Back in around 1992, I think it was, I saw a film advert on a bus shelter.
Nothing unusual about that. But it is the first time I remember that I noticed a an unusual code lurking at the bottom of the ad. Something like this…
I knew instinctively that some strange sorcery was afoot, and I was going to have to get to the bottom of it. Within around two weeks I’d built my first website and I was telling a bemused fifty-something business owner that if he didn’t have a website, he’d be left behind. (By the way, he’s still going, and yes, he does have a website.)
Things have moved on since then, but it’s worth remembering that the World Wide Web, as we don’t refer to it today, didn’t pop in existence uncaused, out of nothing, in 1992. During the 1970s and 1980s, bits of government and university infrastructure were joined up piece by piece which paved the way to the Web that we now know and love.
Many of us still don’t understand properly how it works, but we couldn’t be without it.
So what has this to do with Blockchain? And why are you reading about this on an accountancy blog?
Where Are We Now With Blockchain
My sense with blockchain is that we are in Blockchain-1983. The Blockchain-1970s have passed. Some early work has been done to prove (actually, to invent) the principles, giving birth to a terrifying and exciting new crypto-currency called Bitcoin, which relies upon blockchain principles to actually work. (More about that <HERE> if you’re interested.)
But enough about shadowy crypto-coin speculators. In this world of Blockchain-1983, when Blockchain has not quite yet been unleashed onto an unsuspecting consumer public, what, indeed, is it, and how will it work?
If you wanted me to sum up blockchain, I’d call it a secure, encrypted World Wide Ledger. <HERE> is an excellent introduction to the principles and concepts of blockchain. Whenever I’ve tweeted this link, it’s been right up there with my most favourited, retweeted and impressioned tweets. So do read it.
Now, we’re slowly progressing through the Blockchain-1980s, and everyone is trying to work out how to use it.
Financial Services are getting in on the act, probably due to its birth in Bitcoin. Consultancies are publishing use-cases: see <HERE> for an example from Oliver Wyman of possible uses of blockchain in capital markets.
But what about lowly accounting systems? Can they benefit from the principles of blockchain? We wanted to shine a light on this area, and we were recently in conversation with Jens Mortier, of Belgian-based blockchain consultancy Trase (http://www.trase.be/).
Here’s our transcript of that conversation
Jonathan Smith – Aiteo Consulting (JS- Aiteo): Jens, great to meet you. I’m interested in ways in which blockchain could change the accounting systems market – whether improving the user experience, increasing security of transactions or anything else. But let’s get the basics out of the way first. How would you describe blockchain?
Jens Mortier – Trase (JM – Trase): I’ll explain in short what ‘principles’ blockchain stands for or aims to ‘achieve’. Because a lot of people think of blockchain as a technology to make financial transactions (which it is, but it is certainly not the only application).
I use the word ‘transaction’ in the sense that a transaction is the addition or modification of some data into the blockchain (which can be a financial transaction, but also any other form of data, such as an agreement or a personalia).
In blockchain, every transaction is immutable, which means that if you add a transaction (so whether adding data, a financial transaction or modifying existing data), you can never ever delete the transaction. So for example, if you added your personalia yesterday and changed your address today, tomorrow you can’t remove the fact you changed your address today.
JS – Aiteo: OK, I’d like to understand this non-deletion issue – which seems to be a key perceived benefit of blockchain. But let’s come back to it later.
JM – Trase: Secondly, every transaction is digitally signed. This means all participants in the blockchain network know for sure that you are the creator of a certain transaction. So in the example of changing your name, after you did so, you can’t deny you were the one who did so, because you signed this fact digitally.
Finally, all the data is stored at every participant in the blockchain network. This means that there is no party which is the only owner of the data. For example, Facebook is the only owner of the data of your Facebook profile, so if they want to delete it, they simply can. But this is not the case in a blockchain network.
JS – Aiteo: Just clear up this non-deletion point for me. I remember Bob Newhart running a spoof radio promotion in the US offering the once in a lifetime deal to buy ‘every record ever recorded’ (the joke being how could you fit the collection in your house – I presume. And it was funnier than it sounds, honestly.) So I’m thinking at a macro level, if blockchain transactions can never be deleted, suppose after 100 years (Or 10 years? Or 5?) when all the databases of the world are at capacity due to physical storage limits, what happens then? Do we have a mass consensual purge of 100 years’ of useless (or worse, useful) data?
JM – Trase: Well, currently, storage capacity is increasing faster than the size of blockchains, and the price of that capacity is decreasing accordingly.
JS – Aiteo: OK, so my reading of that is that we’re good for now, and let the next generation worry when we reach peak storage! So given these general principles, how could blockchain be deployed in accounting systems? I’m thinking of the likes of cloud-based platforms that service the SME market, such as Xero and Quickbooks, mid-range solutions such as Netsuite through to Enterprise solutions such as Oracle and SAP?
JM – Trase: To be honest, we see a lot of use-cases in accounting systems.
For example if you can store your books into a blockchain ledger, you can never change the data (or, more accurately, if you want to make a correction, the data before the correction remains in the blockchain so everyone can see what you have corrected). In due dilligence you can prove the correctness of the books, or as an accountant you can prove that your client did something wrong in his books and not you …
JS – Aiteo: … which may well have accountants salivating at the prospect of finally nailing those pesky customers down … not that we’re in the blame game of course. However, I think our readers will be asking themselves what’s the big deal here? We can do this in accounting systems today. In your example of not deleting old transactions, this (in principle) is the case for accounting ledgers today –you have to correct entries, rather than delete them: but probably the means of achieving this is different with blockchain?
JM – Trase: The difference is that some party will have to develop the applications which can record these transactions (which could be Xero, SAP, and so on) but these transactions will be executed and verified by all members of the network. So the difference is that the accounting platform provider will no longer be the owner or controller of the data, but would instead supply the software needed to setup the accounting blockchain network.
JS – Aiteo: So for an accounting platform, who would be the participants in the network where the transactions are stored? Is this a closed network, or could it theoretically be anybody?
JM – Trase: A ‘blockchain network’ is basically public. I mean that for example the Ethereum network (a Blockchain network for executing smart contracts), is public. The advantage is that there are a lot of peers that can verify the transactions. But blockchain networks can be set up privately and the platform provider can choose which parties are able to join the network.
JS – Aiteo: Great. Are there any other use-cases to get us thinking?
JM – Trase: Sure. So for example, via some built-in mechanisms you can do more efficient bookkeeping, since you can ‘couple’ your books on the blockchain with the books of another party. (For example if the other party makes a transaction, this transaction will be automatically be registered in your books).
JS – Aiteo: Yes, this is very interesting, for sure. We have the beginnings of that experience where two separate users of (say) Xero can choose to allow mutual posting of transactions. So if your supplier is on Xero and issues an invoice to your company (also on Xero), you can allow the transaction to be posted directly to your own supplier ledger.
JM – Trase: But blockchain could allow that on a much greater scale, taking out the intermediary in this case (Xero).
A further area would be national governments. They could also start using blockchains to receive your accounting records for your tax calculations. When there are transactions between parties that don’t trust each other …
(JS – Aiteo: an interesting but probably accurate illustration of the relationship between government and the taxpayer!)
JM – Trase: … you can do it through blockchain, since no party is the owner of the data and parties even don’t need to trust each other. I’ll send you a link which provides a good example of this ‘trustless’ characteristic. (Ed. and <HERE> it is)…
JS – Aiteo: I think governments would love this. In the UK the government is grappling with an initiative called Making Tax Digital having only just recently moved their technology onto open API rather than using their own customised interface. So it might be some way off, but they want to recover data from various sources (such as interest records, PAYE records, and so on) and avoid duplication of effort.
Jens, we’ve got some great ideas there to get started – thanks very much for your time. Do you have any closing thoughts?
JM – Trase: So in summary, we’ve talked through a few use-cases which I came up with without having to think too hard about it. A lot of applications come into play in environments where parties don’t trust each other, where it is important to know who did what, in environments where data may not be deleted.
Right now we’re encouraging companies to get ‘blockchain aware’, i.e. to know what blockchain is, what it can mean to your business or which different business models can be created.
We also support businesses in becoming ‘blockchain aware’, through workshops, brainstorm sessions, training sessions, and so on. Please get in touch with us if you’d like some assistance.
Jonathan Smith, CEO and Founder of Aiteo Consulting, was in conversation with Jens Mortier of Trase.
You can connect with Jens on LinkedIn, or follow Trase on Twitter.
About Aiteo Consulting
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