The Building Blocks of Blockchain

Accounting and finance professionals must have a fundamental knowledge of this technology moving forward. Here’s why. By BRIDGET McCREA | Spring 2020



There’s a lot of buzz in the business world about blockchain, cryptocurrencies, and fintech (financial technology) for the future. Emerging technologies that go beyond what we use in our day-today lives can be difficult to envision and even harder to apply in practice. So, here’s the bottom line: “At this point, CPAs and financial professionals should focus on the basics and simply getting to know these concepts,” says Girish Ramachandra, technology industry leader with Wipfli LLP in Chicago.

BLOCKCHAIN BASICS

A blockchain is a “shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network,” according to IBM’s “Blockchain for Dummies.” The assets can be tangible (i.e., a property, vehicle, cash, or land) or intangible (intellectual property, patents, copyrights, or branding). “Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved,” IBM states.

At its simplest, a blockchain is a digital file where data is stored. Through an open ledger, blockchains contain data that’s distributed across various computers. This differs from traditional ledgers, where information is stored in a single database and then—in most cases—processed by a central figure (e.g., a person, organization, or government).

Because a blockchain involves multiple users, computers, and databases, it creates a multilayered transactional environment that’s theoretically more secure since the contents are immutable, accessible, and verified by user consensus.

Within the blockchain ecosystem, the cryptocurrency Bitcoin is the most mainstream example of the technology in action. Blockchain is the foundational technology that facilitates cryptocurrency transactions, which are reported and archived to shared public ledgers that verify each and every transaction.

TAXING MATTERS

For many CPAs, their first foray into blockchain technology may be spurred by their clients’ tax returns. Form 1040, Schedule 1, includes the question: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

While most cryptocurrencies have fallen from their peak valuations, trading and transactions involving them continue to increase and become more accessible and commonplace, meaning more taxpayers will be responding “yes” to that question.

Andrew Gordon, CPA, lawyer and director of The Blockchain Institute, says accountants should, in the best interest of their clients, understand the rules on reporting such transactions. “Something as simple as a client using Bitcoin to buy a cup of coffee now has to be reported,” Gordon says.

INDUSTRY INNOVATION

On the other end of the blockchain spectrum, large corporations are using it for supply chain innovation. For example, Walmart began using blockchain to track organic food products from farm to fork. Walmart’s U.S. division implemented the IBM Food Trust blockchain for tracking leafy greens following 2018’s romaine lettuce contamination problems and has since begun using it to track shrimp exports from Indian farmers in Andhra Pradesh to select Sam’s Club locations in the U.S. In June 2019, Walmart China announced a partnership with PwC, blockchain firm VeChain, and a local trade association and beef producer to create the Walmart China Blockchain Traceability Platform, which is focused on ensuring food supply chain safety.

“Conceptually, blockchain works really well in these situations,” Ramachandra says. Shoppers can use their mobile phones to scan produce on the shelves, track it back to the source and region, trace shipping, and even get product inspection reports.

That said, Ramachandra acknowledges the project’s success comes from Walmart’s entire supply chain ecosystem agreeing to use that system. “It will take time for smaller organizations to roll out such initiatives and for everyone to realize the benefits, what the efficiencies are, and what transformations they can make using blockchain,” Ramachandra says.

BANKING ON BLOCKCHAIN

The opportunities to apply blockchain in finance and accounting are plentiful, but audit is one area especially ripe for a technology overhaul, says Kirk Phillips of The Bitcoin CPA™, a Certified Bitcoin Professional and AICPA instructor.

“The audit process is going to become more technological in nature rather than teams of auditors doing manual tasks,” Phillips predicts, pointing to Armanino’s TrustExplorer product as proof of concept.

TrustExplorer provides the first-ever real-time audit report, an ACT-205 examination opinion on the reserves of TrustToken’s stablecoin TrueUSD, a cryptocurrency. According to California-based accounting and business consulting firm Armanino, TrustExplorer offers transparency to stablecoin holders regarding circulating supply of tokens and escrowed assets backing those tokens. In other words, the web application verifies that TrustToken’s U.S. dollar reserves are equal to or greater than the TrueUSD tokens issued.

“Prior to this service, TrustToken would hire an auditor to do a traditional engagement, which happened once every 30 days,” Phillips explains. “Now, the work is automated and occurs in ‘block time’ once every 15 seconds, which is the average time a block is added to the Ethereum blockchain.”

WHAT’S AHEAD?

“There are many different future opportunities for blockchain in finance and accounting,” Gordon says. He sees more and more companies accepting cryptocurrencies and making digital payments because these transactions can be settled within minutes (versus days or weeks) and involve multiple verification checkpoints along the way, making them both secure and reliable. He also envisions a time soon when tax returns are prepared using data from blockchains and the technology is used to update and reconcile financial statements as transactions take place.

“Accounting is all about recording data, looking at the past data, reconciling the data, and reporting on it,” Ramachandra says. “If you look at blockchain from that perspective, I would say blockchain is an accounting technology. CPAs should focus on what blockchain is, how it works, and why it’s important. Blockchain data is basically preaudited— that’s a significant difference from traditional approaches.”

As the world continues to shift from physical to digital documents, dollars, data, and more, Phillips says the accounting and finance fields will be pulled right along with it. Stablecoins like TrueUSD, for example, represent a new class of cryptocurrencies backed by a reserve asset and centered on offering price stability. “Stablecoins are basically a digitized version of the U.S. dollar, and there’s a whole world emerging around this concept,” Phillips explains. “This is just one of several catalysts that promise to bridge the old world and the new world of money.”

It’s not much different than what happened when innovations like the internet, email, and smartphones came on the scene. “At first, there’s always some confusion,” Phillips says, “but eventually it just becomes something we all use. It will be the same with blockchain.”