Bitcoin disrupted the finance world in major ways, and that technology has given rise to another disruption: blockchain. Blockchain decentralizes technology through a more secure, distributed and transparent public ledger. For finance and accounting specifically, blockchain would eliminate double-entry accounting and introduce the more transparent and trackable concept of triple-entry accounting. Here’s what you need to know about the impending rise of blockchain.
How Blockchain Works
When people need to make a financial transaction, there is almost always a middleman – a bank or other financial institution – involved. Blockchain takes that middleman out of the equation using cryptography to keep financial exchanges secure.
For example, if Party A wants to send money to Party B through blockchain, the transaction is represented online using a “block.” The block is broadcast to every computer in the established blockchain network, and each computer must approve that transaction is valid. The block is then added to the chain, which keeps a secure but transparent record of all transactions. Once it is added to the chain, Party B receives the funds.
Blockchain is taking off because it ensures reliability thanks to the public ledger system that created a hashed history of all transactions; it provides security since transactions can only be approved by authorized computers in the network; it lowers transaction costs by cutting out banks that can charge exorbitant fees; and blockchain decentralizes the transaction network which can lower the risk of system failure.
Blockchain and Triple-Entry Accounting
In the heavily regulated financial industry, blockchain could be a game-changer. In traditional double-entry accounting, parties on both sides reflect their side of a transaction accordingly with debits and credits. Because those entities are independent of each other, it is difficult for regulators to detect fraud since nothing links those transactions together for verification purposes.
Blockchain can take those previously independent records and link them through triple-entry accounting thanks to digitally confirmed counterparty contracts. The blockchain, while secure, would create a hashed record in the block that allows for full tracking and transparency on the full details of every transaction. Currently, triple-entry accounting is more concept than reality, but there is a great deal of government interest in blockchain because it can eliminate fraud and could turn complex tax filing into a simple exercise in tax confirmation.
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