​Bring on the Blockchain

The technology behind Bitcoin is poised to be a force across many industries.

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​Blockchain is breaking out from Bitcoin's shadow to take on financial, health-care, industrial, and other applications. Think digital payments, smart contracts, medical records integrity, and intellectual property control.

Biggest thing since the internet? Who knows? But it's expected to be disruptive, even for auditors.

"Of all the emerging technologies we're currently seeing, blockchain has the potential to have the biggest impact on businesses and society at large," says Ron Hale, chief researcher at Cooraclare Institute and author of the ISACA research report, Blockchain Fundamentals. "Enterprises are increasingly looking at how they can adopt this technology and revolutionize how they deliver products and services."

Best known as the underlying technology for Bitcoin, blockchain keeps track of digital records on a peer-to-peer network. The chain consists of a series of blocks that record current transactions among users of that network. Each completed block attaches to the chain in chronological order so that the blockchain becomes a history of all transactions.

On the financial side, a blockchain is a distributed ledger. Traditional financial ledgers are centralized. Transactions are sent to a designated person or authority, who records them into its ledger.

Blockchain's distributed ledger turns that model on its head. As Bitcoin has demonstrated, the ledger is shared publicly across the network of users, who each enter transactions and sign them through encryption.

That's just one of its features, according to an ISACA Tech Brief, Blockchain Basics. Blockchain can cut the cost of journaling transactions for record keeping, and it can log and validate transactions much faster than with a centralized ledger, the paper notes. For example, blockchain could save financial lenders up to $20 billion each year in settlement, regulatory, and cross-border payment costs, the Spain-based investment fund Santander InnoVentures estimates.

According to a 2016 survey of 500 financial and insurance industry professionals from around the world, 22 percent of respondents expect that within five years it will be common for consumers to use blockchain wallets to hold most of their financial assets. Fifty-five percent predict it will happen within 10 years and 71 percent say it will be common within 15 years, according to the survey report, The Future of Retail Financial Services (PDF). The survey was conducted by Marketforce Business Media on behalf of technology services provider Cognizant and sales and marketing technology vendor Pegasystems Inc.

This radically different approach to financial transactions could have a disruptive impact on financial reporting and auditing, U.S. Public Company Accounting Oversight Board (PCAOB) member Jeanette Franzel told attendees at Baruch College's Financial Reporting Conference held in May in New York. She said the PCAOB is studying how blockchain could affect audit standards, inspections, and oversight.

"Certain technologies, such as robotics, artificial intelligence, and distributed ledger technologies, also known as blockchain or distributed database technology, have the potential to disrupt markets and information-sharing, which could also cause disruption to financial reporting and auditing processes," she said.

Audit firms already are building their blockchain capabilities. Deloitte announced in February that it had completed a project to demonstrate that audit standards and protocols could be applied to providing assurance on blockchain transaction data and infrastructure. "As this technology evolves, it's only a matter of time until our clients tell us they are moving portions of their business onto blockchain infrastructure," says Will Bible, a partner with Deloitte & Touche LLP in Parsippany, N.J.

Blockchain isn't only about financial transactions. Organizations can apply it to fight identity theft and f​raud, for example. The ISACA paper notes that IBM is working with banks in Canada to use blockchain to validate a person's identity. Indeed, 42 percent of respondents to the Future of Retail Financial Services survey expect consumers will be keeping all of their personally identifiable information in a blockchain wallet within five years. Additionally,  organizations can use blockchain to track and authenticate the ownership of physical assets.

Along the same lines, organizations can use blockchain to facilitate smart contracts. These contracts are computer code that function to enforce contractual agreements. They work with blockchain similar to the way a video or photo attachment works with email. For example, smart contracts could enable an insurance company to automate some claims, according to an article on the Tech In Asia website.

Moreover, blockchain could improve security over records and transactions because it is a permanent record that can never be erased, the Future of Retail Banking report notes. The ability to facilitate anonymous transactions, while ensuring identity, is among the features that could make blockchain a force for innovation, according to the Blockchain Fundamentals report. Another is the potential for eliminating third-party attestation requirements because blockchain transactions can be recorded in a trusted manner.

On the other hand, the Blockchain Basics paper points out that blockchain is a new technology with few large implementations, so the limitations of the technology aren't known yet. Despite promises of cost savings, the potential variability of transaction costs is another risk. Moreover, organizations must assess security risks, including access control, encryption strength, and the security of the nodes in the blockchain network. Helping their organization understand those risks may be a way internal audit can contribute to seizing the opportunities blockchain presents.


Tim McCollum
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Tim McCollumTim McCollum<p>​​​​Tim McCollum is <em>Internal Auditor</em> magazine's associate managing editor.​​</p>https://iaonline.theiia.org/authors/Pages/Tim-McCollum.aspx

 

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