By John Higgins, CPA.CITP, Strategic Technology Advisor
John H. Higgins, CPA.CITP is co-founder of CPA Crossings, LLC and is a nationally recognized thought leader for the accounting profession on all aspects of information technology. CPA Crossings, LLC specializes in developing and presenting continuing education programs on important technologies impacting the accounting profession. John will lead Executive Education’s CFO Series – Keeping Up with Technology on September 12th for the Oregon Society of CPAs.
Chances are you have heard the term “Blockchain” recently, but do not have a clue as to what it means. If you invest a few minutes of your time to read this article, I am confident that you will walk away armed with enough knowledge to have well informed discussions with others about blockchain technology and its potential impact on commerce.
The very first question most people ask about blockchain is “What is it?” I like to reply with the answer “The digitization of trust and truth.” As you might imagine, that generates a number of new questions and typically some awkward facial expressions. Please read on and I will explain.
Let us start with a discussion of centralized versus distributed systems. The best example I can think of to compare and contrast them is printers and scanners. Think about your office for a minute. Do you have one central printer / scanner device that is the primary “go to” resource for your office? Or do you have a more distributed model whereby multiple printers and scanners are distributed throughout the office? If you rely on a central device your office is vulnerable to a malfunction or theft of the unit. That would really cripple your operations until you are able to repair or replace it. On the other hand, if you have a distributed collection of printers / scanners, your risk is significantly minimized. What is the likelihood that all of them will malfunction or be stolen at the same time? It is possible, but highly improbable. Take that example and apply it to server infrastructure and transaction ledgers and you begin to see the foundation of blockchain technology.
Now let us consider the concept of distributed transaction ledgers. I realize that as an accountant reading this article your mind’s eye goes immediately to the traditional general ledger. And that is all well and good. However, broaden your imagination to include a ledger of transactions related to your medical history, or the service and sales of an automobile, e.g. Carfax. Perhaps the ledger is a record of the entire life cycle of an Orange grown in Florida and purchased and consumed in Michigan. Whatever example you focus on, consider for the moment that there is only one single ledger that has a record of all the transactions related to the subject matter at hand. What happens if that ledger is lost, destroyed, or fraudulently altered? Suddenly, your source of truth for that information becomes nonexistent or highly suspect.
Imagine if the ledger was replicated and distributed to many different individuals throughout the world. And they were always kept in sync. Oh, and by the way, you could personally view and audit any copy of this ledger anywhere at any time via the internet. That is the essence of blockchain technology. Transactions are recorded, validated and posted to a multitude of ledgers that are stored around the world. If I have only one ledger I am completely dependent on the honesty and integrity of the person or entity responsible for managing that ledger. On the other hand, if I have 2,000,000 copies of the exact same ledger stored on a distributed network of computers around the world and these ledgers are all identical, I have an extremely high level of confidence that the ledger is a legitimate record of all transactions. Hence, we have the establishment of truth through consensus. Which in turn establishes trust. I hope you are beginning to get a grasp of the concept of blockchain technology.