CPA Canada recently published Technological Disruption of Capital Markets and Reporting? An Introduction to Blockchain.
The preface sums up the main theme:
- “Blockchain originated as the technology underlying the digital currency Bitcoin but is currently receiving attention for its expanding applicability, particularly within capital markets and reporting. Blockchain-enabled automated processes could significantly affect the way business is conducted and the way information is exchanged and reported in the future if it is widely adopted.
- The use of blockchain technology will bring about changes; whether a change is positive or negative depends on one’s point of view. By embracing the potential of blockchain technology and using it to advantage, the technology could be transformative and innovative — a good thing. Widespread adoption of blockchain technology could also be disruptive and damaging by rendering some business models irrelevant — a difficult challenge.”
The CPA Canada release provides an overview of how it works, and of some current capital market initiatives; for example, the SEC has already approved a plan to issue shares using blockchain technology. It then goes on to set out possibilities for future application. Even in the relatively narrow field of financial reporting, the implications are considerable:
- “Organizations could retain their double-entry accounting systems. In addition, parties to a transaction could record their respective entries in a shared blockchain ledger which would represent the ‘third entry.’ In this way, participants in the transactions would confirm the integrity of the transactions in the shared ledger. This could be beneficial to assurance providers.
- Early-stage organizations such as Balanc3 are building blockchain applications to deliver this type of triple-entry accounting system.
- Smart contracts could be inserted into or replace operational and/or administrative functions affecting internal and external reporting.
- Performance targets and budgets could be translated into smart contracts that would track performance against actual results. New blockchain performance management tools could be linked to performance contracts, productivity reviews and performance bonuses.
- Non-financial reporting such as sustainability reporting could also be facilitated. For example, stakeholders could access manufacturing supply-chain records on the blockchain and trace them from raw materials through to finished products. Emerging blockchain start-ups such as Provenance are already building supply-chain transparency solutions.
- Blockchain ledgers could rapidly aggregate and consolidate financial reports in real time thus reducing month-end reporting delays. Financial statements for executive and board reporting requiring company-wide consolidation could be largely automated on the blockchain.
- Regulators could be provided blockchain access to review transactions in real time.
- Companies could provide investors with access keys that would permit real-time access to financial information. This could enable easy transfer of information into analysts’ financial models and enable drilling down into the details of material transactions. An important caveat would be that rules prohibiting selective disclosures would remain intact and need to be followed. There would need to be appropriate controls and procedures around access keys to enable regulators and others to determine who had access to what information and when.”
Perhaps some of these developments will be considered by the IFRS Foundation, as part of the new focus outlined earlier this year in the feedback statement on the trustees’ recent review of structure and effectiveness:
- “Technology is an area where further research needs to be undertaken. It is difficult to see which of the technological innovations seen today may have an impact on financial reporting and the Standards, and it is even harder to predict where future innovations will go. The Trustees agree that the Foundation and the Board should formalize how they track technological developments, including establishing a network of experts to provide advice on technological issues and their potential impact on the Standards. This network of experts will comprise individuals from a variety of backgrounds, and the Foundation will work with them using a variety of different mechanisms (for example, roundtables and individual meetings)…”
The title of the CPA Canada study, with its somewhat anxious question mark, seems well chosen. The theoretical advantages of blockchain appear clear enough, but it’s not as if all the technological progress we’ve already been living through has been an unambiguous benefit. The political and social unrest in the West speaks to the anxiety caused by economic and social structures that evolve faster than some of the people within them do. With regard to financial reporting, likewise, it certainly hasn’t been conclusively demonstrated that all the improvements we’ve already had have led to consistently superior decision-making by investors, or by anyone really. And to the extent they have, it might be superior decision-making of the kind that ultimately only adds to inequality and erosion of social cohesion.
Still, this is the world we’re in, for better or for worse. It seems likely we may soon be coming across new blockchain-related news every other day; even between drafting and posting this article, I read that “a blockchain platform developed by a group that includes more than 70 of the world’s biggest financial institutions is making its code publicly available, in what could become the industry standard for the nascent technology.” Even if the greater part of the disruption presumably remains at least a few years away, some companies might assess the risks it poses for their established business model to be material, and so to require current disclosure in their financial statements or MD&A…
The opinions expressed are solely those of the author