What is blockchain?
Put simply, blockchain is a way of recording and distributing digital information. It was first devised by Stuart Haber and W. Scott Stornetta, whose goal was to create a system where document timestamps could not be tampered with. It was first launched in January 2009, along with Bitcoin.
Essentially, blockchain stores financial transactions in ‘blocks’. Every verified new transaction is recorded as a new block with its own unique code by which it can be identified, which is then added to the blockchain.
Contents of a blockchain are not private. On the contrary, anyone can see them. If a user connects their computer to the blockchain network, their computer will hold a live copy of the blockchain, which is automatically updated as blocks are added. Consequentially, there will be thousands – or even millions – of identical copies of a blockchain across all of the computers in a network. It is for this reason that blockchain is otherwise referred to as a ‘distributed ledger’.
The benefits of blockchain
While blockchain technology can be expensive for finance teams to implement, there is a strong business case to be made for it. Indeed, blockchain can potentially be used to overcome various common challenges in transforming finance teams – which could more than pay for itself in the long run.
Efficiency
A key priority of all CFOs is to improve the efficiency of reconciliation, payments and ledger maintenance, thereby boosting productivity. Blockchain has the potential to make such processes significantly faster.
Encrypted joint ledgers, which verify transactions in real time, mean there’s no need to wait for intermediaries to do so. This means payments can be processed much quicker, thereby meeting modern customer expectations and offering the ability to monitor sales instantaneously. Inter-company transactions can also be settled immediately, saving time across the business.
As well as providing faster payment processes, blockchain can also greatly reduce time-consuming data recording and reconciliation, as finance teams would not need to record transactions separately with the use of receipts. Consolidating data for financial reports will also be simplified and far less manual.
Accuracy
Another area where finance teams stand to gain is in the way of accuracy. While humans have many skills yet to be replicated by technology, data recording and distribution becomes more accurate with less human involvement. Immediate and automatic transaction records, perfectly synchronised across networks, undoubtedly has positive repercussions for the reliability and validity of financial data. If an anomaly does occur, a consensus protocol will kick in, meaning the most trusted version of the blockchain is upheld at the expense of any varying ones.
Security
Last, but certainly not least, is data security. Indeed, this is one of the most important and pertinent benefits of blockchain. It’s one that may seem paradoxical at first. After all, how can a system that shares data among potentially millions of users be secure?
In fact, it is the distributed nature of the data ¬– which, in the case of Bitcoin, uses digital signatures and keeps user identity anonymous – that makes it so safe. If there are multiple and identical copies of the same blockchain, data becomes harder to manipulate, as any hacker would need to tamper with all copies of the blockchain.
The bottom line
Blockchain has the ability to transform the landscape of finance. A distributed ledger can process payments faster, save on time-consuming administrative work, improve the quality of data and protect information from data breaches. Forward-thinking finance leaders would be wise to start implementing blockchain technologies today.
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