Last week we talked about how the IRS views cryptocurrency, this week we’re talking about the platform cryptocurrency is built on: Blockchain. Why do tax preparers and accounting professionals need to know about Blockchain? Because the technology has the potential to change the industry all together. Here are some things you should know about Blockchain and its potential.
How Blockchain Works
Cryptocurrency is just one application of blockchain technology. Blockchain is a chain of blocks that exist in a database. Each block contains a digital ledger of transactions (with time stamps) that have been hashed and encoded, and a cryptographic hash of the block that came before it. All of these blocks are linked to each other because they contain an encryption from the prior block. This creates a layer of security that prevents people from altering details about the transaction after it has occurred.
Blockchain, at its core, is a transactional technology. It works essentially as a digital ledger to not only track transactions but to verify them. Within the technology, all transactions are tracked, verified, and secured. There is no question who the buyer and seller is or whether or not the payment was sent because it is time stamped and verified within blockchain – in real time. This leaves little room for confusion, errors, or tampering.
All of this means more data at your fingertips and in real time, which is good news for accounts payable and receivable, bookkeeping, and auditing.
Blockchain is touted as being “un-hackable” because it is a transparent and shared database. Not only is each block within blockchain encrypted, each block also includes the cryptographic hash of the prior block in the chain. This essentially links all of the blocks together to create a chain of blocks. The encryption makes it so that if one transaction within one block is altered, it alters everything down the chain, making the altering traceable.
Not only is everything encrypted, it’s also maintained by an ecosystem of people. Everyone who is a member of the blockchain community has the data replicated on their computer, making it easy to verify transactions against another user’s data.
The verification and security capabilities means increased security when it comes to transactions, less incidents of fraud, and a reduction in dispute management and the need for reconciliation.
If Blockchain is more secure, efficient, reduces disputes, and reduces the need for long auditing processes, then ultimately, it reduces costs. Less time spent on these tasks means more time spent on value-adding activities and business development.
There is talk that the combination of Artificial Intelligence. and Blockchain will hurt our industry and replace accountants, bookkeepers and tax pros but I contend it will only make our industry better. As technology moves us forward we need to grow, adapt, and learn how to implement it into our practices in innovative ways. Otherwise, we will be left behind.
What are your thoughts on Blockchain? Leave a comment!