How will blockchain revolutionize finance and auditing?

Blockchain is currently generating a lot of noise in the finance world. But is it all hype? The rewards for the finance and audit sectors could be plentiful, but so too the challenges

Fist painted on a brick wall

Blockchain “is going to have a profound impact not just on financial services, but on the world of business and society as a whole,” says Alex Tapscott, CEO of consultancy Northwest Passage Ventures and co-author of the book Blockchain Revolution.

It’s hard to overemphasize the importance that Tapscott places on this rapidly emerging technology: “Blockchain technology represents nothing less than the second generation of the internet,” he says. In the future, “every single company is going to need a blockchain strategy.”

Little wonder that many firms in the finance and audit sectors have already invested money, time and energy in assessing how it will disrupt their established business models. 

Enabling digital trust

Banks currently use intermediaries such as settlement and clearing houses when dealing with each other, to verify transactions and provide trust. Core to the concept of Blockchain is that “For the first time in history, two or more parties need not know or trust each other to transact or do business,” Tapscott explains.

This means that Blockchain provides the opportunity to transfer funds without intermediaries, which could significantly cut costs.

Blockchain also enables decentralized groups to work together, from anywhere in the world, in a secure, trusted and verifiable way. Because Blockchain-based systems enable secure, distributed working, they also enable tasks to be executed by distributed teams operating together in a much looser way – but with as much security as if they were working side-by-side. This could significantly cut overheads by reducing office and staffing costs by taking the work to the people, rather than the people to the work.

With digital trust and security comes the potential to automate many more processes. Algorithmic systems can be used to verify and automate payments, foreign exchange trades, the filing of tax returns – almost any task that involves clear results and repetitive tasks.

A plug-in audit?

It’s likely that auditing will also be revolutionized by Blockchain. Key to the technology is its record of transactions, which enables something akin to real-time auditing by default. Indeed, Blockchain has been dubbed “digital era double-entry bookkeeping” for its similarity to old accountancy principles.

Blockchain might also be able to replace random sampling by auditors, by making it easier and more effective to perform a check on every single transaction using code. That would also make it easier to investigate fraud, as real-time systems could highlight and investigate anomalies.

The potential effect of blockchain’s role in auditing has been likened to that of a plug-in, always-on audit. But what might that mean for finance and audit teams?

Woman sitting in a room full of computers

New efficiencies can help enable a culture of innovation

The rise of Blockchain doesn’t mean the end of the finance or audit team. More real-time auditing and reporting will free up CFOs and their teams from some of their more routine, time-consuming activity to play more strategic and creative roles. Allowing them to focus on devising new ways to help deliver future business value, rather than keeping track of past costs. And human interpretation of data and transaction patterns will still be required to generate the new insights that can lead to business growth.

Collaboration will be essential

Cross-industry collaboration is also key to the establishment of Blockchain, because Blockchain’s benefits derive from its network effects: the technology becomes exponentially more powerful the more organizations or individuals are using it.

That’s why it’s great news that 42 of the world’s leading banks are currently setting aside their competitive instincts to collaborate on Blockchain experiments so that they can assess how the technology could be used to affect finance in the future. 

The regulatory bumps in the road

But those financial service providers also need to collaborate with regulators and central banks to make sure that the innovation and regulation works in harmony with existing legal and regulatory frameworks – not least because Blockchain, like the internet, transcends regulatory jurisdictions and national borders alike. Widespread adoption of blockchain could trigger significant amendments to some of the world’s most established finance and trading regulations.

A threat to the established financial service providers?

Significant disruption may be on the way for the traditional financial sector as major players and new challengers begin to bring Blockchain-powered technology to the marketplace. What’s to stop strongly-branded businesses founded in the technology space, like social platforms or software developers, from becoming enablers of value transactions or providers of financial services?

A change is gonna come …

So, although Blockchain may be the finance world’s buzzword of the day, it’s not all hype. Its key advantages, trust, transparency and efficiency are vital to the success of finance and audit firms and the clients they serve. But there are significant challenges to be overcome.

Leaders of organizations in all sectors should start to ask themselves:

  • Does this technology make any part of my business model redundant?
  • What impact could it have on the regulatory frameworks within which our organization operates, or which it sets for others?
  • Could this technology help us demonstrate greater transparency and build digital trust?
  • Does this technology change what some of my people will do with their working day?

Who could be the new entrants that Blockchain could bring to my sector? What competitive advantages and disadvantages could they have?