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distributed
we stand
The professional accountant’s
guide to distributed ledgers
and blockchain
About ACCA This report examines
ACCA (the Association of Chartered Certified Accountants)
distributed ledgers and
is the global body for professional accountants. It offers blockchain. It introduces
business relevant, first-choice qualifications to people of
application, ability and ambition around the world who seek the concept and relates
a rewarding career in accountancy, finance and management.
it to the needs of
ACCA supports its 188,000 members and 480,000 students professional accountants.
in 178 countries, helping them to develop successful careers
in accounting and business, with the skills required by
employers. ACCA works through a network of 100 offices
and centres and more than 7,110 Approved Employers
worldwide, who provide high standards of employee learning
and development. Through its public interest remit, ACCA
promotes appropriate regulation of accounting and conducts
relevant research to ensure accountancy continues to grow in
reputation and influence.
Foreword...................................................................................................... 4
Executive summary....................................................................................... 5
Report structure........................................................................................... 7
1. Introduction to concept........................................................................... 8
1.1 The basics – the clue is in the name...............................................................8
1.2 The network effect.........................................................................................11
1.3 Quick reality check.........................................................................................11
1.4 Things we want to know but don’t ask.........................................................12
1.5 Cooperating to drive win-win outcomes......................................................17
Conclusion.................................................................................................. 33
Appendices................................................................................................. 34
Glossary...................................................................................................... 36
Acknowledgments...................................................................................... 37
Foreword 4
Technology has a profound impact on doing so, it offers the potential to transform
how we live, and a key aspect of this existing business models and the skills
impact has been an increase in the level relevant to delivering them. It is therefore
of connectedness within society. This important that professional accountants
connectedness stems from being able to understand these developments and the
share information in real-time, an ability nature of the impact on their roles.
created by the internet.
ACCA is committed to developing
There now appears to be the possibility professional accountants the world needs.
for another step-change in the impact of This refers not just to the needs of today,
technology as a result of what has been but also to anticipating and planning for
called the ‘internet of value’. The ability the profession of the future. Accordingly,
to track and transfer value (such as money our approach is to look ahead and engage
or assets) in a secure real-time way, similar pro-actively with key trends that could shape
to information transfer today, could tomorrow’s world. This report on distributed
fundamentally alter the way we live and ledgers has been produced in this spirit.
transact with one another.
We are delighted to add to the
The underlying technology to enable this understanding in this area, and to
– referred to as distributed ledgers or complement the work of others like our
blockchain – is at the heart of these strategic alliance partner, Chartered
developments. It could change not just Accountants Australia and New Zealand,
individual organisations, but entire who are also striving to improve awareness
industries and their supply chains. And in of this important topic across our profession.
If the dominant requirement in the It will take time to gauge the impact of
Blockchain presents network is speed or more effective distributed ledgers on overall revenues for
new areas for analysis regulatory compliance, then the cost accountancy firms. But the most likely effects
and effort of establishing trust between on the revenue mix may be clear sooner.
and consideration, and
strangers is not relevant, and private
the sooner professional network technologies may be preferred. There may be a gradual move away from
accountants increase low-margin activities (for example,
their awareness, the Bitcoin blockchain is a public network transaction checking) towards a greater
better prepared they will ledger where transactions are grouped into emphasis on higher-margin work (for
blocks and validated through mathematical example, interpreting technical accounting
be to engage with it. techniques (such as encryption and policy to a given situation). Over time, this
hashing). The underlying governance is may affect the revenue model, with greater
handled by a consensus algorithm that emphasis on paying for expertise and
verifies and confirms that a block contains advice (outputs-based rate card) rather than
valid transaction information and can be for time (inputs-based, per hour billing).
added to the existing chain of blocks. A
linear chain of blocks containing Whether this evolution in revenue mix
transactions creates a single view of the occurs or not depends on the ability of
truth, capturing the details and sequence distributed ledgers to achieve large scale
of transactions as they occur. and mainstream adoption. Views on this
vary but, one way or another, it is
Distributed ledger technology (DLT) refers anticipated that over the course of the
to technologies built primarily to suit the next five years the answer will become
needs of private permissioned networks. It clear. If it looks likely that the revenue mix
shares the characteristics of a digital record will evolve, then accountancy firms may
without a central validator, and where the want to evaluate their structure and
ledger is replicated across different organise themselves differently to prepare
participants. These participants have been for the future.
selected to enter the group and share the
ledger: for example, a network of banks This might involve providing those
that have all agreed to common terms and offerings with potential to be standardised
conditions for using the shared ledger. and automated (eg data collection, records
Also, some participants may have been checking, bookkeeping or exceptions
appointed to hold specific pre-agreed reporting) via a platform interface such as
roles (such as validation) within the an accounting-as-a-service offer.
network. DLTs are typically designed to be
faster than public network shared ledgers. In addition, the professional accountant of
The Hyperledger project is working on the future will need a forward-looking
creating a collaborative, open source outlook and skills and abilities that are well
platform for DLT to support business rounded, resilient and adaptable to changes
transactions and create enterprise-relevant in the business environment. For example,
ledger solutions. there may well be new areas of knowledge
that need to be better understood, such as
As DLT matures, the shared ledger’s how to measure and account for value as
common view of records and transparency assets transfer via a distributed ledger from
of transaction history could reduce one owner to another.
reconciliation across different databases
and drive significant efficiencies. Business Blockchain presents new areas for analysis
processes that are characterised by and consideration, and the sooner
inefficiencies (eg trade finance), or exist professional accountants increase their
because of a lack of trust (eg Know Your awareness, the better prepared they will be
Customer requirements in financial services) to engage with it.
or poor supply chain visibility (eg for global
garment supply chains) are all key areas for
distributed ledger applications.
Report structure 7
The aim of this report is to illuminate this area by exploring what a distributed ledger
is, where it might have commercial applications and how it relates to accountancy
and finance professionals.
1. Introduction to concept 8
The concept is that of a shared system of By combining the actual transaction with
By combining the actual records that the participants can see, and the record of the transaction, distributed
transaction with the where the technology ensures that all ledgers bring significant efficiencies.
copies are kept updated and synchronised.
record of the transaction,
In this type of ledger, doing a transaction 1.1.2 Distributed
distributed ledgers bring and recording it are combined into a single ‘Distributed’ (or ‘shared’) is another way
significant efficiencies. view of an event. of saying that all the participants in the
network can see the same set of ledger
In current systems this is not the case. records at any given time. So if thousands
When selling shares, for example, one of people are looking at the records in a
database records the transaction details distributed ledger from their individual
as the transaction occurs. These details personal computers, they will all see exactly
are then manually re-entered into a the same account balances and positions.
second database that is responsible for
‘settlement’. Settlement is the process Now, if one of them makes any change to
by which transaction details are checked, this distributed ledger, say by selling some
after which shares are transferred and assets to another participant in this
monies exchanged. network, that change gets updated in
everyone’s view of the ledger. The common
The above involves manually re-entering view that they all see is preserved. This
the same information, checking between common view is distributed across the
multiple databases and, where there thousands of people sharing the ledger, ie
are differences due to human error or they are looking at a localised copy of the
delays in updating a database, a common view on their machine.
reconciliation process. When scaled up,
these factors introduce material amounts To examine this a bit more, let’s assume a
of inefficiency. In the case of shares this simple world with only two banks and two
can mean several days of delay before customers, with transactions between
transactions are settled. them as shown in Figure 1.1.
Figure 1.1: A simple world with two banks and two customers
B1 1
of rece oC
£7 ive 0 kt
50 s d £ 15
k f ep ds
£1m from B2
B1 borrows
ro
m osit en
C2 B 2l
The existing method for representing this in this one common record and the view of
If a participant system would be for each organisation to the ledger seen by all participants would
makes an update in record the transactions, from its be synchronised to reflect this update.
perspective, within its database as shown in
a distributed ledger,
Figure 1.2. This creates a total of 10 records In the current approach participants in
the new information across the system. The multiple records for different organisations (or, indeed,
is validated using the the same transaction held in different different departments in the same
technology and then databases need to be agreed upon, and organisation) may use different systems,
added to the ledger, with reconciled where there are differences, often resulting in reconciliation breaks
before further transactions can occur. between them. These could be due to a
everyone’s localised copy time lag in recording information between
of the record getting Let’s assume now that, instead of each the systems or just human error linked to
updated at that point. participant using its own database, all multiple data entry points.
participants use a common database. This
would involve the creation of a common On the other hand, if a participant makes
record that captures all the transactions an update in a distributed ledger, the new
within the system; a representation of this information is validated using the
is shown in Figure 1.3. This would mean technology and then added to the ledger,
that a change or update for any with everyone’s localised copy of the
participant’s transaction would be reflected record getting updated at that point.
3 records 3 records
Counterparty: B2 C1 C2 Counterparty: B1 C1 C2
I am owed (I owe): (£1m) £250k (£750k) I am owed (I owe): (£1m) £150k (£500k)
Counterparty: B1 B2 C2 Counterparty: B1 B2 C1
I am owed (I owe): (£250k) (£150k) I am owed (I owe): £750k £500k
2 records 2 records
10 records across
the system
Distributed ledger
Distributed ledger
Debtor Creditor Amount
Debtor Creditor Amount
B1 B2 £1m B1 B2 £1m
C1 B1 £250k C1 B1 £250k
C2 B1 £750k C2 B1 £750k
C1 B2 £150k
C1 B2 £150k B2 C2 £500k
B2 C2 £500k
Customer 1 Customer 2
Distributed ledger Distributed ledger
Debtor Creditor Amount Debtor Creditor Amount
B1 B2 £1m B1 B2 £1m
C1 B1 £250k C1 B1 £250k
C2 B1 £750k C2 B1 £750k
C1 B2 £150k C1 B2 £150k
B2 C2 £500k B2 C2 £500k
Divided we fall, distributed we stand 1. Introduction to concept 11
The professional accountant’s guide
to distributed ledgers and blockchain
1 Hybrids of public and private distributed ledgers are also being explored by the industry.
2 Proof of Stake consensus is based on economic investment, the consensus also limits too much economic power from building in up in one node (see section 1.5.1 below
for more on nodes). Byzantine Fault Tolerance is a parallel consensus for detecting participants (nodes) misbehaving.
Divided we fall, distributed we stand 1. Introduction to concept 12
The professional accountant’s guide
to distributed ledgers and blockchain
This is based on an idea called public key cryptography. A user in the bitcoin
network has an address with associated public and private keys. As the names
suggest, the public key is visible to everyone, while the private key is known only to
that user. The public key is used for encryption while the private key is used for
decryption. Let’s assume user 1 wishes to pay (ie transfer) bitcoins to user 2.
User 1 generates a coded message with user 2‘s public key and sends this to user 2
to inform them that bitcoins are to be transferred. User 2 uses their private key to
decrypt this coded message. User 2 can check that it was indeed user 1 that sent the
message with the help of user 1’s public key. In effect, the public keys ensure that
the transfer happened from the correct source and went to the correct destination.
The private keys ensure that only the authorised person (user 1) associated with
that source address can spend the money, and the authorised recipient (user 2)
associated with that destination address can access (‘receive’) the money.
3 M. Mainelli and S. Mills, The Missing Links In The Chains?, November 2016.
Divided we fall, distributed we stand 1. Introduction to concept 13
The professional accountant’s guide
to distributed ledgers and blockchain
transactions, with signatures taking a large algorithm). The level of processing power
For a block of amount of space. Therefore distributed needed makes it an investment in time and
transactions to be archiving solutions are being developed considerable amounts of electricity to
which may mean that all the data doesn’t power the computers needed for the task.
successfully added to
need to be held in the primary storage area. Also the answer to the puzzle changes if
the chain it needs to the contents of the block are altered. The
be validated by solving While the above storage issues relate more difficulty of the hashing process serves as
a computationally to public networks, some question whether, an effective deterrence to tampering.
intensive mathematical within private permissioned networks,
there are some circumstances where After the puzzle is solved,4 the participant
puzzle. immutability may need to be suspended. who achieved this presents evidence of this
This might occur in regulated industries to the network, and the majority of
such as banking, where there may be a participants must agree through a process
need to amend transaction errors rather of network voting that it was correctly
than leaving them permanently on the solved. At this point, the block joins as a
network. This may involve a mechanism for validated part of the chain.
amending records, albeit one that leaves
permanent evidence (a record) of this Now, suppose someone wanted to go
action. Like many things in this area, these back and change the transactions inside
are ideas being tested and refined, and in one of the blocks in the chain. Since the
time the situation will become clearer. contents of the block have changed, the
answer to the puzzle has also changed. So
1.4.3 What’s the barrier to tampering they need to expend computation power
with transactions on the blockchain? to solve the puzzle all over again. There are
The answer depends to some extent on the mechanisms5 for detecting suspect
architecture of a given distributed ledger. behaviour and warning the network.
For the sake of specificity, the account below
is based on the bitcoin blockchain, though Furthermore, as mentioned earlier (1.4.1),
other ledgers will have similar protections. each block contains a reference to the
previous block. This means that the next
For a block of transactions to be block following the tampered block
successfully added to the chain it needs to contains a reference to the tampered
be validated by solving a computationally block. This in turn means that the contents
intensive mathematical puzzle (hashing of this next block have also now changed.
The hash of previously validated blocks is publicly visible on the blockchain. The
hashing algorithm is now applied to a sequence of characters comprising three
elements: the hash of the immediately previous block in the chain, the transactions
in the current block and a randomly chosen number. This results in a string that is
the hash of the current block and which is then visible to the network. Validation
happens when a participant in the network called a ‘miner’ solves the puzzle of
guessing what that random number is.
Strange as this process may seem, there is a rationale for it. The probability of
guessing the correct random number is very low owing to the large number of
permutations. The only way is to use brute computing power, to repeatedly try
numbers through trial and error. This need for computing power forces the miner to
do some ‘work’ before they are allowed to validate a block; and it acts as a
deterrent for those wanting to interfere with the network.
4 Referred to as ‘Proof-of-Work’.
5 Known as ‘Byzantine Fault Tolerance’.
Divided we fall, distributed we stand 1. Introduction to concept 15
The professional accountant’s guide
to distributed ledgers and blockchain
Therefore the puzzle solution used for It is important to note here that there is
To tamper with blocks, validating the next block has changed nothing in the code creation process to
the amount of computing – and the rogue actor must expend more allow access to the contents of the title
computing power to also re-solve the deed itself. This validation occurs
power required to change
puzzle for the next block. independently of being able to look at the
a block and all blocks underlying document. This is valuable in
following it is a barrier for In fact this logic applies for all blocks business scenarios where third parties need
an individual rogue actor. following the tampered block. So to to assess risk without breaching data privacy.
tamper with a block a rogue actor would
need enough computing power not just to 1.4.5 Is it possible to mount a
resolve the puzzle for the tampered block, cyberattack on a blockchain?
but for all blocks that followed it as well. Yes, as mentioned (1.3.2) fraud is possible; in
addition, a cyberattack cannot be ruled out.
1.4.4 If it is like a database, am I viewing Like any technology, distributed ledgers
the underlying data? have a design – and that design will have
It was mentioned (section 1.3) that controls points of weakness which unscrupulous
can be put in place so that one can view a attackers could try to exploit. Sybil attacks
record only if one is authorised to do so. (identity theft) and distributed denial of
But what does ‘viewing a record’ actually service (DDoS), which can overwhelm a
refer to? network and disrupt genuine transactions,
are all threats to be considered.
The blockchain technology might allow
participants to record and track the The precise way in which this happens will
movement of assets, for example the title depend on the design, and to build on
deed for a property as it gets bought and observations to prevent tampering (1.4.3)
sold. But the deed itself is not held on the let’s look further at the example of the
blockchain. Rather, the ledger holds a bitcoin blockchain.
string of characters.
Block validation depends on expending
This string is a mix of alphabets and computing power to solve a puzzle, an
numbers that is created by applying a exercise carried out by participants in the
piece of code to a set of information that network called ‘miners’. To tamper with
includes the contents of the deed. This blocks, the amount of computing power
string is now linked to that particular title required to change a block and all blocks
deed as of that point in time. following it is a barrier for an individual
rogue actor. But what if lots of actors join
At a future point in time, one might check together to pool their computing power?
the authenticity of a deed by presenting it There are safeguards in the system to make
to the ledger and checking that the this difficult, with the consensus
generated string is the same as the original mechanism that sits on the nodes (see
string associated with the title deed when 1.5.1 below) being designed to prevent
it was added to the ledger. this, by detecting nodes that may collude
or work against the wider interests
The Swedish land registry has been
working towards putting all its real estate Historically this was not a great a risk but, as
transactions on a distributed ledger. Once bitcoin has increased in use, it has become
a contract is made between buyer and financially viable for participants to pool
seller, it could be put in a shared ledger together and invest in large data centres to
and viewed by all concerned parties, such increase their joint computation power.
as the buyer, seller, government and estate
agents, depending on their level of access.
Divided we fall, distributed we stand 1. Introduction to concept 16
The professional accountant’s guide
to distributed ledgers and blockchain
The impact of this has been to subvert transparent way, with changes made
A smart contract the decentralised ethos of the bitcoin through procedures agreed between them.
automatically fulfils network. The system involved an implicit Clearly, this will not be possible if the two
assumption that the majority of parties hold the information in their
obligations from one
participants corresponded to the majority respective databases, each under its
party to another when of computing power. But with pooling, owner’s sole control. This is why smart
trigger conditions are a numerical minority acting in concert contracts have come into prominence now
met, using a piece of could control the majority of computing that the option of a shared ledger view
self-executing code. power, and hence control which blocks exists. Generally, different DLTs have their
get added to the blockchain. own version of smart contracts.
As shown in Figure 1.4, four such groups The obvious question that arises is: in what
controlled over half of the computation situation would this be useful?
power in the bitcoin blockchain in January
2017. They could collude to introduce fake A typical scenario is when there is a trigger
transactions into the blockchain since their to set off a particular set of actions as part
joint computing power means they could of a pre-agreed obligation. In the title
overwhelm any opposition. It remains to be deed example previously mentioned, the
seen whether this would be economically distributed ledger allows the authenticity
attractive to them in the longer term as it of the title to be validated, while enabling
could erode value from the network – most access to underlying title documents only
miners hold large values of bitcoins to authorised persons.
themselves so it may not be in their best
interests. In any event, so far this risk has not This provides a snapshot view, ie who owns
materialised, but it is theoretically feasible. the title to which property as at a given
point in time. Naturally, transactions occur,
1.4.6 What is a smart contract and is it and titles change hands. This is where
code or ‘contract’? smart contracts come in. They can use the
A smart contract automatically fulfils distributed ledger infrastructure to assess
obligations from one party to another veracity of the title, buyer and seller.
when trigger conditions are met, using a Subject to a list of pre-agreed trigger
piece of self-executing code. If both conditions (eg buyer funds approved,
concerned parties are to trust this code, it identification checks), such a contract can
must be accessible to both of them in a effect a transfer of title from seller to buyer.6
AntPool, 20%
F2Pool, 18%
BTCC Pool, 8% 20%
BitFury, 8%
Other, 45%
45%
18%
8%
8%
Source: Blockchain (2017) accessed 25/01/2017. Percentage in the pie chart refers to the proportion of total
computation power that is controlled by a given mining pool.
6 Referred to as ‘Proof-of-Work’.
Divided we fall, distributed we stand 1. Introduction to concept 17
The professional accountant’s guide
to distributed ledgers and blockchain
Smart contracts are still at a relatively early This is the network effect discussed in
The entire concept stage, and are being explored across a section 1.2 above. A distributed ledger
of this technology spectrum of possibilities. This ranges from can be effective for serving the needs of
using a piece of code within a contract an individual organisation (if it is large
rests on transforming
purely for effecting payments at and complex enough). But it is likely to
an eco-system, appropriate times, to writing a full contract be truly transformative if that organisation
rather than just an entirely in code. also transacts with other stakeholders –
individual organisation. such as suppliers, customers or maybe
The latter would be what is commonly even competitors – on the same shared
understood as a ‘contract’ backed by law. ledger. Some take an extreme view:
There are questions to be answered about the whole world could, in theory, be on
the legal enforceability of these proposed one blockchain!
contracts, and this is a tricky aspect that
may take time to be resolved. In practice the more likely scenario is that
pools of participants will join together to
In the near-term it may be more feasible to form their own distributed ledger on the
envisage a situation where the contract basis of shared or complementary interests.
exists within traditional legal jurisdictional This leads to a world with multiple
frameworks, with the ‘smart’ element being distributed ledgers covering different
restricted to providing payment triggers for industries or parties that are linked by a
fulfilling the contract at a pre-agreed time. common set of transactional activities.
Therefore as things stand, it may be more Various technologies are being developed
accurate to think of ‘smart contracts’ as and tested that allow for participants in
self-executing code rather than contracts in one blockchain to be able to transact or
the legal sense of the word. obtain information from participants in a
different one.7 This may be an important
1.5 COOPERATING TO DRIVE WIN-WIN requirement for scalable use, with ideas
OUTCOMES such as ‘sidechains’ being developed to
explore this.
Traditional management thinking over
most of the second half of the last century Also, to collaborate in a world with multiple
has focused on what is needed for distributed ledgers, it will be important to
organisations to compete effectively in establish some level of interoperability, ie
their markets. Ideas such as garnering a way of ensuring that these ledgers are
market share and out-performing the based on common principles so that
competition, through lower prices or developers can build functionality using
greater product differentiation, focus on the same set of ground rules to enable
how an organisation can increase the scalability. Some examples include Z/Yen’s
percentage of the market that it can software suite, ChainZy, which provides the
capture for itself. base architecture for a range of
applications, and the Hyperledger project
Technology has shifted this mindset by (discussed below).
increasing the emphasis on enlarging the
market, rather than fighting for a bigger 1.5.1 The Hyperledger project
share of static, or in some industries The Hyperledger project brings together
declining, sales. Nowhere is this mindset experts from different organisations and is
more in evidence than in the area of attempting to establish a framework for
distributed ledgers. The entire concept interoperability and thereby bring a degree
of this technology rests on transforming of standardisation to the underlying
an eco-system, rather than just an architecture of distributed ledgers.8
individual organisation.
7 Transaction format, block size and token values are different between different chains – all part of the challenge in this area.
8 The standardisation of the underlying architecture will help in the case of permissioned DLTs. Integration of various permissioned and public blockchains will need
meta-chains, for example as suggested by Kwan and Buchman in their paper on Cosmos (2017) and Wood in his paper on Polkadot, 2016 or 2017.
Divided we fall, distributed we stand 1. Introduction to concept 18
The professional accountant’s guide
to distributed ledgers and blockchain
Founded from the open source Linux Hyperledger is a shared system of records
Hyperledger is community, Hyperledger offers blockchain that helps member organisations to
also developing a options with an integrated tool set called integrate their legacy operations with the
‘Hyperledger Fabric’ to connect with the blockchain and start using it; the various
‘blockchain-as-a-service’
legacy world and create and build a participants may have different roles,
approach which can business network. known as nodes, on the blockchain. For
help customers create, example, a peer node monitors ledger
deploy and manage As a membership based permissioned state, an endorsing peer verifies and
blockchain networks, blockchain, the emphasis on the validates transactions and an ordering peer
Hyperledger implementation is the organises transactions into blocks for entry
all enabled through a business transaction, delivering a hierarchy to the ledger and communicates with other
cloud-based system. of roles and actors that support ledger nodes. Unlike many other blockchains,
updates, consensus, events, systems Hyperledger can handle transactions and
management, wallet integration and smart messages through different channels, so
contracts. Tokens can be added or used. improving overall performance.
distributed ledgers
Efficiency
deficit
Visibility
deficit
Use
case
Trust deficit
Divided we fall, distributed we stand 2. Commercial applications for distributed ledgers 20
The professional accountant’s guide
to distributed ledgers and blockchain
paper heavy with original documents, even company, regulatory bodies, shipping/port
Distributed ledgers in today’s digital world, often sent as hard authorities and other relevant stakeholders,
allow banks to improve copy by courier and needing a manual would be able to access the ledger.
counter-signature.
efficiency levels without
Encryption restricts access to authorised
compromising trust. It can take one to three weeks for a parties for relevant parts or ‘events’ of the
transaction to be completed. When scaling transaction. For example the event
this to the many thousands of importers between the importer and their bank in
and exporters operating in hundreds of creating the letter of credit would not be
jurisdictions around the world, the result is visible to the exporter. The latter’s view
a trade finance industry that is incredibly would be restricted to the events
inefficient for banks. pertaining to its receipt of the letter of
credit from its own (ie the exporter’s) bank.
The industry has evolved in this way to
solve a trust deficit problem between Parties on the ledger achieve consensus
importers, exporters and overseas banks. on the digital record of a transaction event
In solving this problem, however, a massive before it gets legitimately added to the
efficiency deficit problem has been created. ledger. At the end, in order to fulfil the
transaction (ie make payment to exporter) a
Distributed ledgers allow banks to improve smart contract would trigger the instructions
efficiency levels without compromising once certain pre-conditions, such as receipt
trust. The ledger would contain the contract of goods by importer, had been met.
between importer and exporter, letter of
credit, shipping receipt and a range of Ultimately, banks deal with documents
more detailed paperwork not mentioned in rather than the underlying goods, and
the simplified example above, such as trustworthy digitised copies of these
regulatory documentation (eg for customs) documents provide them with the
and insurance. Multiple parties, such as the material they need to establish trust via
importer, exporter, their banks, shipping shared ledgers.
Shipping
company
ds
goo
g of
ippin 5a. Document
. Sh
5b confirming
goods receipt
1. Agree contract
Importer Exporter
3. LoC
Customer
KYC
documentation
Broker
Insurer
Reinsurer
10 Michael Mainelli and Bernard Manson, Chain Reaction: How Blockchain Might Transform Wholesale Insurance, July 2016.
3. Distributed ledgers and 23
professional accountants
* More √ indicates greater potential for direct benefit. Excludes indirect benefit where DL might improve data quality in general terms which creates knock-on benefits
Table 3.2: Distributed ledgers and the roles of accountants working within an organisation
* More √ indicates greater potential for direct benefit. Excludes indirect benefit where DL might improve data quality in general terms which creates knock-on benefits
Divided we fall, distributed we stand 3. Distributed ledgers and professional accountants 25
The professional accountant’s guide
to distributed ledgers and blockchain
75.4
%
17
R*=
CAG
30.7
15.4
year-round basis. This improves the set of input activities, as captured in the
The aim is to reduce auditor’s understanding of the business, as audit work papers for that engagement, is
risks from unknown- the engagement is no longer based on a designed to build trust in the output – which
snapshot at a given time of the year. This is the view expressed in the audit report.
unknowns within the
can facilitate the ability to spot trends or
transaction data. future risks proactively. Since the fee is linked closely to input
activities it has historically made sense to
True and fair view This greater contextual charge on a time basis with a per-hour
understanding will increase confidence that billing rate.
auditors are getting a true and fair picture.
It will also provide time to deepen The aim is to reduce risks from unknown-
understanding of the overall business unknowns within the transaction data. If
model, rather than reducing the audit to a auditors know of a risk, they can test for it
tick-box compliance exercise. Initiatives and decide whether it is material or not. If
such as the extended audit report are they do not know of it, there is nothing
already laying emphasis on developing this they can do about it. The rigorous set of
deeper understanding of the business, and input activities governing the audit process
distributed ledgers might have arrived at acts as a mechanism for sweeping up all
the right time to advance this priority. possible areas that need to be considered,
and reducing the likelihood of an
3.2.3 Considerations for the unknown-unknown.
accountancy firm
Any possible future model for the The future business model If a distributed
accountancy firm will depend, at a ledger can give a definitive view of the
minimum, on the business model for entire transaction data set rather than a
generating revenues, and on the operating selected sample, it might be possible to
model that determines the processes and reduce the risk from unknown-unknowns.
people to realise the business model.
The auditor role may pivot towards non
The current business model Audit transaction-management elements requiring
revenues are linked to the hours required, human judgement, business context and
with charge-out rates being calibrated to knowledge of technical accounting policy
reflect experience and skills. This is so and of the outputs created by the
because an audit job involves an identifiable application of these elements to specific
volume of work based on a well-defined questions within the audit, for example the
set of tasks, usually linked to statutory fair value of assets (Figure 3.2).
requirements. This rigorous and defined
Figure 3.2: Business model for accountancy firms: possible direction of travel?
Outputs
Outputs based
Basis for revenue
rate card
Inputs
Future
Current
Increasing margin
Divided we fall, distributed we stand 3. Distributed ledgers and professional accountants 27
The professional accountant’s guide
to distributed ledgers and blockchain
For the auditor, revenues generated may forensic accounting, etc. But they are all
The auditor’s role may be increasingly tied to providing a view in likely to share the common attribute of not
now be less standardised response to specific questions, which may being a standardised and repeatable
vary from assignment to assignment. The answer to a generic question.
and prescriptive across
auditor’s role may now be less standardised
assignments, and pivot and prescriptive across assignments, and It will take time to gauge the impact of this
away from checking pivot away from checking transaction data. shift on overall revenues for audit. But what
transaction data. could become clear sooner is a likely
The auditor may still need to be able to change in the revenue mix. The catalyst for
interrogate or provide some form of this may be a gradual move away from low
assurance that the outputs of the margin activities, towards a greater
technology can be trusted. While the emphasis on paying for expertise and
details will differ, this may not be hugely advice rather than for time required.
different in approach to systems assurance
as currently conducted. The Operating model – platform-based
operations? If the revenue mix does
The revenue generated by audit firms evolve, some firms might choose to
may become increasingly de-linked from explore the role of platform-based
a standardised prescriptive list of input operating models for certain services, such
activities and the time and effort they as data collection, records checking,
take. And move towards a more outputs bookkeeping or exceptions reporting.
based approach. These might be performed through
platforms jointly held by a firm and its
Over time, this might increase the platform partner, with the client getting an
proportion of revenues linked to an outputs ‘accounting-as-a-service’ offer for certain
rate card, rather than a per-hour billing rate. standardised tasks.
The outputs might be achieved in a range It is useful to examine what is already being
of situations – anything from a technical explored at present. Accounting software
accounting policy opinion, an audit view on providers are a group to be understood
materiality for a difficult-to-quantify value, more closely in this context and they may
mergers and acquisitions implications, to play a key role in future events.
Divided we fall, distributed we stand 3. Distributed ledgers and professional accountants 28
The professional accountant’s guide
to distributed ledgers and blockchain
One cloud accounting application is The operating model – the skills outlook
The professional exploring the sharing of API13 keys Assuming the critical caveat that
accountant of the between customers and suppliers. This distributed ledgers achieve significant
enables the direct passing of transaction mainstream adoption, they could cause
future will benefit hugely
data to ledgers on each side of a the form and content of services to evolve.
from an outlook that is transaction without the need for And so the skills needed to deliver these
well rounded, resilient verification and manual rekeying of data. services may have to evolve as well.
and adaptable
to changes in the If both parties use the software provided The professional accountant of the future
for all messages, they are fully will benefit hugely from an outlook that is
business environment. synchronised. This creates a channel well rounded, resilient and adaptable to
between the two trading entities that can changes in the business environment.
speed up administrative processes, There may well be new areas of knowledge
improve transaction efficiency and enhance that need to be better understood, such as
accuracy of reporting. the emergence of new ways of syndicating
and transferring value, ownership and
This seems to be moving in the direction of rights using token-based cryptocurrencies.
triple entry bookkeeping. Next steps might This may require new ways of measuring
be increasing scalability in a network and accounting for value, as tokens pass
environment, with a large number of from one owner to another or indeed from
simultaneous transactions and delivery of one blockchain to another. Implicit in all
encrypted receipts.14 this, before even getting to this level of
detail, is an assumed, at least high-level,
The compliance sector is also exploring knowledge of how these mechanisms work.
the ‘as-a-service’ model, with platforms
emerging to provide risk and compliance But alongside acquiring this knowledge,
reports. While many of these relate to there is the need to recognise that learning
bitcoins and public blockchains, it is not must be continuous and lifelong. The
inconceivable that bespoke platforms for professional accountant of the future must
the needs of specific sectors will emerge be able to incorporate this and embody
in due course. the skills quotients15 outlined in Figure 3.3.
Bringing it all together A big part of 3.2.4 Legal and regulatory framework
Accounting firms achieving success, when there are really It seems less likely at this stage that the
that stay abreast of big changes involved, is effective fundamental regulation of business form
leadership. While all can be leaders at their (partnership law, company formation
developments may
own level, some have a particular law, etc.) will change significantly in the
find they are better responsibility. Whether they are chief short term.
prepared for future financial officers (CFOs) in an organisation
client retention and or partners in an accountancy practice Statutes change slowly, and legislators will
increasing market share. working with client organisations, the take time to understand the features of any
leadership skills of senior practitioners will new model before creating blockchain-
often be the single biggest determinant in specific corporate bodies. Some are making
arriving at the right response strategy. It is a start, with the European Union (EU)
for them to take the first step and, as Table considering inclusion of cryptocurrencies
3.3 outlines, this can be kept fairly simple as part of upgrading the Anti-Money
to begin with and gradually built up as Laundering Directive – though this may
more information emerges. take some time to be fully analysed.
Accounting firms that stay abreast of Time will show whether smart contracts can
developments may find they are better replace a traditional natural language
prepared for future client retention and contract, with all the complexity and
increasing market share. Firms that can subtlety that contracts used in a court of
drive the client relationship towards a more law involve. Investors will want to see a
output-based proposition, and keep the defined and explicit linkage or alignment
door open for possible service platform to an established legal system before
models if required, may be well placed for engaging with such tools in any meaningful
future developments and resilient against way. There will also need to be evidence of
future threats. effective dispute resolution where these
smart contracts are involved, so that
confidence builds.
Estimate impact Can we identify any possible role for distributed ledgers in our main
revenue generating activities?
On the basis of the above, roughly how much of our revenue could be
‘at risk’ in 3 years?
If ‘at risk’ revenue seems nil at present, when should the next check-
point be to re-assess this?
Divided we fall, distributed we stand 3. Distributed ledgers and professional accountants 30
The professional accountant’s guide
to distributed ledgers and blockchain
RegTech is an area that is fast emerging as rather than hardware may offer the benefits
In practice, the ability a case example of what a partnership of instant refund payments where due,
of the government between nimble start-ups and regulatory reduce scope for fraudulent transactions
bodies might look like. Regulatory ‘sand- and facilitate low-cost instant transmission
machinery to understand
boxes’ provide start-ups with the of verified tax information to facilitate
and engage will be a big opportunity to test their ideas. This gives prompt repayments.
part of incorporating regulators early visibility of potential
distributed ledgers financial products/services and may enable In practice, the ability of the government
and cryptocurrency them to respond effectively. machinery to understand and engage will
be a big part of incorporating distributed
arrangements into the It allows the regulator to think ahead about ledgers and cryptocurrency arrangements
mainstream. the best regime for balancing innovation into the mainstream. There is no regulatory
and risk. This is much more powerful than framework for bitcoin. It isn’t owned by
trying to retro-fit existing clunky regulation anyone, and crosses borders and
to new areas that have quickly grown and jurisdictions. Like the transmission control
caught regulators unawares. protocol/internet protocol (TCP/IP) on
which internet communication depends, it
3.2.5 Implications for taxation cannot be controlled or regulated. The
For some areas, such as value added network is independent, an ‘eco-system’ of
tax (VAT) and customs duties, the anonymous ‘miners’. This therefore will
implementation of Fiscal Till programmes require a different mindset from traditional
might prove helpful. Fiscal Tills are secure government approaches.
transaction recording tools that retain a
tamper-proof record of cash transactions 3.2.6 Future risks
to form the basis of a business’s tax Managing scale As distributed ledgers
records, typically VAT/GST (goods and move beyond proof-of-concept, and
services tax), but potentially profits-based projects such as Hyperledger become
income taxes as well. more mature, it will become clearer
whether the architecture has sufficient
Currently, systems have a number of control and governance to ensure that all
potential cost and security shortcomings, actors work in the best interests of the
such as being based on specific hardware community and that the safeguards are
that needs system-specific software. adequate to prevent collusion.16
Distributed ledgers based on software
A FINE BALANCE
Achieving the right balance between innovation and regulation is crucial to financial
regulators from the perspective of risk management and industry development.
The approach used by the Monetary Authority of Singapore (MAS) stresses that
regulation must not run ahead of innovation. Introducing regulation prematurely
may stifle innovation and potentially disrupt the adoption of useful technology.
Further, as technologies mitigate existing risks but may create new ones, MAS also
seeks to focus on the balance of risks and minimise these new risks.
To achieve this, two basic tests are applied to regulating blockchain and emerging
technologies more generally: materiality and proportionality.
Materiality refers to bringing in the regulation only when the risk posed by the new
technology becomes material or crosses a threshold. Once this has been established,
the weight of regulation must be proportionate to the risk posed. The regulatory
approach must encourage risk mitigation while restraining the new risks.
In other words, the regulator must run alongside innovation, rather than ahead of it,
if it is to promote safety, soundness and long-term sustainability in the provision of
financial services.
16 Particularly for Proof of Stake and permission chains, with owners. Users may be concerned the owners are not neutral and have adapted the code for gain.
Divided we fall, distributed we stand 3. Distributed ledgers and professional accountants 31
The professional accountant’s guide
to distributed ledgers and blockchain
Sceptic Maintaining
status quo
Pragmatist
Evangelist
Creating Protecting
upside downside
Whether this represents Luddite zeal or In many ways, this approach ensures that
A detailed understanding foresight is of course something that time there is a connection with underlying skills
of how the data was will reveal. As has often been noted with requirements despite evolving business and
new technologies, there is the possibility operating models. As an analogy, being a
generated may become
of over-estimating impact in the short-term cab driver in the 19th century involved the
more important than but under-estimating it in the long-term. skill of controlling a horse. The same job in
checking the data itself. Sceptics will no doubt focus on the first the 20th century involved the skill of driving
part of that claim. a car. Looking ahead, with the prospect of
driverless cars, the job of a cab driver in the
There are, however, a few factors for them 21st century may well involve understanding
to consider. the software that controls the car.
Firstly, in a digital age, it is easier to Similarly, the auditor may no longer need
‘fail fast’. The time it takes to concept to understand sampling techniques or
test ideas, launch them, fail, refine/change query individual transactions. But in its
and try again, may not be as much of a place the job of an audit may place a much
barrier as in previous waves of technology. greater emphasis on the skill of querying
This raises the likelihood of eventually the technology, and knowing where and
getting a solution that works. how to look for potential issues in the
system or the use of data. A detailed
In addition, there appears to be no understanding of how the data was
shortage of capital to fund innovation in generated may become more important
this area, whether it is from commercial than checking the data itself.
banks forming consortiums, central banks
willing to test blockchain solutions, or the So the pragmatist is likely to prioritise an
range of venture capital financiers seeking understanding of new skills requirements
the next successful technology. Again, this that might stem from this technology as an
raises the likelihood of eventually getting insurance policy covering unforeseen events.
a solution that works.
3.3.3 The evangelist
Finally, because these ledgers have impact These are the people who genuinely
across the whole economy, even if one believe in distributed ledgers, and who see
works in an organisation that doesn’t them as an opportunity rather than a
have much time for all this, the suppliers distraction, inconvenience or threat.
or customers might use it and, in order to
transact cost-effectively with them, it may The mindset of these early adopters is
become necessary to use this technology often shaped by the view that the upside
in order to operate. opportunity is exciting and important. It
allows professional accountants to increase
None of this guarantees large-scale their value to the organisation, and spend
mainstream adoption, of course, as less time on tasks that the technology can
sceptics will point out. But the bottom line handle faster, with fewer errors and on a
is that five years is viewed as a reasonable much larger scale.
time frame for the technology and its use
to mature – so one way or another it won’t As the use of distributed ledgers, and
take for ever to find out. indeed of FinTech more generally, starts to
grow, the evangelists see a whole new
3.3.2 The pragmatist sector in which to get involved. Some
The pragmatist doesn’t have a particularly accountancy practices, for example, now
strong view on distributed ledgers, but offer FinTech services within their sectorial
would like to be prepared for any change offerings, specifically with an eye to
– just in case. The emphasis is on increasing their size and their revenues
protecting against the downside and is from this new base of clients.
generally accompanied by a relatively
neutral emotional response to these Evangelists would argue that this is just
ledgers; the pragmatist is neither the start and a whole new set of
dismissive of the technology nor a possibilities lie ahead.
cheerleader for it.
4. Conclusion 33
• The first blockchain company to offer triple entry bookkeeping • Ethereum Live transaction dashboard is the home of Ethereum
was Balanc3 (part of the Consensys spoke model): markets: https://ethstats.net/
http://balanc3.net/
• Assembly is a blockchain business that allows collaborative
• Consensys is a leading Ethereum platform and valuable value creation and profit sharing using APPCoins:
blockchain vendor business creating solutions for accounting, www.assembly.com
music, asset management and content management; it was
founded by Joe Lubin, also an Ethereum founder: • Ambisafe is a blockchain asset-management platform that
https://consensys.net/ventures/spokes/ allows the tokenisation of any assets: www.ambisafe.com
• Chain Inc. is a blockchain business that supports the • Nxt and Ardour is an alternative to bitcoin and Ethereum; it
digitisation of currency as tokens: https://chain.com/ provides a decentralised asset exchange: www.nxt.org
• Abra is a next generation payments and remittance provider • Exscudo is a new blockchain exchange, four years in
using blockchain: https://www.goabra.com/ production, providing the gateway between capital markets
and the cryptocurrency market 2.0 Platform:
• Microsoft has committed to blockchain and offers a fully http://exscudo.com/
integrated ‘blockchain as a service’ option linking to its
enterprise software called Bletchley: • Banking 4.0 is the next generation of banking for the previously
https://azure.microsoft.com/en-gb/solutions/blockchain/ unbanked, using BIO Identity software: www.humaniq.co
• cashaa is a blockchain remittance and payment company • Ethereum Foundation is a decentralised autonomous
working with unbanked people in Africa and using bitcoin organisation or DAO: https://www.ethereum.org/dao
financial systems: https://cashaa.com/
• Tokenmarket exists for creating tokens, distribution,
• Cryptocompare is a blockchain comparison website offering and crowd-sale hosting for initial coin offerings:
crypto economics/currencies comparisons: https://tokenmarket.net/ico-calendar
https://www.cryptocompare.com/coins/#/btc
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Glossary 36
Blockchain Consensus
A blockchain is a type of technology used to create a distributed Consensus is the pillar of any blockchain or distributed ledger; it
ledger. A blockchain records data blocks with each block defines the governance of a blockchain and sets the underlying
cryptographically ‘chained’ to the next in a linear chain of blocks, parameters of performance, privacy, authentication, reward, fault
each containing transactions that create an historic immutable, tolerance and structure. There an several types of consensus:
tamper- and censorship-resistant record of historic truth that Proof of Work, Proof of Stake, Byzantine Fault Tolerance, Proof of
cannot be changed or altered. Bitcoin, Ethereum, and NXT are Elapsed Time, Stellar, DPoS, Paxos, Raft, Distributed
open permissionless architectures that anyone can use. Concurrence and Practical Byzantine FT.
ACCA The Adelphi 1/11 John Adam Street London WC2N 6AU United Kingdom / +44 (0)20 7059 5000 / www.accaglobal.com