At Deloitte, our people work globally with clients, regulators, and policymakers how letters of credit work to understand how blockchain and digital assets are changing the face of business and government today. New ecosystems are developing blockchain-based infrastructure and solutions to create innovative business models and disrupt traditional ones. This is occurring in virtually every industry and in most jurisdictions globally. Our deep business acumen and global industry-leading Audit & Assurance, Consulting, Tax, and Risk and Financial Advisory services help organizations across industries achieve their various blockchain aspirations. With Deloitte COINIA, hundreds of thousands of addresses can be loaded in bulk for a variety of crypto assets, and Deloitte can see 100 percent of the transactions and reconcile them to clients’ books and records. Deloitte COINIA also assists with off-chain verification of private key ownership by using an innovative, custom-developed workflow to confirm the integrity of a signed message.
Case Studies and Industry Examples
The security of the blockchain prevents a hacker from acting as an authorized member of the network. A blockchain is a distributed, peer-to-peer database that hosts a continuously growing number of transactions. Each transaction, referred to as a “block,” is secured through cryptography, timestamped, and validated by every authorized member of the database using consensus algorithms (i.e., a set of rules). A transaction that is not validated by all members of the database is not added to the database. Every transaction is attached to the previous transaction in sequential order, creating a chain of transactions (or blocks).
Blockchain Technology in Financial Accounting: Enhancing Transparency, Security, and ESG Reporting
Basically, when a company purchases inventory from a supplier on account, a journal entry debiting inventory and crediting accounts payable for “X” amount is entered in the ERP system. A corresponding entry is made simultaneously to the blockchain accounts and ledger using a token. Think of a token as a digital version of a vehicle that is used to record and track transactions from the ERP system to the blockchain accounts and ledger; the same process is undertaken for each transaction. Different types of tokens can be used for different types of events. A smart contract can be encoded with an obligation token to execute a payment once certain conditions are met (e.g., the payment due date has been reached).
- Blockchain’s decentralized nature also helps act as proof that a transaction happened.
- However, such a network structure is not without its challenges.
- The distributed ledger created using blockchain technology is unlike a traditional network, because it does not have a central authority common in a traditional network structure (see Exhibit 2).
- But it’s maturing, and it may be changing very quickly what you hear, thanks in part to a decision or a release recently by the IRS.
This is done securely using a consensus protocol, or a set of rules based on mutual agreement. Again, there’s going to be a solution that we’ll be training. You know, I think in the early stages of blockchain we said this was going to really be massively disruptive because everybody was going to start doing transactions in blockchains. Because you’re going to have a lot of different, probably permission-based blockchains, private blockchains, where people will potentially do some transaction work or supply chain work. I think the other side of that is enterprise adoption of blockchain. When we look at different blockchain examples, and we brought up many times today the Walmart example, tracking food.
Company X inputs the transaction in the database, thereby creating a block. The block (or transaction) is broadcasted to every authorized member of the network. Once all the members validate the transaction (i.e., approve the payment) a block is then added to the chain of transactions, which provides an immutable and transparent record of the transaction. The money is then transferred from company X to company Y, and the transaction is complete.
Applications of Blockchain in Financial Accounting
Access to the network and data is subject to the individual responsible for the environment. The traditional database structure therefore is controlled by power. To have the suite of skills needed in 2021 and beyond, having an understanding of how blockchain technology affects audits is important. Furthermore, accountants with blockchain experience can serve as consultants by helping their clients navigate both implementation and regulatory issues related to blockchain technology. Contrary to what may be supposed of tech erasing opportunities, the automation of auditing allows for bookkeepers and accounting professionals to increase their advisory services to interpret results and train clients. In addition, unforeseen add-on tech and services will be needed and created.
What Does it Mean for the Accounting Profession?
There’s been firms doing work in the cryptoasset category, but now this is going to make it much wider spread. And I think as they understand how to meet the compliance needs related to cryptotax, they’re going to get a better understanding of cryptoassets, the blockchain category. And in some ways this will be a tipping point for them to go into some of the other areas that Ron just mentioned. The net effect of this rapidly increased usage of blockchain in financial transactions has created a huge demand for interpreting and understanding tax effects of blockchain-related transactions.