Do you know how blockchain affects your profession as an accountant?
If you are unsure about blockchain or have no clue where to start learning about it, this article is for you! Many mysteries surround how blockchain works and what purpose it serves in today’s economy. This article will dispel the myths around blockchain and inform you about how it integrates into the world of accounting.
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,” tackles pressing 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.
In this article, we will cover blockchain and cryptocurrency fundamentals, how blockchain works, and what you need to know about its influence on accounting.
Blockchain and cryptocurrency: should you be scared?
The topic of cryptocurrency permeates popular culture, from Elon Musk’s Dogecoin to an episode of the Simpsons where a character creates cryptocurrency. Because of its prevalence in the media, the hype surrounding cryptocurrency grows rapidly. This hype has spurred growth for businesses that do not deal with cryptocurrency!
There’s this company called Long Island Iced Tea Corp. They just unilaterally changed their name to Long Blockchain Corp. They didn’t change their business. They just changed the name, … and the market value tripled overnight.
– Greg Kyte
The opportunity presented by blockchain comes with fear. Much of the technology remains unknown, which builds skepticism. In reality, the opportunity and fear surrounding blockchain and cryptocurrency are two sides of the same coin. Where one person sees something that is volatile and unproven, another can see an opportunity for expansion and growth:
The strength, weakness, opportunity, and threat are really just two sides of the same coin. … Anything that’s threatening you in professional [life] or business can be flipped over. There’s an opportunity there. If you find that opportunity, you can exploit it.
– Greg Kyte
The newness of virtual currency may seem like a threat, but gaining knowledge gives you power over fear. The increasing presence of crypto generates questions—what are the fundamentals of blockchain and cryptocurrency, should you be scared of it, and how does blockchain affect accounting?
The fundamentals of blockchain and cryptocurrency
Every variation of cryptocurrency relies on blockchain. Blockchain is the program that creates the ability for cryptocurrency to be verified and traded. The blockchain establishes a verification process that gives the currency the ability to be used securely on the internet. The relationship between Bitcoin, one of the most popular cryptocurrencies, and blockchain demonstrates how cryptocurrency is mined and traded.
Blockchain is the backbone of Bitcoin because it is highly verified. Every transaction that goes in [the blockchain] is uncontroversial. … It’s verified by a community of miners. … Then, after it’s verified, it’s put into the blockchain system.
– Greg Kyte
Because of the verification process, cryptocurrency becomes virtually immutable once mined. This process requires gathering and filtering immense amounts of data to find the code that becomes the currency. To process the data quickly, miners distribute the work amongst a sizable community. The mining process gives cryptocurrency security because of the number of people working on a single transaction and contributes to the immutability of cryptocurrency:
Let’s say you have 1,000 miners in a specific blockchain community for specific transactions. The only way to undo a transaction in the blockchain is for every single one of those verifiers to go in and back out of their transaction. [If the timer] says it takes 10 minutes per person who verified. [It would] take 10,000 minutes to [back out of that transaction]. It’s not impossible, but nobody has 10,000 minutes to back out one transaction that’s in a chain of transactions.
– Greg Kyte
The timed process results in a competitive market amongst miners. When cryptocurrency transactions are processed, miners compete to be the first to complete the transaction. Even though only one person comes out on top, the other miners who compete to find the transaction verify the winner’s conclusion. As a result, multiple people corroborate the results:
You’ve got two parties that agree to exchange ten Bitcoin. … [They] each independently submit that transaction to the Bitcoin miner community. Once that [transaction] goes out, it goes out to all the miners, and those miners are actually in a race to be the first one to solve a very difficult, highly computational math problem. The first one who can do that with the block of transactions … gets rewarded for their hard work. But at that point, everybody has been trying to solve this problem. [So] they all verify that they had the same transaction.
– Greg Kyte
Once the transaction is verified, the winning miner adds the transaction to the blockchain record. After being added to the record, every computer within the blockchain ecosystem double-checks the transaction’s validity. This process increases the security of cryptocurrency even further by expanding the verification process:
One computer wins the privilege of submitting the block of transactions to the blockchain, and every computer in that blockchain ecosystem verifies the transaction. Once it enters the ecosystem, it becomes an official link in the blockchain. … [After that,] it virtually can’t be changed.
– Greg Kyte
After the computer logs the transaction to the chain, it serves as a record in the future. In addition to establishing the validity of cryptocurrency, the blockchain system also becomes a secure way to access previous transaction records. Every transaction can be accessed as needed for personal recording purposes and in the event parties involved need to confirm that transaction in the future. Ultimately, the blockchain produces a reliable ecosystem for the transfer of cryptocurrency.
Blockchain’s effect on accounting
From the outside, blockchain looks like it can take over different aspects of accounting because of its security and verifiable record. In addition to its security, the ability to automatically create a detailed list of verifiable transactions makes blockchain appear to pose a threat to accounting. However, the threat may not be as severe as it looks:
There is a model that exists that talks about new technologies. … It says that a lot of new technologies like blockchain go through a predictable curve pattern. In the beginning, there’s tons of hype. When the [technology] is at its most hype-worthy point, it’s called the peak of inflated expectations. … If you follow this curve, after the peak of inflated expectations, it goes down a very steep curve to what they call the trough of disillusionment.
– Greg Kyte
Cryptocurrency continues to expand and remain shrouded in the mystery of its complexity. Many accountants already use its complexity to their advantage. Opportunities for blockchain specialties have developed and give accountants the chance to dive into new technology and learn about the possibilities cryptocurrencies have to offer:
You can go to the Journal of Accountancy and search blockchain. You can find that there are people who are taking advantage of the [situation]. They’re becoming experts in blockchain technology. There are people who desperately need more accountants with expertise in blockchain, and they’re paying [accountants] a lot of money to do the work behind the scenes to set up blockchain technologies.
– Greg Kyte
Because of the amount of research needed to be knowledgeable about the subject, cryptocurrencies have already created an expansion in the field of accounting. These specialized positions provide options to integrate blockchain into more traditional accounting methods. By blending current techniques with blockchain, the future of accounting and blockchain can be symbiotic.
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 very thing that makes blockchain intriguing, its complexity within the system, could keep it from having a significant 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 the complexity of blockchain and its 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 Two and Part Three of this webinar article series.
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