It has been nearly a decade since a programmer under the alias Satoshi Nakamoto entered the pantheon of technological innovators by designing the world's first blockchain. In the decade since, both the coder (or, perhaps, coders) and their distributed ledger technology (DLT) have transformed the way people and businesses trade funds, strategies, and critical data.
Blockchain / DLT technology continues to evolve; and while it could be easy to view its disruptive nature as a risk best left untouched, there is value to accepting, adopting, and utilizing Nakamoto's game-changing approach to human transactions.
If there were a poster child for industry disruption, it would be blockchain. By design, it allows participants to share encrypted records over an open and decentralized peer-to-peer network.
Explaining the nuts and bolts (or rather, ones and zeroes) of blockchain would take a whitepaper in itself. And indeed, KPMG has a growing volume of papers dedicated to doing just that. For our purposes, though, an explanation of blockchain is best told through a run-down of a typical transaction. In this case, the trading of digital currency.
The other nodes receive the broadcast and drop this transaction in their pending pool and collect other pending ones in their tentative block. They then continue cracking the hash puzzle generated from the new block.
There are several advantages to blockchain transactions; particularly when applied to global payments. Take, for instance, a blockchain transaction between a customer in Canada to a business in China. Once sent, the payment is converted into an intermediary currency (e.g. a 'cryptocurrency' which all banks on the network accept) and sent to the nearby nodes within the blockchain network. Here, the customer's account and balance information are verified almost immediately via a distributed ledger available on the networks and the transaction is broadcast further and confirmed when a new block is created and linked to the chain. The processing time is totally controllable by the participating banks depending on how they design the technical protocol. The cryptocurrency received at the Chinese beneficiary bank is then converted into the designated currency according to customer instruction and transferred into the beneficiary's account.
Once the deal is done, the digital ledger is synchronized to all the participating banks in the network. This eliminates the need for reconciliation between the originating and beneficiary banks as transactions are kept at every ledger of all the banks within the network and is almost impossible to be tampered.
While only a hypothetical example, this scenario illustrates the advantages of blockchain compared to the traditional paperwork- and time-heavy process. Overall benefits include:
Pre-transaction verification: Account and balance information verification is fully automated and confirmed instantly.
Authentication: Blockchain's embedded cryptography system makes the transaction safer and transparent.
Transaction cost: Correspondent bank(s) are no longer necessary as payment is made via a peer-to-peer network. The risk of exchange gains and losses is also minimized since the transaction is confirmed almost instantly.
Processing time: Blockchain's verification technology and the elimination of a 'middle-man' (e.g. bank or financial mediator) accelerates the time it takes to validate and settle the payments.
Inter-bank reconciliation: Blockchain's automated process cuts down reconciliation efforts by the banks. Down the road, it may even eliminate the reconciliation altogether.
Transaction efficiency: The reduced processing time and transaction cost improve transaction efficiency and significantly increase the asset utilization to the customers.
Treasury management: Totally controllable processing time and improved transaction efficiency provide better oversight of the banks' treasury management, which will reduce the liquidity risk and credit risk to the banks.
Many financial institutions are working to take advantage of blockchain technology. As described in the previous sections, global payments is just one of the examples that blockchain is capable of in the old school trade finance. The adoption is also scalable to include more complex transactions such as derivatives, cash equities sales and trading. However, considering the fact regulations are becoming heavier and the financial industry itself is transforming at unprecedented speeds, the cost to adopt can be challenge.
To begin unlocking the benefits of blockchain, institutions need to first consider some key questions:
The world is changing – and so are auditors. Just as companies are warming up to the potential of blockchain technology, auditors are also embracing advanced tools and methodologies to tackle the challenges of examining blockchain records on behalf of investors to provide reasonable assurance as to their accuracy and integrity.
The evolution of the auditor is far from over. As blockchain evolves, and as automated audit procedure becomes more tangible, we must also accept, adapt, and utilize the new digital tools of the trade.