Faith Ngwenya | Technical and Standards Executive | South African Institute of Professional Accountants (SAIPA) | mail me |
On the 18th of June, Facebook announced its plan to launch its Libra cryptocurrency in 2020. Bitcoin, the popular digital currency, has been around for over 10 years, but hasn’t significantly changed how we trade. However, Facebook’s massive global user base could usher in wide-scale adoption of blockchain, the technology behind modern cryptocurrencies.
What problem does blockchain solve?
With physical money, each unit represents a quantity of value traded and therefore redeemable as goods and services.
It’s tightly controlled to ensure its units are uniquely identified and resistant to duplication. Because it’s physical, only one person at a time can possess and spend it.
Digital currency is simply a computer file that can be copied, so the same unit could be spent at the same time by different people.
To prevent this, all transactions and subsequent ownership of a unit must be validated through a central third party. This incurs unnecessary fees and exposes our private data and financial history to someone else, like a bank. Blockchain tries to solve this problem.
The blockchain file
A blockchain is firstly a file on your computer that contains batches (or ‘blocks’) of transactions. Each block is linked to the previous one by a unique digital serial number computed from the contents of both blocks and a bit of cryptographic magic. This is the ‘chain’.
Because the serial number is based on the previous block, if past transactions were changed, the serial numbers would no longer agree, signalling that tampering had occurred.
Tracing the discrepancy is accomplished by checking all the serial numbers down the chain until the first mismatching block is found. This makes a blockchain resistant to amendment.
Transactions are entered and maintained through a blockchain management program, also installed on your computer.
The blockchain network
A blockchain file becomes useful for transacting when it is shared with other parties over a network. A blockchain network is like a social network, but instead of exchanging personal news and photos, its users exchange a digital asset, like cryptocurrency.
To avoid needing a centralised database, everyone on the network gets a synchronised copy of the blockchain file.
So their file holds their transactions and everyone else’s! But transactions are individually encrypted, exposing only their values to other users.
Each block submitted to the blockchain is validated by any computer on the network with the most available computing power at the time.
This ensures that transacting parties have proper credentials and sufficient currency to spend and that no single computer can take control of the validation process. Each computer then updates its file with the successfully validated block.
That’s a very basic description of blockchain and is intentionally flawed for simplicity’s sake.
The benefit of blockchain
Because the network shares transactions in a self-validated and secure manner, there’s no need for a middleman.
Although each validator earns a nominal fee, the cost is lower than banking fees. Also, ownership of a specific unit of currency is inherently tracked by the system so there’s no danger of double spending.
Although Facebook will use blockchain, its mechanics may differ from those described above. More significantly, Libra could be the first large-scale cryptocurrency that offers a viable alternative payment platform to rival incumbents like MasterCard and Visa.
Professional Accountants should have at least a basic understanding of how blockchain and other new technologies work.
As their role of trusted business advisor becomes the focus of their services and more of their clients embrace 4IR, they will encounter scenarios where these technologies are being implemented, should be implemented or should be avoided. Knowing how to approach each is important to winning a client’s confidence and adding real value to their operations.
SAIPA and its parent body, IFAC, continue to prepare our Professional Accountants for this and other innovations changing the face of the Profession. We’re already developing advanced standards to ensure the public interest continues to be protected even when dealing with sometimes impenetrable technologies.