While blockchain technology reaches its tenth birthday, many CPAs and accountants continue to ask how this disruptive technology will impact their practices and their customers.
I think the best starting point is the understanding of a "smart contract", a relatively older concept that is taking hold thanks to the blockchain. Smart contracts were born in the mid-1990s during the appearance of purchases and sales of items on the Internet. Nick Szabo, a computer scientist and cryptographer, has designed smart contracts for the evolution of contract law in the new era of e-commerce.
Szabo had planned contracts converted into computer code that could be maintained, monitored and executed by the networks on which they resided. The missing piece of these automatic contracts was, of course, blockchain.
How smart contracts differ from traditional contracts
A standard contract outlines the terms and conditions of the contractual relationship, while an intelligent contract not only defines the rules and penalties of the agreement, but also imposes the terms and conditions. An analogy of the common smart contract involves comparing its technology with a vending machine.
Rather than contacting an intermediary, giving them money and waiting for your product, put money in the vending machine or in the blockchain network and the ownership of the product is automatically associated with your account on that blockchain.
Here is a broader example: consider a global carrier that we call Carrier A picking up a shipment of red wine from a vineyard in Argentina. We will call this vineyard. Supplier A. Carrier A warrants Supplier A that its direct shipment to the port of Houston, USA, will be subjected to control of the temperature of the entire route.
In fact, these two have an intelligent contract that establishes that the temperature readings will be collected every three hours from the sensors inside the container and that if two consecutive readings do not fall within the acceptable range between 45 and 70 degrees Fahrenheit , carrier A will pay a $ 300 penalty for Supplier A, with an additional penalty of $ 300 for each subsequent reading outside of the agreed range.
As the container moves along the almost 7,800 nautical miles from Buenos Aires to Texas, the temperature sensors inside the container automatically collect the readings every three hours, as designed and reports the internal temperature to a tracking system that records the readings in his blockchain. Upon arrival in Houston, the tracking system activates the smart contract, which reviews all the temperature readings for shipping.
If the wine remains at acceptable temperatures, the smart contract does not do anything else. However, if the smart contract finds that the shipment does not fall within the agreed parameters, it makes an automatic payment from the A manager's account to the A supplier's account.
This process seems similar to how a standard contract between a carrier and a supplier would work without blockchain technology, so what is the impact of blockchain compared to smart contracts? Here are five of the biggest advantages:
Lawyers will continue to play a role in contractual negotiations, perhaps less so than in the past, but with smart contracts, a broker, lawyer or other intermediary is not necessary during the execution of the contractual relationship. This also eliminates the possibility of manipulation by third parties since the execution is automated from the network.
In addition to removing intentional manipulation, the automatic execution of smart contracts removes the impact of possible human errors during manual compilation and processing of module loads and other documentation.
The encrypted and unchangeable nature of blockchain technology ensures that the details of the contract and transaction are encrypted and can not be changed after the fact. All stakeholders have access to the data they need on the shared ledger with confidence that it has not been manipulated. As a result, the loss or misplacement of the documentation is impossible.
If you've ever lost your wallet, panic usually follows. It is necessary to identify the documents that prove their identity and residence to replace the ID issued by the government. With your replacement ID, you can prove ownership or right to, your resources. Smart contracts that associate asset ownership with a blockchain provide inherent resilience to generalized accounting systems.
Manual processing of traditional contracts requires a large amount of time, documents and communications back and forth to be completed, not to mention the challenge of conducting business within working hours, although operations may extend across multiple time zones timetables. Contractual activities automated by the IT code of smart contracts reduce the time required to complete the contractual agreements.
Smart Contracts challenges
Beyond the obvious challenges of the smart contract, including errors in the code that could cause unwanted consequences and vulnerabilities exploited by evil people, coding every possible outcome of the business transaction could be an almost impossible task because some results could be unknown.
Likewise, some traditional contracts are designed with intentional flexibility, allowing human interaction or judgment during the execution of the contractual agreement. Flexibility is difficult to automate, so these contracts can be poor candidates for smart contracts.
Off-line events can be difficult to plan and difficult to program in a smart contract. For example, a rental contract for a beach vacation condo may be set up for self-execution based on the date and time of the rental agreement.
But what if a natural disaster seriously damages the property? It is no longer habitable, but the smart contract transfers the rental rate from the owner to the owner of the property.
As with other blockchain applications, the lack of standards that define best practices for the development of smart contracts is one of the biggest challenges of technology. Supervision does not exist on a global or more local point of view, with many discussions about how, or if, governments should be responsible for regulating these contracts. And there are currently no arbitration standards for the management of disputes over smart contracts.
Another challenge: the lack of guidance on where the transactions of smart contracts end up in the budget. Are invoices of smart contracts? Should smart contract transactions be included that automatically exchange criptoassets on blockchain in debits and credits, or could they be escrow accounts?
Going forward: the opportunity for accounting professionals
The PwC Global Blockchain Survey 2018 shows that 84% of the companies interviewed started their blockchain journey; 57 percent have projects in development or production. While financial services are the industry at the forefront of blockchain use, progress is made in production, supply chain and health care.
Walmart, Costco and Tyson Foods collaborated with IBM, forming the largest global food supply chain collaboration project. The group expects that smart contracts will be a tool to automate the governance of food supply chains, as well as a tool to facilitate the commercial relationship between the various participants in the system.
Companies of all sizes pay close attention to the shared value of their blockchain solution, ensuring benefits for all along the supply chain, from farmers to retailers. These companies currently leverage their audit firms for business consulting services over traditional compliance offerings.
As the upstream implementation triggers the wave of interruptions throughout the supply chain, companies that develop specialization in blockchain technology and smart contracts will now have the opportunity to drive these customers. Furthermore, a discussion on blockchain in public accounting typically includes the impact of technology on the audit.
Specifically, the inherent transparency of the blockchain provides information on both sides of a transaction for all participants and, potentially, for regulators. The verification of the transactions takes place before they are added to the immutable ledger, so it seems that blockchain can automate parts of an audit.
Smart contracts offer an opportunity for auditors. Today, intelligent contract verification focuses on the accuracy and security of the contract code. A technical expert examines the code to identify bugs or vulnerabilities, ultimately stating that the code works as intended. This type of audit is essential to ensure the correct functionality of the smart contract.
However, a technical check of the code does not guarantee that the intelligent contract correctly applies the business logic relevant to the industries of the participants. An independent attestation of the functionality of the smart contract provides the customer with the necessary security to make Blockchain become part of our company landscape.
Blockchain technology has come a long way in just 10 years. Although challenges remain for technology, interest and investment continue to increase.
The technology has evolved from a distributed registry designed to track Bitcoin transactions to a platform on which new transparency and automation tools are built. Because customers rely on accountants to be their trusted business advisors, we are responsible for educating and preparing these new blockchain break tools.