Blockchain provides sound building blocks for business.
The Future of Finance research conducted by The Chartered Institute of Management Accountants (CIMA) revealed an urgent need for businesses to embrace digital technology.
Digitisation is the future. Although we might be in the early days of this technology, its potential for changing the world in which we live and work is irreversible. Finance professionals must know how to utilise the potential of this new technology for the benefit of the business as a whole and its potentially transformative impact on all accounting processes.
What is blockchain?
A blockchain is a distributed ledger that digitally records the full history of a transaction. It stores this information in ‘blocks’ of data that are linked or ‘chained’ together. At its simplest, a blockchain is a database – one that’s shared or distributed among participants so that all can confirm, maintain and see the same record of events in close to real-time.
How does blockchain work?
Key to understanding blockchains is to understand how three major problems with ledgers of this sort are overcome: authenticity, overspending and fraudulent transactions. All three of these would be avoided by having trusted intermediaries in standard systems. The ledger itself is stored on some or all of the computers in the network and consists of various transactions between network members. Making a transaction over a blockchain involves broadcasting a message to the network that a given asset should be transferred to a given account.
Blockchain and accounting
Essentially, blockchain is an accounting technology. However, for it to become an integral part of the financial system, it needs to be further developed, optimised and standardised. But, once adopted, it has the potential to enhance the accounting profession by reducing the costs of maintaining and reconciling ledgers while providing absolute certainty over the ownership and history of assets. Blockchain could help free up resources to concentrate on strategic planning rather than recordkeeping. This is why accountants need to be up to speed when considering the impact of blockchain on their industry and to advise on its adoption.
Benefits of blockchain for accounting
- Visibility and transparency The distributed ledger database maintains records in ‘blocks’ that can be seen by all blockchain systems’ users in near real-time;
- Security Supported by cryptography and digital signatures because all nodes validate a transaction and contribute to consensus-based assurance, all participants can trust the data on the blockchain;
- Shared authority No individual owner is responsible for a record’s integrity, meaning resilience is assured;
- Immutability Entries cannot ordinarily be altered or edited, sustaining a permanent, indelible record;
- Embedded controls It’s easy to automate processes through smart contracts; and
- Ease of reconciliation All participants work off the same data set.
What kind of solutions can blockchain provide to our continent?
In Africa, blockchain could provide solutions to various challenges, such as transparency and decentralisation, for both the private and public sectors.
Positive developments can already be seen in South Africa, Nigeria, Kenya and Uganda, where the finance sector is taking a global lead on blockchain experimentation. For example, BitPesa enables small and medium-sized enterprises (SMEs) in Kenya to pay their suppliers in other countries quickly and cheaply. Instead of relying on several banks and other middlemen to move yen into US dollars or euro and then convert those out into African currencies such as the Nigerian naira or the Ghanaian cedi, the licensed BitPesa uses a combination of the bitcoin blockchain and other services to create new currency pairs. BitPesa is revolutionising ancient, but also highly opaque, payment systems such as bokeh in Nigeria and hawala in Malawi, which were often seen as enabling money laundering and even terrorist financing.
In addition, Switzerland-based cybersecurity company WISeKey partnered with Microsoft to help the Rwandan government develop blockchain-based initiatives. The partnership is part of an ongoing collaboration to turn Rwanda into a key player in digital transformation by providing citizens and businesses access to policy, technical and business expertise. This increasingly open, transparent and publicly accessible system could fundamentally change value-exchange, assets, enforcement of contracts, and data sharing processes across all industries, and could ultimately boost the country’s economic growth.
These are only a few developments that show that the private sector and governments are taking blockchain seriously in Africa.
Meanwhile, the adoption of cryptocurrency has been met with scepticism in Nigeria, even though it is expected to address budget-related corruption if applied in the development of budget-tracking mechanisms. Nigerian banks and financial institutions were encouraged to stop using cryptocurrency. Furthermore, transactions using this kind of technology are not seen as legal, and banks and financial institutions are expected to ensure that existing customers that transact in Virtual Currencies should have Anti-Money Laundering/ Combating the Financing of Terrorism (AML/CFT) control.
Tim Simba is Regional Vice President of CIMA Africa, www.cimaglobal.com.