Are you aware of the way blockchain impacts the accounting profession?
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If the thought of cryptocurrency and blockchain brings up feelings of uncertainty, this article is for you! The unknowns surrounding blockchain may seem daunting, but they are nothing to fear. The limits of blockchain and the scope of its impact on accounting may not be as impactful as you think.
We here at Gusto are proud to team up with CPA Academy to shed some light on blockchain. The informative webinar, “How Blockchain will Destroy the Accounting Profession: It Won’t,” explains the issues of blockchain under the guidance of Greg Kyte and our very own Caleb Newquist.
Greg Kyte is the founder of Comedy CPE, which offers professional development with a comedic twist and has been named in Accounting Today’s “100 Most Influential People in Accounting.” Caleb Newquist is the Editor-at-Large at Gusto and the founding editor of Going Concern.
This article will cover the impact of blockchain, how blockchain transactions work, and what you need to know about its influence on accounting. Let’s get started!
The impact of blockchain in accounting
When you think about the world of cryptocurrency, the names are the first things that stand out. Dogecoin, Potcoin, and Coinye West are just a few of the clever, pop-culture-based names of different cryptocurrencies. Blockchain may not stand out as much as the names, but it is vital to cryptocurrency’s existence. So what is blockchain, and how does it interact with cryptocurrency?
The simplest definition of blockchain is the ledger that records cryptocurrency. Blockchain creates a record that authenticates and tracks the currency as it changes hands. When the program records transactions, those transactions are made public to every participant within the blockchain ecosystem. As a result, blockchain builds the auditing process into its programming:
There’s authentication that happens with every transaction. When you go in as an auditor (if you’re doing any assurance work), a lot of what you’re trying to do is authenticate that the transactions are listed in the accounting software. That those [transactions] were true, valid transactions that happened. That already happens within the blockchain.– Greg Kyte
The anonymity of cryptocurrencies creates much of the draw to their use. As a blockchain logs transactions, the only visible data is the record of the currency’s transfer. Because of this, you can discreetly use blockchain for transactions:
All the ledger says is that … one party transferred Bitcoin to another party, and they both agreed on it. It doesn’t say why they did it. … That’s nobody’s business at all. When you have this blockchain, you have it for very specific things. In this case, it’s an external journal [that] only shows the [transactions].– Greg Kyte
The rapid growth of cryptocurrency constantly pushes tax regulations to match the rate. To keep up, the government is constantly passing laws surrounding the handling of cryptocurrency. These new tax regulations have developed a new specialty for accountants’ focus:
Bitcoin, as something that rests on blockchain, is definitely not destroying our profession. It’s actually creating jobs in our profession because there are people who need to know cryptocurrency. They need to know Bitcoin. They need to know [about] blockchain. Those people have value to customers because of their expertise in those areas.– Greg Kyte
There will always be a need for accountants in the world of finance, and with the growing prevalence of cryptocurrency, questions about the functionality of blockchain arise. How can blockchain be used in accounting, and what are its limitations?
How does blockchain work, and what are the limitations?
When crypto transfers occur, both parties have to give consent to the transfer. The blockchain logs the transfer. After the blockchain logs the transfer, both parties gain viewing access to the log. This process creates secure transfers within the blockchain’s respective community.
However, blockchain’s record-keeping process is its strength and its weakness. Blockchain cannot create detailed records accounting for the specific reasons behind the transaction because it does not classify why a crypto transfer happens. The lack of details surrounding transfers develops many limitations to the blockchain.
Blockchain lacks a double entry system
When a transaction occurs, both parties contribute to the record’s creation, resulting in a double-entry system for each transaction. However, each party only has access to their side of the data:
There are several limitations to blockchain. One of the big [limitations] is that it’s not double-entry. Meaning, if you’re looking specifically at blockchain, it’s double-entry but not for [the individual]. It’s for [the transaction].– Greg Kyte
Because the parties involved can only see their side of the transaction, the transaction information lacks the data needed to exist within accounting records practically. As a result, there is difficulty integrating cryptocurrency transactions into accounting software.
Blockchain does not define the value of a transaction
When crypto transactions log within a blockchain, the reasons behind the trade are not recorded. Consequently, blockchain creates problems for analyzing how long the transfer will retain value. The lack of information surrounding the purpose of transactions produces complications defining the transaction as capital or expense:
If I’m just talking about my internal recordkeeping, there’s nobody out there who’s going to say whatever I bought with my Bitcoin should be capitalized or expensed. That’s a decision I have to make that nobody else is a party to other than my auditors. … Auditors still have to come in and make sure I’m not screwing up the books because there are no external parties.– Greg Kyte
Since blockchain transactions do not define the reason for a transaction to retain anonymity, the reason behind transactions becomes challenging to classify. The minimal information results in the need to log the transactions outside of the blockchain and leads to subjectivity problems.
There is no subjectivity within blockchain
Blockchain also suffers from accrual limitations because there is no subjectivity with blockchain. When cryptocurrency changes hands, it simulates a cash transaction. This simulation creates a problem because defining why a transaction occurs is vital to assess its value correctly:
We need auditors to come in and make sure things were valued correctly. Was it classified properly? Was that supposed to be short-term or a long-term liability? Is it a current asset, or is it a fixed asset? Those are the classification things that blockchain doesn’t do automatically.– Greg Kyte
The lack of subjectivity limits the ability of currently using blockchain as a primary system for accounting. Without the proper information to classify why the transaction occurred, each transfer needs to be recorded separately from the blockchain to define why the transaction occurred.
Blockchain transactions are hard to verify
Another limitation to blockchain lies within the way cryptocurrency is mined. The process to verify transactions consumes a significant amount of time and computing power, and each transaction has to be verified by its respective data-mining community. Consequently, miners focus on large quantity transactions, which makes it difficult to implement crypto on small scale:
One of the big things for blockchain is that [it is] a community of miners. So, we have a transaction. We submit it to a miner community. The miners then verify it. … There’s not going to be a huge group of people that want to verify my transactions for a little business.– Greg Kyte
People who deal in relatively small amounts of cryptocurrency do not take priority when verifying transactions. As a result, small transactions lack the support needed to effectively use crypto for general use.
The classification system and verification process keep cryptocurrency from practical use. These limitations keep blockchain from being used as a comprehensive substitute for auditing processes and current accounting software. Ultimately, blockchain is useful as a supplement to established accounting systems.
Learn more about the impact of blockchain in accounting
As the world of blockchain and cryptocurrency continues to evolve, its influence will grow as well. However, its effect will ultimately be determined by its practicality. The complexity within the system and the lack of subjectivity could keep it from having a large impact in accounting:
I think there are limitations of [blockchains] actually being able to be implemented. … The idea that it’s really going to be a huge tectonic shift within our profession is very, very small.– Greg Kyte
If you want to learn more about blockchain’s influence on accounting, check out the entire webinar here. Also, if you want to learn more about the world of blockchain and cryptocurrency, be sure to check out Part One and Part Three of this webinar article series!
Our mission at Gusto is to create a world where business owners can have peace of mind, a great workplace environment, and personal prosperity. Be sure to look into our People Advisory Program to learn how you can train your team to reach its potential. We also provide a partner blog full of resources for all your advising needs. Visit our Gusto for Accountants page for more information on utilizing people-based accounting within your firm.