A blockchain is essentially a ledger - a chain of data blocks, each of which records a single transaction and is linked in chronological order to the one before. Unlike traditional ledgers, all records are permanent, difficult to alter and usually have no central control. Instead, data pis shared and verified by multiple computers in a network. 

“Blockchain is a combination of a number of existing technical components with the aim of creating an infrastructure or ecosystem that is maintained and managed by people who may not know each other, but rely on the underlying technology to give them confidence,” explains William Gee, an emerging technologies specialist and member of the ICAEW Tech Faculty Board. 

The first use case for blockchain was the launch of Bitcoin in 2009, but it’s important to separate the technology from cryptocurrencies. “The most interesting thing about blockchain is that it is not technology – it is a business case,” William explains. “This is a revenue model that incentivises people who do not know each other to collaborate and participate in managing the infrastructure.”

What do I need to know?

Blockchain is already being used in business in two main areas. The first is the emerging virtual assets sector. “The US Securities and Exchange Commission has approved a Bitcoin exchange traded fund, which brings that asset class into the traditional financial market,” explains William. “Around the world, crypto exchanges are being set up to facilitate transactions in virtual assets. Regardless of the issues it brings, a new sector has formed, it is developing – and it is asking for assurance services.”

The second area is where businesses are using the technology in the ‘traditional’ world, for supply chain track and trace, for example, or managing the flow and sharing of documents. “Adoption is on a small scale as firms try out the technology, but things are moving forward,” William says. “So one day, you will come across this in audits, where part of a client’s revenue comes from services supported by a blockchain system.”

Esther Mallowah, ICAEW Head of Tech Policy, agrees that accountants are more likely to come across blockchain and virtual assets in the near future. “There are two sides to it: there’s what clients are doing, which means they need to be aware of it, but there’s also what accountants are doing themselves, and how their activities are going to change,” she explains. “How you conduct an audit today is probably not the same way you would do it on a blockchain. The principles might be the same, but how you go about it and the risks you identify will be different.”

Students are introduced to the technology as part of their ACA training. The syllabus covers the key principles of blockchain, how it operates, and some of the use cases. “With digital assets and the blockchain ecosystem, understanding the fundamentals is really important,” Esther says. “Keeping abreast of developments is a challenge across technology because it’s moving so quickly, so what students need to learn is curiosity and a mentality of continuous learning - being aware of what’s happening and being interested in knowing how that impacts them, their work and their learning.”

What are the opportunities?

The potential for blockchain is huge. “Identity is one aspect - using blockchain to recall certain attributes and credentials,” William explains. “Let’s say you apply it to ICAEW membership: you qualify, and ICAEW sends you a digital token that can be verified and says that you are now a member. Over time, you apply for a fellowship and become an FCA and that milestone is recorded. Then, say you become a registered auditor and get your practising certificate, that’s another credential that gets added on – and then you could use the same thing to digitally sign an audit report. It’s a complete lifecycle.”

William compares where we are now with blockchain to the early days of the internet. “There is a lot of experimentation going on, but we are only at the starting phase,” he says. “What we see today may not be the end game – and it will be a long time before we see what it can do.” He cites the example of Public Key Infrastructure (PKI) - digital certificate technology devised in the 1990s to encrypt data and confirm identity. “PKI is one of the components used in blockchain,” he explains. “Today, nobody talks about PKI anymore, but it’s embedded into all our devices. In the same way, one day people may not talk about blockchain, because it’s an infrastructure element.”

What are the barriers?

Regulation is a key barrier to blockchain really taking off. “The worst-case scenario – but a possible one – is that because of volatility in the virtual assets sector, and regulators not being able to manage all the risks, the whole thing gets banned,” says William. “For the next few years, though, the technology will probably still be there, so it will be a challenge to accountants and firms to handle that particular space.”

For the accountancy profession, the adoption of blockchain raises ethical questions around independence. “Imagine a client has a blockchain with all their transactions. You could do real-time auditing – you wouldn’t even need to ask the client for the data. Wonderful, right?” says William. “Well, if the auditor were to run a node on the blockchain network, then the auditor could be considered as operating the client's system, which would create independence problems.” 

Auditing standards also require auditors to satisfy themselves as to the completeness and accuracy of data provided by a third party – something that cannot currently be done when viewing information on a decentralised system.

Where next?

Issues around regulation will be resolved over time, believes William, and new applications for blockchain will emerge that we don’t yet know about – in much the same way that the internet evolved. “Netflix did not happen on day one,” he says. “On day one of the internet, the discussion was – is it legal to do business online? Where do we pay taxes? Which authority has jurisdiction over the internet? We don’t talk about those issues anymore because they resolved themselves over time.”

Esther encourages accountants not to think about blockchain in isolation. “It’s important to recognise that the real big change is different technologies working together,” she says. “One of the challenges for AI, for example, is deep fake technology – and there are people who think that blockchain and digital identities may be the answer to that.” 

It’s also important to recognise that accountancy and technology can no longer be separated. “I remember when I started working in audit, anything that had the word ‘technology’ got passed to the technology audit team,” Esther adds. “That mentality needs to change - accounting and technology are going to be a lot more closely linked together.”

Going forward, blockchain and digital assets are big areas of focus for ICAEW. “We have a cross-faculty digital assets working party looking at everything from audit to tax,” explains Esther. “We’ll be producing some publications and launching practical resources, and we have a conference coming up in November. We’re hoping that when blockchain and digital assets go big, we’ll be at the front of it.”