Are you like most people, thinking of Bitcoin, the virtual currency first released to the public in 2009, as a currency only for criminals, drug rings, and money launders? Though adoption of the currency has been slow, it is increasing in popularity and use, and by more and more “normal” folks. As proof, the total value of the currency is close to $9 billion, and increasing. Venture capital firms have raised significant money to invest in Bitcoin related enterprises. And there are more virtual currencies taking advantage of the investment interest (e.g., Ethereum, Litecoin, Monero to name a few).
No government, no entity “owns” the Bitcoin system, making it different from pretty much any currency you know.”
But what is Bitcoin? It is a peer-to-peer, decentralized network that allows for only a single “use” of the software-created currency. With the use of cryptographic technology and blockchain underpinnings, Bitcoin creates a verifiable audit trail, creating trust out of the open source network that it operates on. No government, no entity “owns” the Bitcoin system, making it different from pretty much any currency you know.
And the technology that is now getting the attention is the one that forms the underpinnings of Bitcoin – blockchains. But, why? And what is a “blockchain”?
A quick overview is warranted. Essentially, a blockchain is an incorruptible virtual ledger of transactions (typically economic ones) that get recorded across a network of connected computers, or “nodes.” It helps to think of it as a distributed spreadsheet where entries are made not just in a single database that is stored in come central location but where entries are made in each of the duplicate spreadsheets at the same time. As a transaction occurs, for example with a transaction of Bitcoin for services provided, the transaction gets recorded in the ledger that keeps track of all the transactions of Bitcoins. And the record is updated throughout the network, simultaneously.
There are many benefits to having such a system. Because of the distributed, decentralized nature of the system, whole aspects of traditional commerce could become unnecessary. For instance, by using Bitcoin to transfer money from the US to another country, the transaction occurs on the Bitcoin network, does not involve traditional banks or other intermediaries (think VISA, Western Union, etc.), and can be done for pennies on the dollar, no matter the amount transferred. Transaction fees for typical, traditional foreign money transfers can run 7% to 12% of the amount transferred, plus additional fees – meaning transferring money with blockchain technology (which Bitcoin uses), is about 250 times cheaper. Recently the World Bank estimated that in 2015 more than $430 billion in money transfers were sent; obviously there is a large market for such a disruptive technology.
And the expectation of investors is that the blockchain technology will begin to be used by many industries, not just currencies or financial services. Any industry that maintains records of transfers of ownership or valuable assets could be significantly impacted by the use of blockchain technology. Some examples:
Real estate titles – The systems tend to be local, are not transparent, are susceptible to fraud and are costly and require labor-intensive administration. Blockchain technology would allow for publicly available information that is easily verifiable by all parties or anyone who wants to look. Watch out title insurance companies and title attorneys.
Intellectual property – Using smart contracts (which have blockchain technology at their core) allows for easier maintenance and tracking of transactions related to the use and payments for intellectual property (e.g., music copyrights) .An example is Mycelia, a peer-to-peer music distribution system, that enables musicians to sell songs directly to audiences and provides for efficient divvying up of royalties to songwriters and musicians.
Stock trading – Increased efficiency in trade settlements make this area a natural benefitter of blockchain technology. Given the near-instantaneous trade confirmations, intermediaries (i.e., clearing houses, auditors, and custodians) are no longer needed and will get removed from the process. Some exchanges are already moving in that direction. The best known is Nasdaq’s Linq platform that provides for trading private market shares (typically between pre-IPO startups and investors). Nasdaq’s Linq completed its first share trade in 2015.
Why should you care? Due to the potentially widespread application of blockchain technology, it is likely it will impact many industries including legal and accounting services. And it is better to be aware of such changes and be able to adjust to them, then to be caught off guard when your bread and butter services are no longer in demand because blockchain technology has made them obsolete.
Though blockchain technology consulting is not a primary focus of IAG’s services (which include business valuations, forensic accounting, and fraud investigations), IAG stays informed of the issues and technologies that could impact your or your client’s business – do you? If you have any questions or need assistance in a business valuation, forensic accounting, or fraud matter, please call Dan Branch at 770-635-1582.