Blockchain and other DLTs: Where is the Accounting?

Posted by Francesco Grossetti - Feb 05, 2020

I am sure that most of the readers involved, even tangentially, in the Accounting practice, whether academics or practitioners, have already heard of the terms blockchain and distributed ledgers. As you might imagine, there are plenty of questions we can ask about these two topics. Let’s maybe focus on the role that Accounting could have in this framework. 

Does the rise of cryptocurrencies have implications for the fundamental development of Accounting? One may wish to quickly conclude that excluding the issue of whether or not to recognize gains and losses on holding a cryptocurrency nothing is new. However, what is perhaps more important is that the distributed ledger system (blockchain) developed to facilitate cryptocurrency trades introduces a range of new possibilities for how to organize Accounting systems. So perhaps a more pertinent question is: could developing distributed, in contrast to traditional centralized ledger technology, transform the practice of Accounting in organizations? 

This article addresses this question by arguing that distributed ledgers, have several general desirable features. To illustrate, one of the most obvious applications is in the area of compliance. Take the following example – a mass container cargo ship is arriving in port with 1500 containers. Each container needs to clear customs. This could involve customs officials collecting 1500 custom declarations – reading and processing them, then individually approving them. This could take a considerable time and use up scarce docking time. What if instead the captain of the ship, while at sea, could send all the customs declarations, generated by the (distributed) shippers to the port customs officials for pre inspection before arrival? This is a simple example of use of a distributed (shared) rather than a centralized ledger system. Clearly security of data entry is a critical concern and this is where the immutability feature of a distributed ledger system comes into its own. This simple example, which has far wider implications than just shipping logistics, provides one reason why accountants that control centralised corporate ledgers should actively be monitoring the development of alternative designs of distributed ledger systems.

Another impressive application of such technologies is forensic Accounting. Many argues that distributed systems of cryptocurrency like Bitcoin are the home of a set of criminal activities, like money laundering. The argument lies on concepts like anonymity and privacy which are inherent features of Bitcoin. In the paper, we discuss how these assumptions cannot be taken for granted. As a matter of fact, such systems allow an educated user to track down every single movement of another user. Through the application of some heuristics borrowed from Computer Science, it is possible to reconstruct the full identity associated with a given wallet. This has a huge impact in fighting organized crime since by simply being in the system ensures the traceability of an account. It is our job to educated and develop the Accounting practice and reduce cultural gaps which nurture these misconceptions about a new approach and technology to do business.

As increasing numbers of organizations are recognizing the potential benefits of distributed ledger systems, those that are experimenting with implementing systems are becoming aware that there are also some specific design questions that need to be addressed. Much of the early focus has been on micro implementation issues like how to code a distributed ledger system, perhaps exploiting code developed for a cryptocurrency. 

However, now with the plethora of coding methodologies that exist, we argue that more attention needs to be given to macro issues such as what does decentralizing a ledger mean for the management of an organization? Deciding to share significant parts of your ledger system with suppliers and customers needs to be thought through very carefully. This article provides 4 areas to focus upon. Security, supplier relation specific investment, compliance simplification, demand for smart automated contracting.    


The full paper, co-authored with Miles Gietzmann, is available on SSRN here.

Francesco Grossetti – Bocconi University, Milan, Italy

Miles Gietzmann – Bocconi University, Milan, Italy