Date posted: 01/12/2016 6 min read

Blockchain a complex and evolving cryptocurrency

Blockchain has the potential to radically improve the efficiency and integrity of financial records and markets

In brief

  • Blockchain is an internet native, there is no single source of control — no one owns Bitcoin
  • Blockchain-based records will still need to be evaluated, requiring innovative auditing techniques
  • Australia and NZ are well positioned to lead the adoption of blockchain permissioned ledgers

By Vikram Kumar, Jonathan Perkinson CA and Richard Miller

In 2015, blockchain had all the frothy bubbles of a new wave crashing. Headlines called it the next big thing. Venture capital fuelled start-ups at a record rate. Patent applications flooded in. Big name companies jumped on the bandwagon with their own version of the potential.

All of this for what’s essentially a database?

There is a strong sense of déjà vu. All those hopes and expectations, the promise of a new age dawning.

It’s a mistake to dismiss blockchain as something technical. In the same way that the internet affects everyone and the big benefits came from commercial and community innovation, blockchain can’t be left to technologists alone.

A blockchain is a sequential record of transactions. Quite simple really.

Only verified transactions are stored in the blockchain. Each transaction is immutable, timestamped, independently verifiable, and its inputs and outputs linked to other transactions.

Unlike a shared ledger or the familiar database, what makes blockchain different is that it is an internet native. There is no single source of truth or control with everyone having their own authentic copy of the record set.

Origins of the blockchain

Seven years ago a person using the pseudonym Satoshi Nakamoto created the Bitcoin cryptocurrency.

Since it is trivially easy to duplicate electronic files and data, a cryptocurrency system (a medium of exchange that controls creation and usage of currency with cryptography) needs to ensure that, like physical money, it is only possible to spend digital money once. Blockchain solved this “double spend” problem.

(Note there is a rough consensus that “Bitcoin”, with a capital “B”, refers to the system and technical protocol while “bitcoin” is used for currency units. That consensus does not extend to using “blockchain” as a single word or “block chain”.)

What makes Bitcoin as a network so interesting is that, so far at least, it has shown that trust does not have to flow from centralised institutions and law. The design assumes that some participants are dishonest and malicious. No one owns the Bitcoin network, no permission required. A tiny fee, independent of the transaction amount, is all that it takes.

At the heart of Bitcoin is blockchain. So much so that for a long time most people didn’t distinguish between the two, just as the web is used interchangeably with the internet. Looking at the blockchain as an independent component in its own right, with Bitcoin only its first application, has unlocked its potential — useful in providing a transaction layer for distributed and decentralised systems at global scale, analogous to the internet providing the communication layer.

Permissionless vs permissioned blockchains

Usage beyond Bitcoin has created a new form of blockchain, one that requires participants to get permission to record their transactions. This implies that some authority or process gives that permission to identified participants and is therefore distinctively different from the “permissionless” Bitcoin.

There is also increasing differentiation between public and private blockchains, depending on whether anyone can access and write to the transaction set.

These differences are not merely semantic. There are significant differences in security versus features which has led to much debate about relative strengths and applicability.

Permission and private blockchains, designed poorly, could end up negating the very fundamentals that make blockchains attractive in the first place.

Blockchain and financial services

Given its cryptocurrency origin, the wider financial services industry is one area that’s started paying attention to the blockchain.

Financial services are about asset ownership, transferring value and working across boundaries. At another level, they are about record keeping, trust relationships and regulatory restrictions. An overriding interest is to push down costs while increasing efficiency and timeliness.

Blockchain can change each of these, which is the source of its significance as a tool for innovation.

Some early examples illustrate the potential. Companies like Abra, Bit2Me, BitPesa, CoinJar, Streami, TransferWise, and many others allow person-to-person international remittances, cutting down costs and time to a fraction of traditional providers. Ripple aims to do the same for bank-to-bank transfers.

Bitcoin and other cryptocurrencies are programmable money so “smart contracts” (software code that defines and enforces agreed terms) on platforms like Codius, Ethereum and Rootstock can transfer money based on the results of software code and logic without intermediaries. Services like BTCJam provide peer-to-peer lending.

Blockchains are powering other financial services. Koinify and Lighthouse are crowdfunding platforms while Nasdaq’s Linq uses the blockchain for issue, cataloguing and recording of transfers of shares of privately-held companies. Earlier, Overstock launched tØ (pronounced tee-zero), a blockchain-based private and public equities trading platform.

There is a clear division between those using the blockchain to innovate within the traditional regulatory structure and those challenging it. The former are a powerful force given their resources, scale, and domain expertise. A prominent example is R3 CEV, a consortium of 42 major banks developing blockchain-based commercial products, standards and protocols for the wider financial services industry. Such efforts are welcomed by governments and regulators keen to support innovation within their comfort zone of established frameworks.

Yet, it is likely to be start-ups and others working outside established frameworks that will try to make fundamental changes. They understand that the blockchain challenges the underlying assumptions of centralised hierarchies. They also understand it is easier to start from niches — such as international remittances and private capital.

The greatest disruptive potential will be on middle- and back-office roles that maintain the integrity of financial records. As more financial records become self-validating, those roles will need to be cut or reshaped.

The future

It’s still very early days and so far, there have only been small glimpses of a future where the blockchain will change, or at least impact, every aspect of the financial services industry.

Take the experience of Bitto NZ. It set up a Bitcoin ATM in New Zealand about three years ago. Its bank promptly shut down their account for “associating with the bitcoin”.

The company has recently seen a big change in attitude and now provides expert advice to a bank and two government departments.

Director Jonathan Ewing says: “Sending five cents to 500 people every five minutes is now a possibility, requiring no intervention by a third party. Research shows that teenagers in particular, are increasingly unlikely to require a personal banking relationship. Instead they will access services via a multitude of smart applications and crypto-based exchange solutions.”

There are three historical lessons that can be applied to new generic technologies such as the blockchain:

  • First, its impact will be overestimated in the short term but underestimated in the five-to-ten-year period
  • Second, it will be used to solve known problems before its true, differentiating power is unleashed (think programmable money and triple entry accounting)
  • Finally, technology libertarians looking at the blockchain as the next crack at getting governments and corporate interests out of Cyber Utopia are going to be disappointed again

If you could go back to the early days of the web in the 1990s, what would you do? Seek the leading edge, be a fast follower or wait till the dust settles?

That’s what you should be thinking about with regards to the blockchain in 2016.

Vikram Kumar is the founder of start-up KotahiNet and an advisory board member of start-up BraveNewCoin.

This article was first published in the March 2016 issue of Acuity magazine.

How blockchain technology will change accounting for good

  • Could blockchain revolutionise the accounting profession?

    The potential of blockchain to radically improve the efficiency and integrity of financial records and markets across the world raises questions as to its impact on accountants and auditors — who traditionally play a pivotal role in maintaining the integrity of financial systems.

    Understanding the core features of a blockchain-based design is key to appreciating the likely impact.

    Transaction confirmation: Blockchain ledgers have protocols in place requiring parties to confirm transaction details as a prerequisite to posting — thereby ensuring the transaction’s underlying validity.

    Settlement verification: In addition to two counterparties confirming transaction details, the blockchain verifies the pre-transaction ownership of the underlying asset being exchanged — thereby enabling instant settlement of the asset’s transfer at the completion of the transaction.

    Permanent time-stamp: As a transaction is validated and added to a block, the blocks on the chain are precisely ordered and time stamped creating an immutable record of their sequence and timing – thereby unambiguously capturing when the transaction occurred.

    Smart contract automation: While not necessarily an innate feature of a blockchain design, blockchain ledgers could escalate the start of smart contracts which execute themselves under specified conditions to confirm contractual agreements, track satisfaction of performance obligations and automatically execute transactions according to contractual terms.

    These design features are particularly appealing in environments where transaction reconciliation, verification and dispute resolution can take up a disproportionate amount of the finance function’s energy.

  • Blockchain vs accountants

    When technology underpins the integrity of financial information and contracts execute themselves, what will happen to accountants’ and auditors’ reconciliation work? The short answer is they will move up the value chain.

    While blockchain has the potential to remove undue administration from financial record keeping, it’s hard to envision it navigating the complexities of accounting standards and financial reporting.

    Valuation of financial assets, impairment tests, financial disclosure, and financial planning and analysis will still require the expertise of accountants. These very same items will still require an inquiring auditor to independently challenge management decisions.

    The greatest disruptive potential will be on middle- and back-office roles that maintain the integrity of financial records. As more financial records become self-validating, those roles will need to be cut or reshaped.

    Many accountants get their start within auditing houses looking at bank statements, reconciliations and stacks of invoices. As records are digitised (not just due to blockchain-based technology) their audit effort will need to be traded for critical analysis of management estimates. The existing role of the junior audit analyst will involve far fewer paper cuts.

    That said, the accuracy of blockchain-based records will still need to be evaluated, requiring innovation in auditing techniques for assets that might be held in pseudonymous blockchain addresses.

  • Change on the horizon?

    Blockchain will revolutionise the accounting profession.

    Expect to see blockchain-based systems being developed for internal use. Peel back the brand from most major corporations and you are likely to find inconsistent data, siloed information and a patchwork of complex legacy systems. Internal use will focus on trouble spots to migrate financial information onto a scalable blockchain infrastructure. Once the system is proven, organisations will migrate more financial information onto the distributed ledger.

    The real game-changer — multi-party distributed ledger or blockchain financial systems — will come later but will deliver truly revolutionary progress.

    Expect to see the first use cases in financial markets with a small number of sophisticated players and clearly defined market boundaries. A current example is Nasdaq’s Private Markets “permissioned” blockchain prototype with a confined number of market participants.

    Then we will see more application in financial services, particularly where transactions are costly, time consuming, inefficient or fraught with fraud or error.

    Deloitte has been working in this space for some years now, in the development of distributed ledgers and blockchain-based systems for clients, and applications for use in audits and client service. (See We chair the committee seeking to define relevant accounting standards through the Australian Digital Currency Commerce Association. Deloitte is also assisting with World Economic Forum research on distributed ledgers and their applications globally.

    While the ecosystem of technologies, participants, regulations and standards is still evolving, blockchain has the potential to help build a more efficient, productive and innovative financial system.

    Australia and New Zealand are well positioned to lead the adoption of permissioned ledgers given their rich history as early adopters of technology. The best way to predict the future is to create it.

    By Jonathan Perkinson CA and Richard Miller lead Deloitte’s payment and advisory practice in Australia.

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