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Decrypting blockchain and cryptocurrencies

South African Institute of Professional Accountants
24 April 2018

Cryptocurrencies are dominating the media. This one has collapsed, that one is on the rise, and a new one is around the corner. Their flavour isn’t quite as piquant today as it was yesterday thanks to fraud, an upsurge in Initial Coin Offerings (ICO) and the challenges that face its legislation and regulation across country and government.

In April the South African Revenue Service (SARS) announced that it will be treating cryptocurrencies using normal income tax rules. Affected taxpayers will, therefore, be expected to declare cryptocurrency gains or losses as part of their taxable income in the tax year in which it is accrued.

Cryptocurrencies are also often confused with blockchain which is a complex, layered technology that provides the backbone of cryptocurrency, but has the potential to deliver so much more to enterprise, industry and the consumer.

Cryptocurrencies may be getting all the airtime, but blockchain is the underlying technology, and this application of the technology is only a small part of what this technology can enable. Blockchain itself is largely unexplored, even though it has been around for nine years now.

To fully understand the potential of blockchain, it’s worth understanding precisely what it is and what it is not. According to Deloitte, blockchain is defined as a ‘digital and distributed ledger of transactions, recorded and replicated in real time across a network of computers or nodes’. It is already being used as a way of replacing databases thanks to its secure, centralised network – taking the vulnerable database of today and turning it into something that can be trusted.

If a bank runs its own database, they can change information without anyone knowing. With blockchain, it is impossible to do so without leaving a digital trail. This means it provides a system that all parties can trust inherently, and the applications of this high level of transparency and security aren’t limited to just the finance industry.

Removing the middleman

By implementing blockchain, the business can cut out the middlemen who originally provided the verifications needed for transactions. There is even talk of it being implemented in security exchanges where the exchange is currently the middleman between the investor and the company they want to invest in. While the technology may not have an immediate and profound impact on the man on the street, for the accountant it potentially offers an additional layer of trust to the numbers.

Blockchain provides the certification between two parties in a transaction, acting as the verification in itself. There is increased emphasis on the validity and accuracy of the information. The Professional Accountant (SA) can lean on the security afforded by blockchain to focus on adding value to the enterprise across financial reporting, analysis and insights.

Of course, this does mean that the accounting industry needs an understanding of the technology, how it supplies the verification and the reasoning behind its security and validity.

Businesses are set to adopt this technology, of that there is no doubt. It won’t happen overnight, and the middlemen are going to push for a lot of legislation to delay the advance of blockchain technology as far as possible or even make some of the applications unlawful. It is a battle that technology will most likely win in the long run, and the Professional Accountant (SA) needs to know how this will impact on clients and the industry they are working in.

For the Professional Accountant (SA), the pressure is on. By understanding how blockchain works and the impact it has, they can provide clients with exceptional insight into everything from the latest regulations to innovative applications.

The circle of success

In South Africa, we still have a way to go, but that doesn’t mean that the Professional Accountant (SA) can put their head in the sand and ignore it. As cryptocurrency fluctuates and organisations such as the Reserve Bank, SARS and other government departments implement regulation to manage the movement of money around the globe, blockchain is going to evolve at a rapid pace.

Another aspect to consider is information. The POPI Act and other similar forms of legislation that control information are set to impact on the development and adoption of blockchain. It connects to the digital lives that people are leading, the regulation around what companies can or cannot maintain, and how blockchain can support compliance.

It is difficult to say how blockchain and cryptocurrencies are going to play out. The Professional Accountant must be aware of how cryptocurrencies are declared in business records and monitor regulation. They have to know what to look out for, the risks that are involved and the impact on the business. And they need to recognise that these technologies aren’t going to leave any time soon.

Authored by: Darren Gorton, Finance Executive at the South African Institute of Professional Accountants (SAIPA)