Kathy Brunner, founder, CEO, and president of Acumen Analytics, joins us to explore the basics of blockchain. She sheds light on the four different types of blockchain networks, how blockchain is currently being applied in business environments, opportunities for CPAs, and more.
By Bill Hayes, Pennsylvania CPA Journal Managing Editor
According to our guest today, as the prominence of blockchain continues to grow in the financial industry, it's important for CPAs to have a basic understanding of the technology's role in transferring the ownership of assets in a safe, verifiable manner. Kathy Brunner, founder, CEO, and president of Acumen Analytics, joins us to discuss the basics of blockchain, including its applications and value to CPAs.
Can you give us some basics of what blockchain is and how it operates within the financial landscape?
[Brunner] Blockchain really is an accounting technology with a fancy name, I'll say. It's a growing list of records called blocks that are linked together using a cryptography technology. It's a hash or timestamp of the previous block, as well as the transaction data. The timestamp proves that the transaction data existed when that block of information was published to be able to get into the hash. If each block contains information about the block prior to it, they form what's called a chain. With each additional block reinforcing the ones before it, it makes block change-resistant to data modification. Because once recorded, the data in any given block cannot be altered retroactively without all the subsequent blocks. The blocks are actually records creating a digital ledger, and that's where the reference that I said before about it being an accounting technology … they're distributed ledgers. Decentralized and frequently public.
Why is it important for CPAs to be fully up to date on blockchain and its development and evolution as an accounting technology?
[Brunner] There's just so much opportunity. I feel that a familiarity … once we remove the hype about blockchain, it's managing a ledger of financial information at its basic foundation, and it's the transfer of ownership in a safe and verifiable manner. But it can be integrated into a variety of areas. Primarily, what people think of is cryptocurrencies, the most famous, of course, being Bitcoin. But the accountant of the future is going to need to be technologically savvy in order to evolve with all the changes across all industries.
The accounting profession will need to be familiar with relevant software programs, how to set up these information ledgers, contracts, and records. I believe, as everyone knows, a refresh of the CPA Exam is coming, and with that will be all these requirements to understand about automation, risk, and internal process and controls as it relates to things such as audit and IT controls. There's a lot of opportunity here, but I don't think people should consider it overwhelming.
There's four different types of blockchain networks. Can you tell us what those are and the differences between them?
[Brunner] There are two ends, I would say, and then two in the middle. So, at one end are public blockchains. A public blockchain has absolutely no access restrictions. Anyone with an internet connection can send transactions to these networks. They're offering usually an economic incentive to those that secure them with algorithms. There are three algorithms – three main algorithms. One called proof of stake, one called proof of work, and another called practical Byzantine fault tolerance. The largest and most well-known public blockchain, as I said, is Bitcoin, and another is called Ethereum.
At the other end are private blockchains, and they are just that – private. You cannot join a private blockchain unless you're invited by the network administrator. Private blockchains usually are subject to a process called selective endorsement.
In the middle are two – a hybrid or semi-private, and another one, consortium, or federated blockchain. They utilize some or a variety of combinations. There's one small last one called a side chain, which is really just a subledger. They run in parallel to the primary blockchain. Again, this terminology, I think, folks in the accounting profession can easily grasp the logic behind what the function is supposed to be.
How is blockchain being used and applied at this point in the mainstream business environment? Who's putting it to use, and is that use becoming more widespread and accepted?
[Brunner] Yes. There are a variety of different use cases currently being implemented. Smart contracts is a big area, and the Ethereum blockchain is a main player in that space. What that means is you can use these to be partially or fully executed, and they are enforced without human interaction. What is an opportunity in one area is automated escrow. They don't need a trusted third party to act as the intermediary, the blockchain executes that contract on its own. Currently, Home Depot is using smart contracts to quickly resolve vendor disputes.
Another area is financial services and banking. There are several banks currently who are implementing the technology because it speeds up back-office settlement systems. UBS has recently opened up research labs that are dedicated to the technology. A German bank launched the first regulated banking solution, enabling users to manage both Bitcoin and Euro deposits. It's definitely moving into the mainstream. Of course, the other area is initial coin offerings and the new categories of digital assets. There's a variety of different places. One I might bring up that's really gaining traction, particularly as a result of all of this accelerated technology and the pandemic, is supply chain and de-risking the supply chain. These contracts that can execute without intervention allow for a guaranteed supply chain, which is important as we've all learned recently.
What would you say the opportunities are for CPAs around blockchain if we can drill down into that? How can they use it to increase their personal skill set?
[Brunner] This is where I really think there is a great area of opportunity to become a part of the value for organizations. Not just reporting historical information but actually participating in a variety of different areas. For example, auditing and smart contract, being a service auditor for blockchain, serving as administrators on blockchain networks, arbitration functions to settle disputes, and really taking a look at how they can participate in all of this transformation that's occurring, everything 4.0 where they are going to become a participant in the future, right? We're going to see things like closing the books as an instant process, not a timely process.
What used to take months for financial close, it'll be done in real-time. Well, that moves the process of completing things to analyzing and looking for opportunity and optimization. This is where, as a trusted partner, I think the folks in the CPA and accounting profession are going to become extremely valuable and participate, as I said, in planning and strategy. We haven't talked about the tax implications, but, of course, the linking of all the transactions in a secure manner so that the technology is using a triple ledger technology. You've got two participants with theirs plus the public record, which allows for this undeniable evidence. There's a lot to learn, but they shouldn't be worried about erasing opportunities. It's really creating opportunity.