An introduction to blockchain

Blockchain operates on a virtual and decentralized ledger that records everything in a secure and transparent manner across an ecosystem of computers or nodes. This eliminates the dependency on a middleman for each transaction, which is verified using a smart contract and synced with every node on the blockchain ecosystem.

To put it simply, it’s like a notebook – each sheet is a transaction/block on which data cannot be changed, and therefore blockchain immutable (see Figure 1).

Blockchain has rapidly evolved from overused buzzword to high-value technology with real-world applications in business. But now the hype has died down and the technology has matured, how can organizations leverage blockchain to drive value across their finance and accounting (F&A) function?

By enabling transacting parties to interact seamlessly on a frictionless, tamper-proof global ecosystem, blockchain has the potential to eliminate recordkeeping activities across procure-to-pay (P2P), order-to-cash (O2C), and record-to-report (R2R), thereby transforming the entire F&A department, and helping to create the frictionless enterprise.

An introduction to blockchain

1,000-years of decentralized ledgers

Around 700–1,000 years ago on the island of Yap in the Western Pacific, the Yapese people would use large stones called rai stones as a mode of payment for goods or services.

As these stones were huge in size and weight – and therefore difficult to move – they were cut into pieces and exchanged each time a transaction was made. This transaction was announced to the entire tribe, and every member would have to keep a mental log – or ledger – about who owned which piece.

In today’s world, this would be called a “distributed ledger,” where every group connected to the ecosystem would be made aware of every transaction made. This is a key feature of blockchain technology.

The hype behind blockchain

The word “internet” seemed a little elusive 20 years ago – something you might not have thought would impact on your daily life. In the age of fintech startups and with digital transformation at its peak, consumers now look for the most sophisticated, innovative, and transparent ways of doing business.

We have now reached the stage where technology is able to give us real-time information and data at the touch of a button on our mobile device – when we want it, where we want it, and how we want it.

But is that the case for everything that we use in our lives? For example, we have apps that tell us in real time about the food we have ordered, but not the source of the ingredients used to make the food. Where did the rice, grain, or meat come from? What if technology could actually give us this level of information?

Enter blockchain – let the hype begin!

Smart contracts

Large organizations deal with multiple suppliers, especially in manufacturing. Traditional contract management involves a long, drawn-out process of negotiation, authoring, execution, payment, and renewal. These activities need to be coordinated across multiple organizations – and multiple departments within those organizations – making the entire management process cumbersome.

Blockchain technology can make these contracts smart by programming them to execute themselves when certain events happen. Smart contracts are embedded with rules, based on which a transaction occurs within a blockchain ecosystem once the rules are met between the two nodes/parties. In a typical F&A scenario, these would be accounting and business rules that are set within the groups in the blockchain ecosystem. Any transaction that does not meet the rules of the smart contract would automatically be pushed out of the ecosystem to be manually handled.

With blockchain, organizations can set up a distributed peer-to-peer network in which parties can interact with each other without an intermediary, in a frictionless, verifiable manner.1 As there is a trusted platform, the stakeholders can agree to exchange data and authorize transactions without the need for intermediaries (see Figure 2).

This improves speed of execution, and enables faster and frictionless dispute resolution and a faster payment mechanism for the suppliers involved. For example, a proof of delivery from a supplier can trigger an automatic quality inspection of the materials. If the inspection is satisfactory, a digital payment is triggered, which helps reduce suppliers’ working capital requirements.