On October 29th I’ll be speaking at an NYU Roundtable on the topic of blockchain and accounting based on a piece I wrote on Techvibes back in 2014 entitled, “How Technology Behind Bitcoin Could Transform Accounting As We Know It”. In it, I stated that within 10 years, this technology would significantly impact the accounting and audit profession and replace a good chunk of what the profession does. Well, we’re 4 years later and for the most part we are dealing with a ton of hype around the word “blockchain” and we’re still waiting to see the impact of blockchain on bookkeeping, accounting & auditing.
For the most part, since blockchain has increasingly gained in popularity over the past 5 years, the technology has been mostly in a testing phase, where the market is feeling out what use cases it will have exactly. While some have taken the technology into a production/live environment, for the most part, it hasn’t had a major impact on our lives yet and the same is certainly true when we talk about blockchain and accounting. Lots of hype, lots of hope, but no real use case.
In a 2 part blog series leading up to my Roundtable discussion, I’ll examine when and how blockchain will impact bookkeepers in Part 1 and in Part 2 I’ll discuss things in a similar light but for accountants/auditors.
So let’s cut through the hype and start talking about the impact of blockchain on bookkeeping. How will this technology impact bookkeeping and when exactly will we see this impact?
How Blockchain will Impact Bookkeeping
Back in my Techvibes piece, I explained in very simple terms what a blockchain is. Without getting back into it, the technology, at its core, is simply a ledger that records transactions as they occur. What you send over the ledger can vary, but most people are familiar with the cryptocurrency, Bitcoin, which can be issued, sent and recorded without any centralized party. This very basic concept is central to how we will see the impact of blockchain on bookkeeping.
If I send you a bitcoin, this transaction will be automatically recorded in the blockchain with the correct date, time, amount, sending party address and receiving party address. For instance, in the image below, I grabbed a screenshot of a random bitcoin address with 2 transactions recorded on the blockchain.
You can see this address has 2 transactions, with the first (bottom) one:
- Having a transaction ID of “852c1c22c3ca6d8b1a59f1b5090b36c38461031382d47c3fc78321dae9558082”
- Going from from address “1GonUNoGazPZWwdAPpWw5Rd39o7F4BRPK8” to address “13g2Gst3fYYGgofBhbzfwxh8GJLwMe552o”
- Consisting of 4.72172378 bitcoins
- Sent on Sep. 6, 2018 at 17:32:59.
If you’re a bookkeeper, you might notice that this transaction has mostly everything we need to be able to record this in the books. The only thing that we’re missing is supplier name and customer name. If we knew our customer’s bitcoin address though, we would be able to associate the alphanumeric string with the name quite easily.
So what the blockchain is automatically creating on its ledger is no different than what bookkeepers do today when they’re working on the books of their client, though the former is more automated than the latter.
Since we know that blockchain is a ledger that can’t be tampered with, is immutable and has been proven that everything that hits the ledger is accurate and true (read up on this if you have any doubts), then on a go-forward basis, we can use the blockchain as the source of all information for a company’s financials when handling the bookkeeping process and effectively have the blockchain handle just about most of the bookkeeping process, with no intervention, provided there is a super tight integration between the blockchain in question and the company’s accounting system, which isn’t too hard to imagine as being very plausible. This is where the impact of blockchain on bookkeeping will become apparent.
Already we have cloud accounting systems like Xero & Quickbooks Online today that can automate various functions by being able to connect to various online data sources to pull information directly into the system, such as bank transactions using bank feeds or expense receipts via apps like Receipt Bank or Hubdoc. But I believe that blockchain can take this to the next level by being able to automate areas that are still quite manual in the process, provided that the transactions are occurring on a blockchain and that an integration exists with the accounting system.
Here’s a simple example:
If an invoice is issued using an app that has blockchain technology baked into its back-end, that can automatically then be entered into the accounting records of the customer (as well as the supplier at the very same time, which is where we get into the concept of triple entry accounting – ie. one entry in the blockchain, another in the customer’s ledger and a third in the supplier’s ledger, though this is a bit out of scope for this discussion). As a payment is made (through software with blockchain in its back-end), that payment can be automatically applied to the receivable and as payment is received, once again, through blockchain technology, that payment can be reconciled against the amount that hits the bank, all automatically.
This is possible because there is data/information that can be embedded in all transactions that hit the blockchain and this data/information can dictate in great detail how transactions should be recorded and executed. It’s an incredibly powerful technology.
Already with the advent of cloud accounting, we have seen the bookkeeping profession undergo a disruption, where manual data entry has been replaced with apps that can extract data automatically (ex: Receipt Bank & Hubdoc) and can enter this data automatically in a company’s ledger with bookkeepers now acting as data verifiers and managers of automated workflows rather than as number punchers.
But all that these current solutions do is get data into the system. It doesn’t help (much) with duplicates, it doesn’t help with omitted transactions and it doesn’t help with reconciliations. Bookkeepers still need to go through the manual process of dealing with all these issues. I believe that blockchain is a technology that can solve for automation in many of these areas and if so, the impact of blockchain on bookkeeping will be substantial.
When Blockchain Will Impact Bookkeepers
The above sounds idealistic and while there’s a lot of hype about blockchain taking your bookkeeping job, it’s not going to happen tomorrow. But technology does move fast and I think we are ripe for another disruption in 5 years or less.
Ultimately, in order for blockchain to have an impact with what I had outlined above, what it will come down to is an increased reliance on blockchain technology and have a fair chunk of our transactions flowing through blockchain-enabled software. That won’t happen until regulation sorts itself out and the big guys come onboard, such as banks and governments. There are big blockchain players in the market that are currently working with banks, central banks, regulators and governments as we speak, and there is a high amount of interest in adopting this technology among them for various reasons. Once those dominoes start to fall, most of the way that we’ll be transacting will be on a blockchain without us even noticing it and this is where the impact will become apparent.
Technology can be a gift and a curse. For some bookkeepers out there, blockchain will almost completely replace how they have traditionally created value once we see full scale implementation of the technology. For others, though, it will create opportunities to manage business in a whole new way. It is my belief that the impact of blockchain on bookkeeping will be substantial in the years to come.
This won’t happen tomorrow, but what this means is that there is now an opportunity to understand the technology and and to carve out a time to understand the impact of blockchain on bookkeeping. By doing so, you will be ready for the months and years to come so not to fall behind the 8-ball like others have done with regards to cloud accounting.
If you are interested in reading Part 2 of this blog series dedicated to how blockchain will impact bookkeepers, please subscribe to my newsletter to keep in the loop!