Ep. 5: Dr. Ariel Markelevich - Blockchain in Accounting

FULL EPISODE TRANSCRIPT


Mitch: (00:03)


Welcome to Count Me In, IMA's podcast about all things affecting
the accounting and finance world. Mitch Roshong and Adam Larson
here with you again and today we are going to hear all about how
blockchain works and how it applies to accounting. Now, Adam, can
you give us a little more background on the topic? 


 


Adam: (00:17)


Yes, thanks Mitch. Some of the biggest curiosities and ongoing
questions in accounting revolve around blockchain. To get some
insight on the topic, I asked Dr. Ariel Markelevich to help us
answer a couple of the most common questions. Dr. Markelevich is
an associate professor of accounting at Suffolk university. He
has written a number of articles for academic and professional
journals and has presented much of his work. I think you're going
to learn a lot about blockchain. I certainly did. So let's take a
listen. 


 


Adam: (00:52)


What is blockchain? And do accountants really need to care about
it? 


 


Ariel: (00:56)


Thank you. That's a great question. So many people have heard
about blockchain, and I'm guessing that many people don't really
know what block chain is. So block chain is essentially a
technology. So when you think about blockchain, you typically
think about a list of individual records. So, many talk about the
ledger or a distributed ledger. In essence, it's a list of
individual records. Now the records can contain any type of
information. So when you think about blockchain in the context of
accounting, it could be transactions. When you think about a
blockchain in the context of Bitcoin, it again could be
transactions between individuals. Now what is unique about
blockchain is that it forms a chain by the name. You can get
that. So there are the key thing to understand is that there are
many types of books and systems. The basic process in a
blockchain system is that each record would include some
information. As I said, for example, a transaction and it would
contain a digital signature for each of the parties. Now the
records, before added to the chain, they're checked and they're
approved. We'll talk a little later about different ways to prove
the records, but in essence, they need to be checked and approved
before they're added to the system. Once they're approved,
they're record is added to a block and then the blocks are in
essence linked to each other and create the chain and we get the
block chain. Now there are other common characteristics of
blockchain. One of them is that it uses group cryptography. So
instead of just having the information there we go through a
crypto process to create what's called the hash, which
essentially is a list of digits and letters that represent, in
essence, the record, you can also think about it is the key to
the record. Now the hashes connect the records and the blocks
together in a specific order. If you were to make any change to
the record, that would cause the hash to change as well. And
hence you would know that there was a change in the record now
because the next block contains still the old hashes. If you
wanted to hack and change a potential record in the system, you
would need to change all the subsequent records. Because again,
all of them contain the previous hashes for the previous records.
And that makes it hard, which is one of the key advantages or
interests in blockchain. A key thing to understand is that
blockchain is not Bitcoin. So many have heard about Bitcoin,
which is a cryptocurrency. I'm guessing that some of you are sad
that they didn't buy Bitcoin years ago. But anyway, Bitcoin uses
blockchain. Blockchain's was introduced when Bitcoin was
introduced, but the two are different. So the way Bitcoin uses
blockchain is just a specific use for blockchain. And in many
cases, when you think about blockchain, blockchain could be
converted or used in a variety of different situation and variety
of different settings and not just the one that Bitcoin is using.
So for example, the Bitcoin use of blockchain is what's called a
decentralized or a Galatarian network. The basic idea there is
that there's nobody in charge of the system. There are many users
within the Bitcoin blockchain system. All those users or nodes,
sometimes that's the technical term, but again, no central
authority. You don't need to get approval from anybody to join
the system. In the Bitcoin network. The members are kept
anonymous. Now I'm saying all this because you need to think
about blockchain for potential business uses. And for example,
you may not want to keep the blockchain system decentralized or
egalitarian. You may not want to keep the members anonymous, but
the fact that Bitcoin is using it that way doesn't mean that all
blockchain applications would be the same. Another characteristic
of the blockchain use in Bitcoin is the fact that transactions
are approved by consensus. So in essence, what you have is you
have what's called miners. Many of you have heard or potentially
heard the term minor. A minor is somebody who is part of the
blockchain system. Again, we're talking about Bitcoin
specifically and they approve the transaction by solving, a
variety of mathematical equations essentially checking that the
hash represents the information in the transaction that is being
uploaded to the system. And you have many miners that are trying
to solve this equation or sets of equations. And the idea here,
the reason for the miners to try and work is because they get
paid in Bitcoin. So many of you have heard, that potentially the
payment is going to be reduced in the future, things like that.
But in essence, the way it works now is that miners are paid
using Bitcoin for the work they're doing to approve the
transactions. Again, since many there are many miners out there
and the approve the transactions, it is approved by consensus.
And what once it's approved, it's added to the system as we were
discussing before. Now these characteristics of the Bitcoin
application of blockchain may not be a good fit in all
implementations. So as blockchain evolves there are other types
of blockchain systems that exist. One example is the Hyperledger
which is a consortium of companies that is developing an open
source blockchain. So one question that comes up out of this is,
okay, should accountants care about blockchain? So something that
old transactions can be on a blockchain. So imagine a case in
which the blockchain would include all the transactions that
accompany has. Everybody would have access to that information.
We can think of a case in which, and there's actually some, some
academic research that talks about this, that users would have
access to all these transactions and could use some software or
some code to create their financial statements. Auditor's would
have access to it and things like that. Personally, I don't think
that would happen. Companies are not likely to be willing to
share the information of all their transactions with the world.
So I don't think things like that would happen. Just again, it
doesn't make business sense. Now, it is true that blockchain
systems can be used for some underlying relationships. So for
example, when you think about your businesses, transactions with
customers or suppliers, we could have all our supplies on a
blockchain system. The idea here are the advantages that is that
all the transactions will be recorded there. Now the approval
would most likely not be by consensus. Maybe we do a two party
verification. One of the attractions is that it could make it
easy for some smart contracts. So, for example, if you think
about a contract in which I promise to pay you, once you deliver
some shipment, let's say we could have all that information in
the blockchain, once that ...