In the field of accounting for nonprofits, you may never have dreamed that you’d need to consider blockchain. Blockchain, the technology undergirding the entire cryptocurrency realm and beyond, is a rising star in the world of technology innovations. You may not think that as an accountant, especially one who does accounting for nonprofits, that you must consider blockchain. But, its impact goes well beyond Bitcoin, Ripple, and all the other cryptocurrencies out there.
What Is Blockchain?
In 2008, a white paper appeared on an obscure forum for technology enthusiasts. The paper, entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System”, outlined a new system of value exchange. This pure peer-to-peer electronic cash system was built upon a foundation of mathematical computations called blockchain.
Before this paper was published, people worldwide had dreamed up an electronic transfer system for cash, but the problem of double counting and tracking securely each transaction had not been solved. The pseudonymous author of the paper, Satoshi Nakamoto, discovered a solution to the double counting problem through what has since become known as blockchain.
The blockchain is a distributed database of records. This database is also called a public ledger. It contains all the transactions or digital events that have been executed and shared among participating parties.
When a transaction is made in the public ledger, it must be verified by consensus of a majority of the participants in the system. Once a transaction is confirmed, it’s never erased. Every single transaction on the blockchain from the moment it began to this present second is recorded and saved. You can look back along the blockchain to verify a transaction or see it changing now.
The blockchain can be accessed from any location via the internet. Transactions which take place between users are verified and added to the global blockchain ledger by “miners” who, by contributing their computing power, earn small transaction fees.
While we use the singular term “blockchain”, there are literally thousands of blockchains worldwide, or distributed ledgers, each running on their own mathematical code. That’s what sets them apart from one another. When you want to make a transaction, a signal goes out along the blockchain, which then is received by all the computers, or nodes, on the chain. When the majority or consensus verifies the authenticity of the transaction, the transaction is complete.
An Example of a Blockchain Transaction
Let’s use bitcoin as an example since that’s the most famous (and first) cryptocurrency ever on the blockchain, and the first transaction on the blockchain was the transference of bitcoin. In this example, you want to send 1 bitcoin from your account, called a wallet, on an exchange, or place where fiat currency such as dollars can be exchanged for bitcoins.
You want to send this bitcoin to your friend Susan. You log into your exchange account and type in Susan’s public bitcoin wallet address. Each account has a public address, which looks like a long string of letters and numbers, and a private key, which is held by the account owner. The private key is NEVER shared—sharing it gives anyone access to your wallet. It’s like leaving your wallet, purse, or bank account open.
You enter the amount of bitcoin you want to send to Susan and her public wallet address and hit “send.” A signal goes out through the exchange to all the nodes on the bitcoin blockchain. Miners on the blockchain confirm that yes, you have the bitcoin in your account and that yes, Susan’s wallet account is authentic. Once this is confirmed, a process which can take a few hours or even days, depending on blockchain traffic, the bitcoin arrives in Susan’s wallet. Now Susan, using her private key set up on the site hosting her wallet, can access her money and spend it or exchange it for another currency such as dollars, euros, or other cryptocurrencies.
The Impact on Accounting for Nonprofits
Although this may sound esoteric, blockchain technology itself goes well beyond cryptocurrencies. The government of Sweden moved all its land titles onto a unique blockchain, forming a permanent and publicly accessible record of every land title transaction. Think about that for a minute and how it impacts the real estate market. Anyone can now do a title search. It is no longer relegated to title search companies to hunt down records—they are all available via the internet for anyone to view.
For accountants, the potential is still being explored. Imagine using blockchain to record all your nonprofit’s transactions. The blockchain would form a permanent, public ledger. It would eliminate fraud since consensus must be reached to change data on the nodes, so one person can’t tamper with the books.
The Ethereum blockchain offers something called smart contracts which eliminate the middleman in any contract. Consider the benefits of transactions without having a third party involved. Real estate and automobile transactions could take place on the blockchain via smart contract without needing to run them through the court system or another recording body—it’s all on the blockchain.
For accountants, this is an exciting time, and although the blockchain can be difficult to wrap your head around when you’re immersed in traditional finance, it holds enormous potential. It’s still in its infancy, but bears watching.
Beck & Company
Beck & Company is a certified public accounting firm serving the greater Washington D.C. area and the Eastern seaboard. We offer consulting services, auditing, and software selection to help nonprofits with their accounting needs. Contact us today for more information or assistance.