As an accountant, you’re likely familiar with blockchain and gone through the full range of emotions: fear, concern, consideration, and perhaps even embracing it.
But, just like the cloud or other technology that came before it, it’s your responsibility as your clients’ trusted advisor to gain a deep understanding and knowledge of blockchain so that you can give expert advice to help them grow and succeed.
Here is more about this complex—and still often misunderstood—phenomenon.
The hype surrounding blockchain technology has caused many companies to view it as a “solve-all” for any problems within their industry. This misguided perspective may damage companies, as they try to force blockchain networks into inappropriate contexts. In fact, according to Bitcoinist, 92 percent of blockchain projects fail in less than two years. This statistic doesn’t mean that blockchains are a failure; it merely shows the damaging effect of wrong information.
Because there are legitimate use cases in which blockchain holds great promise, I thought it’d be helpful for both myself and other industry professionals to understand the most critical questions to ask. When the inevitable client discussion about blockchain does happen, these questions will hopefully help you give informed advice regarding this misunderstood technology.
Blockchains in the real world
Because blockchains are subject to widespread misconceptions, it’s helpful to remind ourselves of how blockchains look in the real world. Blockchains function as a time-stamped series of data records that are reasonably immutable and decentralized. Each block in the blockchain contains information about the transaction and the parties involved in the transaction.
There are many legitimate use cases where blockchains have enormous potential to disrupt and revolutionize current operational flows. For example, supply chains are currently opaque and complicated to audit. Incorporating blockchain may help organizations improve transparency regarding manufacturers and sources, and demonstrate value to buyers.
The main advantages of blockchains are decentralization and transparency. Because transactions can be carried out without third-party verification, many opportunities exist in areas such as supply-chain management, trade finance, and even insurance. If your clients are considering blockchain for their businesses, there are some key questions to ask as you advise them.
Do you need, or rely on, third parties or intermediaries?
Blockchain simplifies transactions by eliminating unnecessary third parties, facilitating a direct relationship with end-users. If your company’s activities demand third-party involvement, then you shouldn’t consider a blockchain system.
For example, an insurance company could eliminate third-party processors and retain control over patient data. However, the insurance industry is heavily regulated and must have third-party reports on their activities, especially their management of patient data. So, a distributed ledger system would not be applicable. If the use of third parties in your operations doesn’t cause any problems to overall efficiency, blockchains are likely unnecessary.
Can you afford to incorporate blockchain?
Although the decentralized and transparent characteristics of blockchain make it an attractive option for improving process efficiency, some inherent traits make it an expensive option as well. Distributed ledger systems require massive amounts of energy, and are theoretically alterable and sluggish.
Blockchain networks consume large amounts of energy due to the “mining” process. Receiving cryptocurrency (like bitcoins) requires computers, known as “miners,” to perform mathematical calculations to verify transactions on the network, improving the system’s overall security. For confirming transactions, miners receive newly created bitcoins. The system is designed to increase the difficulty of the “puzzles” that miners are required to solve.
This increasing level of complexity means that the computational power needed to solve them, and the overall energy requirements, are always increasing. Alex de Vries, a PwC expert in cryptocurrencies, estimated that a network’s energy consumption is comparable to countries like Ireland and Austria.
Which architecture is best for your company?
If blockchain is a suitable solution for your client’s company, the next step is to determine which blockchain architecture is best. While there are many nuances to distributed ledger systems, there are a few general blockchain architectures: public, private, and hybrid.
- Public blockchains are accessible and editable by anyone. This type of network underpins cryptocurrencies such as Bitcoin and Ethereum.
- Private blockchains are accessible by invitation only. An administrator controls permissions and access, making it ideal for contexts such as voting.
- Hybrid blockchains incorporate aspects of both private and public networks. The cryptocurrency Ripple is a well-known example of a hybrid blockchain.
Moving forward with blockchain—Build your role as trusted advisor
Despite the misconceptions surrounding distributed ledger systems, blockchains hold great promise for many industries. Because the applications of this technology are under research, it’s necessary to guide client discussions with reliable facts and avoid exaggerated claims. By helping clients make an informed decision about blockchains, you’ll increase your value as their essential advisory partner.