Post on 27-May-2020
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technology
business
cryptography
blockchaincryptocurrency
transactiondigital currency
bitcoin
contract
virtualexchange
data
payments
electronic
coin
litecoin
internet
internet technology
business
market
financial
cryptography
network
ledger
business
payments
virtual
transaction
network
paymentsmoney
contract
ledger
AN EXL WHITE PAPER
Blockchain: The Next Big Digital Disruptor for CFOs
Sanjeev BhattF&A CD CoElookdeeper@exlservice.com
Blockchain technology is establishing itself as the next digital disruptor in transaction recording.
By 2022, a blockchain-based business will be worth $10 billion! It is expected that blockchain-based
systems will be used across many industries for reducing transaction costs, eliminating manual
validation and streamlining business processes. - Gartner
CFOs must prepare to recognize prospects,
evaluate the challenges and strategize
their move to tap potential blockchain
possibilities.
Blockchain: Promises beyond cryptocurrency technologyRecently, a new Japanese law effective
April 1st, 2017 categorized Bitcoin, a
cryptocurrency, as a legal payment option
within the country. Other countries are also
not far behind, assessing and exploring
ways to leverage this new currency system.
While the full potential and long term value
of cryptocurrencies has yet to realize, many
think the underlying technology, blockchain,
is more important than the currency itself.
Blockchain technology certainly has greater
business-impacting potential. While many
of its use cases are still in their infancy, the
use of blockchain in accounting is quite
promising. From enhancing bookkeeping
to simplifying compliance with regulatory
requirements, there are possibilities
everywhere.
Blockchain: From double- to triple-entry accountingIn simple terms, blockchain is the underlying
technical infrastructure powering Bitcoin
and other cryptocurrencies. Currently, most
people use a trusted middleman such
as a bank or clearinghouse when making
financial transactions. But blockchain
allows consumers and suppliers to connect
directly, removing the need for a third party.
A blockchain is an online public ledger that
uses data structures to simplify the way
people or organizations transact. It enables
the users to manage the transaction ledger
of all bitcoin transactions that have ever
been executed securely and without the
help of a third party.
This ledger keeps the details of the new
bitcoin and previous bitcoin ownership.
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Blockchain: The Next Big Digital Disruptor for CFOs
In a conventional system, such a ledger
is centralized. This is not the case with
bitcoins, as the transaction happens on
internet and everyone has a copy of the
ledger. This also means that everyone can
see the balance of all accounts in real time,
making the data almost tamper-proof.
Additionally, these transactions are
conducted over a decentralized peer-
to-peer network. The decentralized or
distributed nature of the blockchain ensures
that there is no single controllership of
the transaction data. The blockchain data
is accessible to all the participants in the
network. Every 10 minutes, all transactions
are recorded in a virtual block, and a new
block is created, linked to all the previous
blocks in the chain. The blocks are visible to
both parties involved in the transaction.
How a blockchain works
A wants to send money to B
The transaction is represented online as a ‘block’
The block is broadcast to every party in the network
Those in the network approve the transaction is valid
The block then can be added to the chain, which provides an indelible and transparent record of transactions
The money moves from A to B
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Blockchain: The Next Big Digital Disruptor for CFOs
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To use modern banking as an analogy, the
blockchain is like a full history of banking
transactions. Blocks, meanwhile, are like
individual bank statements.
In conventional B2B trades, transactions
between parties require raising PO, settling
through banks and working out VAT.
Utilizing blockchain methodology, the
need for every party to create transactions
in their own accounting systems would
be eliminated. The blockchain network
would validate an order in real time and
upon receipt, everyone connected would
be settled as per their standard terms.
Accounting entries could be pre-reconciled
and auto-posted.
This can also lead to a triple entry
accounting practice, the premise on which
Reduction in multiple reconciliation
Most of the corporate finance
transactions—transferring shares or
funds and signing contracts—have
several tracks managed by various
stakeholders. Those tracks are generally
interdependent but unconsolidated,
leading to redundant and replicated
ledgers. A blockchain-based solution can
provide a single shared ledger model
that is faster, immutable and possesses
verifiable transactions properties with
full audit trail and extended assurance
capabilities.
Potential uses of blockchain in financial sector
Streamline cross-country payments
Cross-county payments are generally
expensive than domestic payments, as
more banks are involved to complete
the transaction with each bank taking a
fee. Additionally, there is also a high risk
of critical information being lost about
the payment, as payment details are
transferred across multiple banks and
countries. Blockchain-based solutions
can reduce the payment duration and
simplify this process by cutting out
many of the traditional middlemen.
Also, it makes money remittance more
affordable.
Blockchain: The Next Big Digital Disruptor for CFOs
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blockchain is based. With blockchain, there
are three parties to any digital transaction:
payer, receiver and blockchain middle
intermediator. Each holds a copy of the
same transaction receipt. This transaction
receipt within the blockchain network
becomes vitally resilient because it is
cryptographically authorized by the payer
and cryptographically signed off by the
mediator. It characterizes such robust
evidence that the facts on record become
practically undisputable.
Blockchain can potentially maintain and
prove the integrity of digital accounting
reports for companies. It can also simplify
and speed up work for independent
public auditors by providing a common
verification platform for the accounting
manager, government regulatory agencies
or other parties.
The CFO’s dream: One version of the truthFor CFOs, the key advantage of blockchain
is that every entry is authenticated and
confirmed by the network and can never
be altered. The distributed and transparent
nature of blockchain makes financial data
owned by various teams open for everyone
in the network to view and verify. This
can speed up and reduce complexity for
checking and approving transactions. CFOs
can have access to a single source of truth.
The real-time nature of blockchain
provides CFOs with the ability to review
transactions between parties as they
happen. Digital dashboards powered
by strong analytical tools can provide
both micro- and macro-visualizations of
a company’s finances. Centralizing this
information has the potential to reduce
costs and speed up settlement times,
which can improve liquidity and improve
operational efficiency for expense or
revenue forecasts, identifying transaction
irregularities or other tasks.
Blockchain: Growing prospects for CFOsAccounting, auditing and compliance create
significant expenses for businesses. For
instance, fines alone have cost the banking
industry more than $200 billion since 2008.
Blockchain-based accounting could help
prevent these fines.
Blockchain can help minimize any conflicts
of interest during an audit. Usually, the
interest of the auditor can depend on
the dynamics of whether they are hired
by the CFO or another party. Blockchain
Blockchain: The Next Big Digital Disruptor for CFOs
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offers an independent, automated and
standardized way of auditing that minimizes
and mitigates the chances of any biases
affecting the audit’s outcome.
Conventional manual auditing comes with a
number of accounting issues, redundancies
and complexities. Integrating and aligning
blockchain technology with the internal
mechanism of a business would help speed
up the pace of these operations. Also,
gradually reducing the need for manual
auditing would result in a significant amount
of cost cutting in the accounting function.
As the cost of audits were found to rise
every year between 2012-2015 by between
3.8% to 5.5% , reducing the need for these
increasingly expensive audits would save
companies money over time.
As blockchain technology provides real-
time access to transaction cash flows,
its distributed data also authenticates
and confirms every entry by default.
CFOs would have the power to track
every penny in their system on a second-
to-second basis. This can help them
understand and address spending
or payment challenges, which would
eventually help further streamline the
processes. Since blockchain provides a
secure, decentralized ledger immune
to tampering and hacking, employee
theft and fraud would be minimized
because no one can alter the distributed
ledger without cryptographic security
permissions. Greater transparency and
a decentralized agreement ledger allow
discrepancies to be identified immediately
and the source of fraud traced to the micro
level. More broadly, embedding blockchain
technology would enable CFOs to tighten
accounting processes, generate better
data insights, improve policymaking and
enhance treasury management.
Blockchain: The Next Big Digital Disruptor for CFOs
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Blockchain: Challenges before the big takeoffA transparent, secure, and completely
digital ledger promising an almost flawless
audit trail can address many challenges
of the CFO, but adopting this technology
currently poses some difficulties.
One quick search on the internet and you
can find a wide variety of players offering
blockchain solutions that are either in the
proof of concept stage or somewhat more
evolved that can be commercially rolled
out in coming future.
Despite the tremendous potential
blockchain technology holds,
governments and regulators still need
to put in a framework that lays down
the ground rules. Until these regulations
provide companies with a sense of
security regarding their use, expecting
all businesses and financial institutions to
adopt blockchain in its current form and
join a true distributed network is a distant
dream.
In the public sector, this would require both
cultural and process changes. Moving away
from the current centralized approach to
a decentralized environment is a marked
shift in the status quo that will take some
getting used to. IT, cyber security and
finance teams must collaborate on better
understanding the blockchain framework
and how it could fit into current finance
processes. Even though there are some
players already in the market with promised
offerings around blockchain, it would most
likely take a significant investment of time
and resources to implement, manage and
stabilize customized blockchain technology
solutions across the finance sector.
The way forwardAlthough it is early for many businesses
to think about the practical implications of
blockchain on their day-to-day business
operations, this technology will be exploited
for commercial gains in the future.
As with all disruptive technologies, a first-
move advantage is useful only if coupled
with a realistic approach. CFOs should
take it upon themselves to understand
the implications for their business. This
includes seeking advice or establishing a
cross-functional team that includes IT, audit,
compliance, accounts and other key parties
to brainstorm and identify blockchain
opportunities.
While the widespread adoption of
blockchain may still be a few years away, its
use is well on its way to becoming a reality.
Blockchain: The Next Big Digital Disruptor for CFOs
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