blockchain Disruptor for CFOs - EXL Service€¦ · Disruptor for CFOs Sanjeev Bhatt ... Blockchain technology is establishing itself as the next digital disruptor in transaction

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AN EXL WHITE PAPER

Blockchain: The Next Big Digital Disruptor for CFOs

Sanjeev BhattF&A CD [email protected]

Blockchain technology is establishing itself as the next digital disruptor in transaction recording.

By 2022, a blockchain-based business will be worth $10 billion! It is expected that blockchain-based

systems will be used across many industries for reducing transaction costs, eliminating manual

validation and streamlining business processes. - Gartner

CFOs must prepare to recognize prospects,

evaluate the challenges and strategize

their move to tap potential blockchain

possibilities.

Blockchain: Promises beyond cryptocurrency technologyRecently, a new Japanese law effective

April 1st, 2017 categorized Bitcoin, a

cryptocurrency, as a legal payment option

within the country. Other countries are also

not far behind, assessing and exploring

ways to leverage this new currency system.

While the full potential and long term value

of cryptocurrencies has yet to realize, many

think the underlying technology, blockchain,

is more important than the currency itself.

Blockchain technology certainly has greater

business-impacting potential. While many

of its use cases are still in their infancy, the

use of blockchain in accounting is quite

promising. From enhancing bookkeeping

to simplifying compliance with regulatory

requirements, there are possibilities

everywhere.

Blockchain: From double- to triple-entry accountingIn simple terms, blockchain is the underlying

technical infrastructure powering Bitcoin

and other cryptocurrencies. Currently, most

people use a trusted middleman such

as a bank or clearinghouse when making

financial transactions. But blockchain

allows consumers and suppliers to connect

directly, removing the need for a third party.

A blockchain is an online public ledger that

uses data structures to simplify the way

people or organizations transact. It enables

the users to manage the transaction ledger

of all bitcoin transactions that have ever

been executed securely and without the

help of a third party.

This ledger keeps the details of the new

bitcoin and previous bitcoin ownership.

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In a conventional system, such a ledger

is centralized. This is not the case with

bitcoins, as the transaction happens on

internet and everyone has a copy of the

ledger. This also means that everyone can

see the balance of all accounts in real time,

making the data almost tamper-proof.

Additionally, these transactions are

conducted over a decentralized peer-

to-peer network. The decentralized or

distributed nature of the blockchain ensures

that there is no single controllership of

the transaction data. The blockchain data

is accessible to all the participants in the

network. Every 10 minutes, all transactions

are recorded in a virtual block, and a new

block is created, linked to all the previous

blocks in the chain. The blocks are visible to

both parties involved in the transaction.

How a blockchain works

A wants to send money to B

The transaction is represented online as a ‘block’

The block is broadcast to every party in the network

Those in the network approve the transaction is valid

The block then can be added to the chain, which provides an indelible and transparent record of transactions

The money moves from A to B

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To use modern banking as an analogy, the

blockchain is like a full history of banking

transactions. Blocks, meanwhile, are like

individual bank statements.

In conventional B2B trades, transactions

between parties require raising PO, settling

through banks and working out VAT.

Utilizing blockchain methodology, the

need for every party to create transactions

in their own accounting systems would

be eliminated. The blockchain network

would validate an order in real time and

upon receipt, everyone connected would

be settled as per their standard terms.

Accounting entries could be pre-reconciled

and auto-posted.

This can also lead to a triple entry

accounting practice, the premise on which

Reduction in multiple reconciliation

Most of the corporate finance

transactions—transferring shares or

funds and signing contracts—have

several tracks managed by various

stakeholders. Those tracks are generally

interdependent but unconsolidated,

leading to redundant and replicated

ledgers. A blockchain-based solution can

provide a single shared ledger model

that is faster, immutable and possesses

verifiable transactions properties with

full audit trail and extended assurance

capabilities.

Potential uses of blockchain in financial sector

Streamline cross-country payments

Cross-county payments are generally

expensive than domestic payments, as

more banks are involved to complete

the transaction with each bank taking a

fee. Additionally, there is also a high risk

of critical information being lost about

the payment, as payment details are

transferred across multiple banks and

countries. Blockchain-based solutions

can reduce the payment duration and

simplify this process by cutting out

many of the traditional middlemen.

Also, it makes money remittance more

affordable.


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blockchain is based. With blockchain, there

are three parties to any digital transaction:

payer, receiver and blockchain middle

intermediator. Each holds a copy of the

same transaction receipt. This transaction

receipt within the blockchain network

becomes vitally resilient because it is

cryptographically authorized by the payer

and cryptographically signed off by the

mediator. It characterizes such robust

evidence that the facts on record become

practically undisputable.

Blockchain can potentially maintain and

prove the integrity of digital accounting

reports for companies. It can also simplify

and speed up work for independent

public auditors by providing a common

verification platform for the accounting

manager, government regulatory agencies

or other parties.

The CFO’s dream: One version of the truthFor CFOs, the key advantage of blockchain

is that every entry is authenticated and

confirmed by the network and can never

be altered. The distributed and transparent

nature of blockchain makes financial data

owned by various teams open for everyone

in the network to view and verify. This

can speed up and reduce complexity for

checking and approving transactions. CFOs

can have access to a single source of truth.

The real-time nature of blockchain

provides CFOs with the ability to review

transactions between parties as they

happen. Digital dashboards powered

by strong analytical tools can provide

both micro- and macro-visualizations of

a company’s finances. Centralizing this

information has the potential to reduce

costs and speed up settlement times,

which can improve liquidity and improve

operational efficiency for expense or

revenue forecasts, identifying transaction

irregularities or other tasks.

Blockchain: Growing prospects for CFOsAccounting, auditing and compliance create

significant expenses for businesses. For

instance, fines alone have cost the banking

industry more than $200 billion since 2008.

Blockchain-based accounting could help

prevent these fines.

Blockchain can help minimize any conflicts

of interest during an audit. Usually, the

interest of the auditor can depend on

the dynamics of whether they are hired

by the CFO or another party. Blockchain


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offers an independent, automated and

standardized way of auditing that minimizes

and mitigates the chances of any biases

affecting the audit’s outcome.

Conventional manual auditing comes with a

number of accounting issues, redundancies

and complexities. Integrating and aligning

blockchain technology with the internal

mechanism of a business would help speed

up the pace of these operations. Also,

gradually reducing the need for manual

auditing would result in a significant amount

of cost cutting in the accounting function.

As the cost of audits were found to rise

every year between 2012-2015 by between

3.8% to 5.5% , reducing the need for these

increasingly expensive audits would save

companies money over time.

As blockchain technology provides real-

time access to transaction cash flows,

its distributed data also authenticates

and confirms every entry by default.

CFOs would have the power to track

every penny in their system on a second-

to-second basis. This can help them

understand and address spending

or payment challenges, which would

eventually help further streamline the

processes. Since blockchain provides a

secure, decentralized ledger immune

to tampering and hacking, employee

theft and fraud would be minimized

because no one can alter the distributed

ledger without cryptographic security

permissions. Greater transparency and

a decentralized agreement ledger allow

discrepancies to be identified immediately

and the source of fraud traced to the micro

level. More broadly, embedding blockchain

technology would enable CFOs to tighten

accounting processes, generate better

data insights, improve policymaking and

enhance treasury management.


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Blockchain: Challenges before the big takeoffA transparent, secure, and completely

digital ledger promising an almost flawless

audit trail can address many challenges

of the CFO, but adopting this technology

currently poses some difficulties.

One quick search on the internet and you

can find a wide variety of players offering

blockchain solutions that are either in the

proof of concept stage or somewhat more

evolved that can be commercially rolled

out in coming future.

Despite the tremendous potential

blockchain technology holds,

governments and regulators still need

to put in a framework that lays down

the ground rules. Until these regulations

provide companies with a sense of

security regarding their use, expecting

all businesses and financial institutions to

adopt blockchain in its current form and

join a true distributed network is a distant

dream.

In the public sector, this would require both

cultural and process changes. Moving away

from the current centralized approach to

a decentralized environment is a marked

shift in the status quo that will take some

getting used to. IT, cyber security and

finance teams must collaborate on better

understanding the blockchain framework

and how it could fit into current finance

processes. Even though there are some

players already in the market with promised

offerings around blockchain, it would most

likely take a significant investment of time

and resources to implement, manage and

stabilize customized blockchain technology

solutions across the finance sector.

The way forwardAlthough it is early for many businesses

to think about the practical implications of

blockchain on their day-to-day business

operations, this technology will be exploited

for commercial gains in the future.

As with all disruptive technologies, a first-

move advantage is useful only if coupled

with a realistic approach. CFOs should

take it upon themselves to understand

the implications for their business. This

includes seeking advice or establishing a

cross-functional team that includes IT, audit,

compliance, accounts and other key parties

to brainstorm and identify blockchain

opportunities.

While the widespread adoption of

blockchain may still be a few years away, its

use is well on its way to becoming a reality.


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blockchain Disruptor for CFOs - EXL Service€¦ · Disruptor for CFOs Sanjeev Bhatt ... Blockchain technology is establishing itself as the next digital disruptor in transaction

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