In a post a few days ago, I mentioned that someone was creating a "triple-entry accounting system". They point out three key pieces to that system:
- InterPlanetary File System (IPFS)
Those three things might be "technologies" or "implementations of technologies". But I don't think that those are the pieces of the puzzle. Or, there may be more than three pieces. For example, Ethereum is one of many blockchain and other supporting technology implementations.
One of the fundamental pieces though is the idea of a digital mutual distributed ledger. (I have heard "distributed ledger" and "mutual distributed ledger" and "digital ledger" used interchangeably. I will use the term digital distributed ledger.)
So what is a digital distributed ledger? A digital distributed ledger is an indestructible and uneditable decentralized computer record, or ledger. It provides a full and complete history of transactions in that ledger. Ledgers can be as public and open or private and limited as the use case demands. Ledgers can be permissioned or permission-less in determining who can add new transactions. Different approaches can be used to determine how new transactions are authorized (proof-of-stake, proof-of-work, consensus, identity mechanisms) before they can update the ledger. Ledgers can be interlinked with one or more other ledgers.
The key innovation that enables computerized digital distributed ledgers is the blockchain technology. Blockchain technology is used to maintain what amounts to a continuously growing list of translational data records hardened against tampering and revision, even by operators, using advanced cryptography (basically, cryptographic mathematics). As Gabriel Tumlos of KPMG put it in his paper Blockchains, Distributed Ledgers in Finance and Accounting, "Blockchains introduced a trust-minimizing transactional platform that all but eliminates the need for a vulnerable third party and allows accounting systems to take their logical next step."
What can digital distributed ledgers be used for? This video mentions the following use cases:
- Regulatory records
- Delivery records
- Chain of custody
- Property titles
- Know your customer
- Digital rights management
- Loyalty management
- Motor insurance
- Proof of authenticity
- Account portability
- Anti-money laundering
- Peer-to-peer lending
- Personal insurance
- Corporate credit
- Trading records
Don't limit yourself by thinking that a "transaction" is an accounting transaction such as an invoice. While transactions can be recorded, so can events, circumstances, and other phenomenon that affect, say, a business during a period. That sounds a lot like the sort of information from a financial report. A report is a transaction. The "payload" of the transaction is the information in the report itself. XBRL-based digital general purpose financial reports, say to a regulator like the Securities and Exchange Commission, are really transactions that hold complex information structures about the financial condition and financial position of an economic entity.
What XBRL brings to the table is an ability to agree on and document the relations between the reported facts in the complex transactions we refer to as financial reports. But XBRL can also be used to make sure that smaller transactions that go into these ledgers adhere to agreed upon business rules. This keeps information within those digital distributed ledgers correct.
If digital distributed ledgers are used to their full potential, it could enable a fundamental shift in the way economic entities transact business with one another. How will this impact the role of accountants and auditors? Time will tell.
Here are some additional resources useful in understanding computerized digital distributed ledgers:
- Mutual distributed ledgers:
- Unblock the shared economy - Growing trust in mutual distributed ledgers – such as the Blockchain technology underlying Bitcoin – will change financial services for the better: Three page concise overview of what mutual distributed ledgers do.
- The Digital ledger landscape: This is a 70 slide presentation that provides a lot of details about distributed ledgers.
- InterChainZ: Sharing Ledgers for Sharing Economies: This is a 5 minute video that explains distributed ledgers.
- Crash Course on Mutual Distributed Ledgers (BlockChains):
- Rubix, and initiative by Deloitte: Part of Rubix appears to be "blockchain as a service".
- How to Implement Block Chain and Distributed Insfrastructure in Financial Services: Blockchain’s and distributed ledger technology’s potential to make ledgers more transparent, trustworthy and efficient leads to suggestions that it can possibly revolutionize financial services. But applying the blockchain within each firm’s context is complicated, and it is as yet unclear what business needs, if any, the blockchain will truly resolve. Ernst & Young explains the blockchain’s potential to change financial services, explores possible applications and describes the issues worth considering when applying the technology.
- Distributed Ledger Technologies
- EY, Blockchain reaction: Tech Plans for Critical Mass
- A brief history of blockchain