Blockchain as a topic around the board room table or the watercooler is so hot right now it’s cool. Amongst all this blockchain chatter there are some misconceptions being passed around that the Accounting Blockchain Coalition wants to debunk and set the record straight with this blog. We also created an infographic on this topic that you can find here.
The Seven Blockchain Myths And What It Means For Accounting Professionals
1. Blockchain equals cryptocurrencies
- Bitcoin the blockchain and bitcoin the cryptocurrency were born at the same time, however cryptocurrency is considered to be one of many applications of blockchain technology.
- The Massachusetts Institute of Technology considers blockchain technology to be a General Purpose Technology (GPT). A GPT is a technology that; 1) can be applied across a wide spectrum of industries; 2) has the capacity for continual improvement and; 3) acts as a catalyst for innovation with complementary technologies. Well-known examples include electricity, the steam engine, the railroad and more recently, the internet.
What it means for accounting and tax professionals? In your career you will come across a wide variety of client uses of blockchain. To audit or attest, or advise on controls or tax issues you will need a base understanding of what benefits and risks accrue to use of the technology across any use case. This understanding will need to stay current with the continuous improvements and adjacencies integrated into blockchain business models and technologies.
2. Cryptocurrencies are primarily used for nefarious purposes
- Bitcoin is often quoted as a favorite among criminals due to its anonymity. Transactions on the Bitcoin blockchain are in reality transparent. However, the identity of the transacting parties are not readily apparent.
- The transparency of public blockchains such as Bitcoin, being easier to track than physical cash, has proved very useful in forensic analysis for governmental agencies to crack down on illegal activities such as drugs and money laundering.
- Depending on the type of blockchain implementation, transaction data can be completely private, semi-private or public.
3. Blockchain will remove all intermediaries
- This idea has been popularized largely due to Bitcoin eliminating the banking intermediary (and related cost) between transacting parties.
- Some intermediaries may be completely eliminated; however the extent of elimination will depend on the specific application of a type of blockchain implementation. In some cases, blockchain will still need to work with existing intermediaries, although their role and function may change.
4. All Blockchains are the same
- Blockchain actually consists of a collection of technologies.
- The ledger, the peer-to-peer network, the consensus and incentive mechanisms are some of the core components that form a type of blockchain implementation. Change any of the components and you may end up with a completely different type of blockchain, or perhaps not even a blockchain at all.
- There are a wide variety of blockchain and distributed ledger technology implementations being built for specific industry applications including, but not limited to, supply chain, real estate, insurance, trade finance and telecommunications.
5. Everyone needs “a blockchain”
- Blockchain is not a “one size fits all” solution and not a replacement for a “traditional database”. There are many types of blockchain implementations including, public, private and hybrid chains each with its own security and technological trade-offs to be carefully considered against the objectives and required use case of an organization.
- In many circumstances “a blockchain” is not needed.
6. Transactions on a blockchain are automatically immutable
- Immutability has become a hallmark of blockchain technology largely due to Bitcoin blockchain’s resilience to attacks.
- But this comes with a cost: the Bitcoin blockchain consensus mechanism, designed for completely untrusting partners, requires a high computation cost, making it impractical and not cost effective to try to “rewrite the past”.
- Other blockchain implementations rely on other mechanisms, like proof of stake, where the organizations allowed to write to the blockchain are known, and therefore tampering with the chain becomes immediately noticeable.
- As in any software system, errors (bugs) are possible, and there have been a few cases where blockchains have been hacked.
7. Distributed Ledger Technology (DLT) and blockchain are synonymous
- The popularity of blockchain technology has brought attention to older technologies such as distributed databases, often resulting in the terms Distributed Ledger Technology and Blockchain being used interchangeably.
- Part of the confusion in the terms and the related benefits or risks is due to the lack of a universal definition of blockchain. The International Organization for Standardization is working towards standardization of blockchain technologies and distributed ledger technologies.
- Generally, if transactions are gathered into blocks that are cryptographically linked together and designed to produce immutable records, it’s considered to be a blockchain.
- Blockchain is generally considered a subcategory of DLT given it’s typical distributed architecture, but a DLT is not necessarily a blockchain.
The Accounting Blockchain Coalition is helping organizations navigate accounting issues related to digital assets and distributed ledger technologies, including blockchain. We offer a platform for our members to contribute their knowledge and expertise while fostering best practices. To learn more and join our community of accounting professionals, click here.