Business Blockchain: An Introduction
What is a blockchain?
Blockchain is a shared, immutable and irreversible ledger that facilitates the process of recording
transactions and tracking assets in a business network. It is a distributed ledger technology that
enables digital assets to be transacted and traded in real time. Blockchain technology is a way to
structure data without the need for a central authority.
A blockchain is a distributed database that hosts a continuously growing number of records. The database stores records in blocks rather than collating them in a single file. Each block is then “chained” to the next block, in linear, chronological order, using a cryptographic signature; as a result, records cannot be revised, and any attempted changes are visible to all participants.
This process allow blockchains to be used as ledgers, which can be shared and corroborated by anyone with the appropriate permissions. These distributed ledgers can be spread across multiple sites, countries or institutions. Although blockchain technology is the foundation for cryptocurrency (such as bitcoin), there are variety of financial and accounting applications beyond the realm of cryptocurrency.
Blockchain technology has the potential to turn over entire industries. Especially the financial sector may undergo disruptive change. Although this technology caught the attention of many of the largest financial institutions, use cases still remain in the experimental phase. Since the 2008
financial crisis occurred, institutions have been in state of flux trying to reduce operational costs and achieve efficiencies on the back of high regulatory compliance cost, as well as facing stiff
competition from the financial tech sector. Also in recent time, global economy is facing recession
due to covid-19 outbreak and now all companies are trying to cut overhead and operating expenses to sustain the business.
Blockchain majorly has two applications. Cryptocurrencies like Bitcoin and Ethereum’s trading and managing are managed by blockchain. The other main use of blockchain is for managing transactions related to trade and commerce, including finance processes like payables, receivables,and compliance i.e. Business blockchain.Business or enterprise blockchains operate outside the realm of commercial cryptocurrencies. Companies can gain substantial value simply by using blockchain as a transaction management platform without any consideration of digital money.
Business blockchain are being used today to help reinvent how transactions are managed. They can reduce time and costs nearly to zero, of almost any process, enabling near real-time settlements and they deliver a high degree of accuracy and control, with much less risk than many alternatives.
Blockchain perform recordkeeping using automated, low-cost mechanisms. They enable asset transfer through secure, real-time methods. Smart contracts provide the governance mechanism for business blockchains. Once a smart contract is locked down, the terms and conditions can’t be changed unless all those affected agree. Smart contracts enforce contract terms such as payment, and thus enable greater trust to the record keeping.
Common finance applications for blockchain include self-validating sub-ledgers for receivables and payables, procure-to-pay and order-to-cash integration, Revenue cycle management, Working capital and cash-cycle improvements, trade finances, Payrolls, intercompany transactions, and reconciliations. Processes that extend beyond Finance, such as supply chain management, asset tracking, capital planning and performance managements, warranty accruals and management, fraud and risk detection and regulatory compliance can also be streamlined using blockchain technology. Although Business blockchain can operate as standalone solutions, but significant value can be realized when it is combined with other technologies, such as machine learning, robotic automation or Internet of Things.
The recent survey shows that many business see compelling use-cases with blockchain as an enabler. Some Business owner expect blockchain to transform their finance organizations—and maybe their whole businesses—in the years ahead. They see significant efficiency and control benefits on the horizon, and they’re evaluating options now so they can capture savings sooner.
Some of them believe that verifiable and measurable return on blockchain investment will be achieved within 5 to 6 years. Blockchain technology is broadly scalable and will eventually achieve mainstream adoption. Blockchain can enhance integration towards more “touchless” business procedure.
Since, blockchain is a new and nascent technology and no one has put it all together yet, it is believed that blockchain will enable new business functionalities and revenue streams in any industries. This is time for businesses to explore their options.
Finance and Blockchain
There are many parts of how finance delivers value. i.e. business finance, operational finance and specialized finance. Blockchain can be used in each finance value to smoothen and streamline the processes. For example, Operation finance includes various operation processes like Order to cash, Procure to pay etc. Blockchain can be used to streamline these processes and achieve better performances.
In total of accounting man hours, it is estimated that more than 25% is used in reconciliation thus blockchain can help to eliminate the reconciliation needs. Also blockchain can be used in tax and treasury function in business finance.
By improving communication between entities and their individual systems, business blockchain will help companies overcome challenges in the business process. For these, collaboration and clear communication is needed between vendor, sub-vendor, customer and banks which seems easier in theory but quite difficult in reality because the buyer and the seller operate with different sources of the same truth – one in each of their individual ERP systems. This leads to inconsistent information between them and results in increased cost and time for reconciliation. Blockchain is a distributed database with a single source of truth for all stakeholders and enablers that can overcome communication challenge.
In current scenario, all information is decentralized, updated manually and it is highly probable that these information are not aligned with each other. Business blockchain on the other hand are distributed database shared between participants which contains one single source of truth and provides full and verified record of transactions in a chronological format in real time. It also provides the possibility to use smart contract which minimize manual errors by automating action and validation and can execute data transfers to stakeholder’s ERP systems. Smart contract in blockchain are like Macros used in Excel.
Business blockchain can also automate VAT settlement and reporting process in Nepal. National governments are losing millions of money in VAT and responds with increasing compliance requirements. VAT is the key revenue driver for tax authorities and the largest contribution to governmental budgets and some even demands transparency near real-time. Therefore, the incentive to search for ways of more effective VAT collection is big.
VAT system is facing problem in both national and international level. Tax authority are relied on business themselves to correctly calculate and deposit VAT on fixed period. (E.g. monthly, quarterly). Controlling of datas related to VAT are troublesome as each company maintains their own ledgers where entries are made inconsistently and time their VAT settlement differently. Blockchain provides some interesting features, which could help counter these complications, by providing one single source of truth and the possibility to distribute information between several parties in a secure way.
It is believed that these features could enable a better automatic VAT reporting in real time. Hence, the future of TAX reporting could be less rigid, uncomplicated and more resistant to fraud. It is also believed that instant VAT reporting and automated VAT settlement based on two-sided validated invoices could heavily reduce the missing trader intra-community fraud (MTIC) of approximately 5-6 billions every year. It is hoped that blockchain-based solution could bring more than just a fraction of the exorbitant amount back.
Business blockchain can aid treasury department through enhancing treasury function by bringing all parties across companies into a single platform to allow sharing of real-rime information and automated intercompany reconciliation. Recent survey shows that companies are facing problems with intercompany reconciliation due to FX volatility and cash repatriation or liquidity. Blockchain technology is a tool for bringing all parties involved in intercompany settlement onto the same platform. The process is simplified with smart contracts enforcing an agreed set of fixed rules within the companies. All transactions on the blockchain are distributed to all parties in the company and are immutable.Since all transactions are visible on a need-to-know basis, a common source of truth appears within the companies, and miscommunication is minimized.
Above are some examples where blockchain can streamline the business process and help business to achieve better performance.
What are the current challenges that business are facing? There are two main groups of challenges: human and technical.
The human challenges revolve around trust, governance and change. Close collaboration and trust between two or more entities are needed to work on the project together and share data. As some of the data in the blockchain could reveal business models or close partners, the stakeholders must trust the encryption and security built into the blockchain. The technology provides us with new possibilities, but it requires a change in our mindset regarding sharing and collaboration. Agreement in relation to governance and engagement rules between participants are still a hurdle that needs overcoming. It is observed that engagement rules are difficult to agree on when the number of participants increase. However, the possibility of blockchain is now fueling the discussion of what the joint governance models could look like.
On a technical level, integration between the blockchain and ERP platforms should also be addressed, as the connection needs to be able to function with a variety of ERP versions of different business as well as be able to handle the potential volume of transactions. Even though it can seem immense and troublesome to create and facilitate this type of platform and project, we should never forget the benefits. Keep in mind that the solution should be scalable, cost efficient and facilitate close and beneficial collaboration between relevant stakeholders. So, I advocate that companies should start or accelerate their blockchain journey and reap the positive benefits in the future.
CA Bigyan Adhikari
Email :- firstname.lastname@example.org