It may seem that in 2020 you can’t go anywhere without hearing about blockchain, and while our profession is working to understand this transformational technology, it is imperative to keep the learning going. If you missed our last article on Blockchain – Back to Basics, make sure to read it today.
For those of you back for round two, we are going to take a deeper dive into understanding the implications and impact of blockchain and specifically in this article talk about the differences between public and private blockchains. Yes, that is right, there is more than one kind, just like we have multiple types of assets that can qualify for a like-kind exchange, we have multiple kinds of blockchains. Once we fully understand this transformational technology and the different types, we can begin to leverage our higher level of understanding to evolve our firms.
Public vs. private blockchains
Blockchain as a technology is often spoken about, especially in practitioner publications and conversations, as if it was just one option, tool, or application. This may make for simpler conversation and debate, but represents an incomplete view of just how blockchain technology functions. Specifically, there are two broad categories that should form the basis for any comprehensive blockchain discussion, public blockchains and private blockchains.
Perhaps the easiest place to start the conversation about blockchain is with the concept that most practitioners are likely to be familiar with at this point. The most high profile and well-known example of blockchain technology, to date, is the blockchain platform that underpins the cryptocurrency bitcoin, which rose to fame during 2017. A public blockchain is perhaps the idea that a blockchain purist would most likely recognize with a completely open source construct, access for any individual or institution that wants to be able to join, and a completely decentralized hierarchy. Put another way, in the context of a complete public blockchain, anybody could join, and if something were to go awry there is no one party to contact in order to resolve outstanding issues. While interesting and exciting from a conceptual and potential perspective, private blockchains appear to be the option most commonly implemented by market participants. Let’s take a look at what exactly a private blockchain means for organizations.
A private blockchain, contrasted against an entirely public blockchain model, represents perhaps most simply, a hybrid of some attributes of blockchain with additional security and exclusivity that many organizations are seeking. Instead of a purely public model, where anyone can join, there is always an organizer who writes the protocols, sets rules, and invites different members to become part of the network. An example of this and one that is already being used by market actors is that a large multinational organization will establish a blockchain platform and network with suppliers and partners. Different suppliers can, and are, as a result of communicating more effectively with a variety of information, which can reduce errors, and improve the end quality of goods shipped throughout the supply chain. Specifically, linking together the accounting implications of blockchain with the technological basis of this tool, different participants can be granted different levels of access to the data embedded in the blockchain network.
How is blockchain impacting accountants?
Given our newfound understanding of the differences in public and private blockchains, we can move on and talk about the real world takeaways to our firm and our clients. Sure, blockchain sounds like a fantastic technology tool that is already being used by some of the largest and most influential organizations, but what are the specific accounting implications and ramifications that blockchain will have on the profession? At this point in the implementation of blockchain technology, it is accurate to state that most of the investment and work is occurring at larger organizations. Like any other technology tool, however, it would make sense and appear logical to project that as this technology becomes more cost-effective and simpler to use, that adoption and implementation will proliferate throughout the profession. Drilling down to accounting specific applications, there appear to be a few key takeaways especially important and applicable for the profession.
- Cryptocurrencies – in the public blockchain space we will see an increase rise in cryptocurrencies, but also a dramatic increase in IRS and governmental overweight of this deregulated industry. We need to inform our clients of the trading, tax, and reporting implications of these transactions in this evolving space.
- Audits efficiencies – in the typical trend, we will see this start at the large global organizations and then work their way down in the market. As organizations establish private blockchains to better communicate and verify transactions, this will transform how we test receivables and payables. What used to be one of the most time-consuming steps in the audit process will in the near future become one of the quickest to complete.
- Being an advisor – a lot has been said about how accountants and CPAs are our clients’ most trusted advisors. By understanding transformational technology like blockchain and the differences between public and private blockchains, we have a once in a generation chance to truly be that trusted advisor. Start with your largest clients and think about how this technology will impact their business, their clients, their supplies, their workforce and become that trusted advisor to help them navigate this complex journey.
From the basics to public vs. private blockchains, you now have the knowledge you need about what this transformational technology is and how it will begin to impact your daily life. Don’t sit back and wait for this technology revolution to make your life more difficult and challenging. Take that first step today to leverage this new technology and embrace the coming future.
Editor’s note: This article was originally published in June 2018.