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Blockchain Technology is going to be a big game-changer. It could help to solve many business challenges. Some industries would get highly impacted while for others, the impact might not be so much. As technology is evolving and getting mature day by day, the new applications of this technology are getting discovered. The role of the CFO in a business organization is quite dynamic and challenging. It is quite critical that they are abreast of the latest development around Blockchain and its impact on their business, impact on Finance Function of Blockchain Technology.

What is Blockchain Technology?

The technology behind Bitcoin and many other crypto-currencies is a distributed ledger database for recording transactions, more commonly known as blocks. Blockchain technology enables users to share their ledger of transactions. The record of events gets distributed to all participants in a given network, who in turn use their computers to validate the transactions; thereby removing the need to have a third party intermediary such as a bank or central clearing centre. Blockchain records can only be updated by consensus of a majority of the participants in the system and, once entered, information can never be erased – providing a detailed audit trail of all associated events.

Basic Principles on which Blockchain works?

Immutability: 

Once a transaction is entered into the database and the records are updated, the records cannot be altered since they are linked to every transaction record (hence, it’s called Blockchain);

Distributed Database: 

Each user can access the entire database and its complete history;

Peer to Peer Transmission: 

Communication happens directly between peers instead of any central node.

Transparency: 

Every transaction is accessible to all users in the system. Also, Users can choose either to remain anonymous or provide proof of identity to others.

 

Major uses of Blockchain Technology in the field of?

The application of Blockchain is evolving and currently, it can be summarised in the following cases:-

• Smart Contract: Blockchain facilitates the storage of any kind of digital information that can be executed once two or more parties enter their keys. This could be revolutionary for the Legal industry. In the legal industry, lots of paperwork are involved and subsequent storage and tracking of these papers and if we digitize this, then everything changes.
• Clearing & Settlements: Clearing and settlement are the most active use cases for the banking industry. Once the verification of the identity of the certified transaction is complete, then the strangers can trade directly with each other without any trusted third party person and records of transaction history gets stored. This technology would lead to phenomenal savings for investment banks.
• Payments: Blockchain allows banks higher security with minimal lower costs to process payment between organizations and their clients and even between banks themselves, particularly international payments.
• Digital Identity: Blockchain has been used to form the basis of national identity built on distributed ledger technology. Users can record their name, date and time of birth, parents and other data stored in a distributed ledger. A user takes sole possession of their identity and can use that identity to establish social media accounts (no fake accounts and fraud), open bank accounts, sign contracts and so on. With time, this identity will get credit scores, identity proofing, and so on but the owner gets to device what information is given up from that identity.
• Aadhaar – Current Status: Aadhaar data includes fingerprints, retina scans, names, addresses, and phone numbers through which SIM cards can be purchased, and important government services and bank accounts can be accessed. There is a big risk if by any means this sensitive data gets comprised.
• Aadhaar – Solutions through Blockchain Technology: Aadhaar secured by immutable blockchain to prevent future data breaches in future dealings. The challenge would crop up to architect a Blockchain solution and to securely transfer the existing centralized structure to the blockchain solution without loss of data.

This technology is poised to innovate and transform a wide range of applications in the times to come.

What’s the Benefit of Blockchain Technology?

Blockchain would help the business in the following ways:-

• Building and enhancing Trust factor;
• Speed up the business process;
• Manage risk;
• Cost optimisation
• Ensure fraud reduction

 

Impact on Finance Function of Blockchain Technology

This technology will impact the financial service industry in a big way. Let’s look at the impact on the various functions of Finance as follows:

Financial Management: 

Impact on sub-function like Strategic Planning, Annual Budget & Forecasting process: Blockchain help to collate consensus on Business Plan through a transparent process and in an immutable way.

Financial Reporting & Analysis:

Impact on sub-function like Strategic Finance, Management Reporting (Balanced Scorecard, Dashboards), Statutory & External Reporting: A permissioned Blockchain can lead to a secured & tamperproof communication of reports in a speedy manner.

Financial Consolidation:

Impact on sub-function like Period end book closure, Intercompany & Intra Company Balance reconciliations, Book closures (Chart of Accounts (COA), General Ledger (GL), Sub-ledgers: A permissioned Blockchain can be built to share and agree on intercompany balances.

Governance, Risk & Compliances:

Impact on sub-function like Finance Process & Governance Framework, Tax Accounting, Audit & Controls and Internal Control on Financial Reporting (ICFR), Sarbanes-Oxley (SOX) Compliance and Risk Management: A permissioned Blockchain can be built to get consensus on the account balances for audit purposes. A Blockchain would help in the communication of reports to government authorities on a secured channel.

 

Any Pitfalls?

There are many potential uses of this technology. As the technology matures, and more Proof of Concept (POC) gets executed, further new cases are getting identified and discovered day on day. While Blockchain is immutable, highly secure, there are few exceptions and special attention is needed to ensure the exceptions are understood and managed. The Government regulation to manage Blockchain contracts also needs to be evolved and further relevant regulation needs to be enacted to enforce the rights of participants. There is also concern relating to data transparency which would get solidify over a while.

 

 Conclusion

The impact of Blockchain technology on finance function is inevitable. Further, the evolution and up-gradation of technology will help CFO’s to automate, speed up the process, and build up the internal controls process and governance framework.

Most importantly, Blockchain is not a threat to those who are constantly evolving and embracing new technology.

Also read CFO Services – Silicon Valley, New York, London, Bengaluru.