, Managing Director of the International Monetary Fund, recently presented “Virtual Currencies and Beyond: Initial Considerations” at the World Economic Forum in Davos, Switzerland. The invitation-only annual meeting brings together chief executive officers from its 1,000 member companies, as well as selected politicians, representatives from academia, NGOs, religious leaders and the media.  

There, Lagarde said, “Virtual currencies and their underlying technologies can provide faster cheaper financial services, and can become a powerful tool for deepening financial inclusion in the developing world.”

Blockchain applications are not limited to the financial services industry. In fact, www.blockchaintechnologies.com lists Smart Property, Smart Contracts and Smart Identity as popular-use cases where blockchain technology can improve efficiency or unlock capabilities of new technology.  
 
The website goes on to describe these use cases:

  • Smart Property - Smart Property allows ownership of both physical and nonphysical property to be verified, programmable and tradeable on the blockchain. Physical examples of smart property include vehicles, phones and houses, which can be activated, deactivated, tracked and maintained.  
  • Smart Contracts - In blockchain law applications, smart contracts are verified on the blockchain, allowing for programmable, self-executing and self-enforcing contracts. Blockchain law also encompasses the idea of "Smart Corporations," which includes concepts such as Decentralized Autonomous Corporations (DAC) or Decentralized Autonomous Organization (DAO).Applying blockchain technology to music applications allows for a paradigm shift in the way artists can control their musical work. From ownership rights, to royalty payments and first edition rights, blockchain technology applications empower artists to extend ownership of their works.Blockchain technology can also be applied to the real estate industry. In a mostly paper-record based industry, blockchain real estate allows for an upgrade in how records are stored and recorded. Utilizing blockchain applications in essential functions such as payment, escrow and title can also reduce fraud, increase financial privacy, speed up transactions and internationalize markets.
  • Smart Identity - Blockchain identity applications allow for unaltered identity verification, authorization and management, resulting in significant efficiencies and reduced fraud. Blockchain technology provides an engine to power digital identities. While digital identities are emerging as an inevitable part of our connected world, how we secure our online information is coming under intense scrutiny. Blockchain-based identity systems can provide a solution to this issue with hardened cryptography and distributed ledgers.
Now that blockchain technology has received the attention of the governmental, private and public institutions that drive global economic changes, businesses should begin to understand how those changes can affect their short term and long term strategies for bringing products and services to market.
 
Richard Pasquantonio, CPA/CFF, CFE, CDFA (NC License Number 33577), is an associate at Adam Shay CPA, PLLC. He focuses on forensic accounting, fraud prevention and detection, and tax controversy resolution. He is also an AICPA CFF Champion. The purpose of the CFF Champion program is to inform the professional community about the vital role of forensic accounting professionals, the knowledge required to become a CFF, and the benefits of the CFF credential. For more information, visit www.wilmingtontaxesandaccounting.com or email him at [email protected]. Pasquantonio can also be reached by phone at (910) 256-3456.

Adam Shay, CPA (N.C. License Number 35961), MBA, is managing partner of Adam Shay CPA, PLLC. He focuses on minimizing taxes and improving the financial results of entrepreneurs, and is actively involved in supporting the Wilmington entrepreneurial and startup community. For more information, visit http://www.wilmingtontaxesandaccounting.com/ or email him at [email protected]. He can also be reached by phone at (910) 256-3456.
 
 

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