The ability to track and transfer value, in the form of money or assets, in a secure, real-time way, similar to how we transfer information today, could fundamentally alter the way businesses transact with one another. Distributed ledgers, or block chain – the underlying technology to enable this – is at the heart of these developments. It could change not just individual organisations, but entire industries and their supply chain. The financial services industry is not exempt from this phenomenon. Banking, insurance, and even the implementation of the Goods and Services Tax, can benefit from utilising the blockchain technology.

Blockchain is a method of recording data, a digital ledger of transactions, agreements, contracts and bills distributed across several hundred or even thousands of computers around the world. Digital records are lumped together into ‘blocks’, then bound together crypto graphically and chronologically into a ‘chain’ using complex algorithms. It is used as a ledger which can be shared, but can only be updated or altered by consensus of the majority. Thus, there is trust, but it is ‘distributed trust’. This peer-to-peer network makes participants responsible for the validation of records, without the use of a central authority for this purpose. So if the majority of participants agree that an update has been correctly validated, that becomes the basis for the updated entry to be added to the ledger.

New technologies are allowing us to re imagine the way we live and interact with one another, and blockchain can be a defining moment in this new wave of information sharing. Some of the major benefits of this technology are:

• Data privacy: The permissioned distributed ledger has mechanisms in place to ensure that users can only see data that they are authorised to see, or that transactions can be viewed without the identities of the participants being shown, providing extra assurance. A common ledger doesn’t necessarily mean that everyone can see every detail; controls can be put in place if necessary

• Eliminating human error and fraud: Distributed ledgers can significantly reduce, but not completely remove, human error or fraud; the technological architecture makes fraud and error difficult. The in-built

consensus mechanism has safe guards to prevent either collusion between participants or the acquisition of too much influence over a single participant within the network. It also makes it difficult for a rogue actor to single handedly disrupt the network.

• Accountability: Records are shared among network participants and co-owned by them, similar to a model of mutual ownership. There is a certain level of accountability inherent to the concept of a distributed ledger. Consensus is a pillar that supports governance, assurance, privacy, security and performance; any change that needs to be made needs to be voted upon and all participants are made accountable for said change.

• Immutability:‘Immutability’ refers to the inability to remove or amend transactions once they’ve gone through the process of validation, achieved majority consensus, and been added to the ledger. Once the entry has been created, it cannot be removed or changed in any way. This means that an un corrupted view of all entries recorded by participants is created – a perfect audit trail. As a corollary, if a transaction is incorrect, it cannot be amended; instead a new reversing transaction in the opposite direction must be entered to cancel it out.

• Greater efficiency: In industries that involve a large amount of manual processing, ‘legacy’ systems, or have heavy reliance on outdated and/or offline modes or working could immensely benefit from the blockchain technology.

Innovation, where it concerns new technologies in particular, tends to be a constant iterative process of improvement by trial and error

Commercial applications of blockchain

Many notable entities have examined blockchain and are now moving to adopt it. In India, several banks are looking into the technology to better understand how best it can revolutionise their banking services. Last year, RBI, SEBI and IRDAI decided to launch a new system of online KYC (Know Your Customer) that helps reduce redundancy in collating documentation from customers. In order to comply with the process of KYC, banks and other entities must dedicate a huge amount of resources. The new system aims to have a common KYC process for all financial sector intermediaries, which include mutual funds, banks, insurance companies and brokers. The distributed ledger technology reduces reconciliation across different databases and drive significant efficiencies. A block chain-based registry would not only remove the duplication of effort in carrying out KYC checks, but also enable encrypted updates in real-time. The record would also provide evidence of the institutions’ compliance in carrying out the KYC process.

Whatever one’s opinion about distributed ledgers, they look likely to be the focus of sustained attention over the coming years. Innovation, where it concerns new technologies in particular, tends to be a constant iterative process of improvement by trial and error. And distributed ledger technology is very much in the early to middle stages of that development. Its attractiveness is as an idea that creates more than a technology process improvement. It aspires to create a business model and ecosystem-level transformation.

Yet while such new technologies may well transform the role of the accountancy profession, they are a long way from supplanting the strategic skills and judgement of professional accountants. Just as online learning did not eliminate the classroom teaching model, distributed ledgers may prove to be at their best when combined alongside human experience and judgement.