The distributed ledger challenges assumptions about the ways in which organisations can share information and trust each other, while still generating sustainable economic returns.
The distributed ledger is crossing over from a topic of discussion among technologists to one that is familiar to a generalist or business audience. It presents new areas for analysis and consideration, and the sooner professional accountants increase their awareness, the better prepared they will be to engage with it.
What is a distributed ledger?
A distributed or shared ledger is a digital database of records where all participants are looking at a common view – in contrast to a typical situation currently where participants (for example, in different organisations) are looking at different databases that are independently managed and updated.
When a change or update to any participant’s record is confirmed, the technology ensures that the view seen by each participant in the network synchronises to reflect the latest update.
This is a peer-to-peer network where the participants are themselves responsible for the validation of records – without the use of a central authority for this purpose. The network itself may be public or private.
Distributed ledgers in action
As the technology matures, the shared ledger’s common view of records and transparency of transaction history could reduce reconciliation across different databases and drive significant efficiencies.
Business processes that are characterised by inefficiencies (eg trade finance), or exist because of a lack of trust (eg Know Your Customer requirements in financial services) or poor supply chain visibility (eg for global garment supply chains) are all key areas for distributed ledger applications.
"This technology checks that transactions are genuine by referencing previous transactions and grouping them into 'blocks'. These blocks then get added to a 'chain' of successive events to create the single, accurate view of the full list and sequence of transactions for all network participants to date."
Bitcoin is a cryptocurrency, so unlike a traditional ('fiat') currency, its supply is not controlled by a national government.
It operates on a digital peer-to-peer basis.
Encryption tools are used to ensure that the bitcoin transfer occurs between the designated source and recipient address.
Also, when bitcoin transfers occur they use balances from individual transactions, and do not net-off balances across transactions into a single balance.