THE DEFINITIVE GUIDE TO BLOCKCHAIN FOR ACCOUNTING AND BUSINESS
THE DEFINITIVE GUIDETO BLOCKCHAIN FORACCOUNTING AND BUSINESS
ENDORSEMENTSPraise for The Definitive Guide to Blockchain for Accounting and BusinessI have no doubt that Professor Dutta’s book will be very well-received. Hepresents a clear and comprehensive overview of developments in blockchaintechnology that is both timely and highly accessisble to those looking to understand its wide range of business and industry applications.Deborah Terry. AO Vice-Chancellor,Curtin University, Perth, Australia.A very intuitive and comprehensive book on blockchain technology and itsbusiness applications. Particularly relevant for professionals to understandthe implications for business and accounting.Wes Bricker, Vice Chair—US and Mexico Assurance Leader,PricewaterhouseCoopers (PwC), U.S.A.Blockchain technologies have redefined the way businesses operate. A greatbook for those who want to master the knowledge of blockchain.Deborah Leung, FCPA, Executive General Manager International,CPA Australia, Hong Kong.A well written book that provides a timely examination of the many challenges and opportunities afforded by blockchain technology. Thoroughly recommended reading for professionals, managers and educators.John Cordery, Provost,Curtin University, Perth, Australia.Through the description of various scenarios, this book illustrates blueprintsfor possible applications of blockchain. This book will lead in the educationof future professionals in accounting and business.Birong Dong, Vice President,Nanjing Audit University,Nanjing, P. R. China
EndorsementsiiiA great account of evolving blockchain technology and its application acrossvarying industry sectors. Will be a key resource in educating accounting andbusiness professionals of the future.Colin Pavlovich, Group CFO,Navitas, Australia.An excellent coverage of blockchain evolution with an industry perspectiveof how it will mature in the future. It has several examples of how blockchain will be used, and that makes it easier for readers to apply the blockchain techniques as well.Shyam Mamidi, Director,Natsoft Corporation, Singapore.Professor Dutta is a brilliant researcher, recognized teacher and anaccomplished administrator. In this timely book, he guides a nontechnical reader through a complex topic with effortless ease. A must-readfor everyone connected with Business.Bin Srinidhi, Carlock Endowed Distinguished Professor,University of Texas at Arlington, U.S.A.Professor Saurav Dutta has been engaged in accounting education andresearch for many years. The blockchain era has arrived which will bringmany changes to accounting and finance professions. This book willenhance our understanding of the subject, deeply and comprehensively.Xiao Xue. Editor in ChiefFriend of Accounting. P.R. ChinaA valuable resource for business and accounting professionals to gain a nontechnical perspective on the inherent opportunities in blockchain.Professor Carla Wilkin, Head of Accounting,Monash University, Sydney, Australia.
EndorsementsivThis is a timely book explaining the essence of blockchain technology as digital ledger creating an incorruptible and de-centralised record-keeping system.Professor Dutta discusses the potential impact on bookkeeping processes andthe required skillsets. The book is highly recommended for teaching studentsand upskilling professionals in the industry.Claus Otto, Director, Oil and Gas Innovation Centre,Curtin University, Perth, Australia.An outstanding and valuable work for the accounting professionals andlearners to understand how to apply the method of blockchain on accounting and business management.Professor Tao Meng, Dean of International Business College,Dongbei University of Finance and Economics, Dalian, P.R. China.Professor Dutta has provided a fascinating and comprehensive introductionto a technology with critical applications to financial reporting, risk management, and auditing.David Marcinko, Emeritus ProfessorState University of New York, NY, U.S.A.
THE DEFINITIVE GUIDE TOBLOCKCHAIN FORACCOUNTING AND BUSINESSUnderstanding the Revolutionar yTechnologySaurav K. DuttaCurtin University, AustraliaUnited Kingdom – North America – JapanIndia – Malaysia – China
Emerald Publishing LimitedHoward House, Wagon Lane, Bingley BD16 1WA, UKFirst edition 2020Copyright 2020 Emerald Publishing LimitedReprints and permissions serviceContact: permissions@emeraldinsight.comNo part of this book may be reproduced, stored in a retrieval system, transmittedin any form or by any means electronic, mechanical, photocopying, recording orotherwise without either the prior written permission of the publisher or a licencepermitting restricted copying issued in the UK by The Copyright Licensing Agencyand in the USA by The Copyright Clearance Center. Any opinions expressed inthe chapters are those of the authors. Whilst Emerald makes every effort to ensurethe quality and accuracy of its content, Emerald makes no representation impliedor otherwise, as to the chapters’ suitability and application and disclaims anywarranties, express or implied, to their use.British Library Cataloguing in Publication DataA catalogue record for this book is available from the British LibraryISBN: 978-1-78973-868-1 (Print)ISBN: 978-1-78973-865-0 (Online)ISBN: 978-1-78973-867-4 (Epub)
DEDICATIONI dedicate this book to my beautiful wife Ushashiwho for over thirty years has maintaineda detailed, easily accessible, immutable and time-stamped recordof my every foible, folly and flub.
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CONTENTSForeword xvAbout the Author xviiAbout the Contributors xix1Introduction 2The Infrastructure Supporting Bitcoin: Blockchain2.1. Introduction 2.2. Evolution of Trade – Barter System to Cryptocurrency 2.3. Trust – Foundation of Trade 2.4. Cryptocurrency – Basic Features and Challenges 2.5. Blockchain Introduced 2.6. Illustration of Bitcoin Transaction EnabledThrough Blockchain 2.7. Blockchain Beyond Bitcoin 31781013151721Basic Primer on Blockchain Terminology3.1. Introduction 233.2. Participants and Transactions 253.3. One Word, Two Meanings and OtherMisconceptions 283.4. Blocks, Hashes and Merkle Trees 303.5. Types of Blockchain 343.6. Essential Features of Blockchain 363.7. Blockchain Platforms 373.8. Monopoly on Blockchain 393.9. Summary 40ix
Contentsx456The Consensus Mechanism4.1. Introduction 4.2. Importance of Consensus 4.3. Byzantine Generals Problem 4.4. Economics of Validity and Verifiability 4.5. Proof of Work 4.6. Proof of Stake 4.7. Conclusion 43444651525758Smart Contracts5.1. Introduction 5.2. Smart Contracts Defined 5.3. Economics of Microtransactions 5.4. Features of a Smart Contract 5.5. How Does it Work? 5.6. Smart Contract Applications 5.7. Advantages of Smart Contracts 5.8. Blockchain Facilitates Smart Contracts 5.9. Legal Complexities of Smart Contracts 5.10. Conclusion 61636667697173747577Tokenization6.1. Introduction 6.2. Untapped Potential of Tokenization 6.3. An Illustration of the Appeal of Tokenization 6.4. Operationalization 6.5. Use-Cases 6.6. Process of Tokenization 6.7. Growth in Tokenization Market 6.8. Prevailing Risks 6.9. Back to the Future – Asset Securitization 6.10. Tokenization and Securitization – The Similarities 6.11. Conclusion 798082838589919398102103
Contentsxi7 A Framework to Evaluate Blockchain Use-CasesContributors: Phillip G. Bradford and Roger M. Benites7.1. Abstract 1077.2. Introduction 1077.3. Technical Primer on Cryptography andEncryption 1127.4. Framework to Evaluate Use-Cases 1137.5. Applying the Framework 1167.6. Smart Contract: A Distinctive Feature 1187.7. Sample Use-Cases 1207.8. Caveats and Risks 1257.9. Summary 1268 Financing Corporate Expansion Through TokenizationContributor: Mike Rogers8.1. Introduction 8.2. Company Background – Curzio Research 8.3. Private offering – Alternatives and Challenges 8.4. Security Token Offerings Versus TraditionalPrivate Placements 8.5. The STO Process 8.6. Financing in the Mineral Industry 8.7. Conclusion 1271271281301331451469 A Transparent New World: Ethically SourcedMineral Supply ChainContributors: Nathan Williams and David Lee uction Complexity of Mineral Supply Chain Lack of Transparency in Mineral Supply Chain Evolving Regulation on Traceability of Minerals Money Laundering Through Mineral Sourcing Traceability Requirements Blockchain Solution Incentivizing Participation in Blockchain Conclusion 149150153153158159160168174
Contentsxii10 Tokenization of the Japanese Real Estate MarketContributor: Mike Rogers10.1. Introduction 17710.2. Financial Transformation Sparked by Blockchain 17810.3. Smart Contract Standards Expedite DigitalAsset Functions 17910.4. Harmonizing Financial Regulation AcrossJurisdictions 18010.5. Digital Securities – Migration to Web 3.0 18110.6. Projected Growth of Security Tokens 18310.7. Digital Securities Ecosystem 18710.8. Real Estate Market Inefficiencies 18810.9. The Japanese Real Estate Market 19010.10. Tokenizing Japanese RealEstate Investments 19710.11. Conclusion 20511 Blockchain-Supported Business Innovations11.1. Introduction 11.2. Cryptotax Business Model 11.3. Collateralized Lending in Cryptoworld 11.4. Application in Automobile Industry 11.5. Microrental of Parking Spaces 11.6. Insurance to Protect Against Flight Delaysand Cancellation 11.7. Establishing Provenance 11.8. Conclusion 20921021321822022122422712 Internal ControlsContributor: Gerard Brennan12.1. Introduction 22912.2. Risk Management and Internal ControlsFramework 23112.3. Types and Assessments of Internal Controls 240
Contents12.4.12.5.12.6.12.7.xiiiAuditing Blockchains/Distributed Networks System Audit for Blockchain Controls for the Entire Ecosystem Conclusion and Other Considerations 13 Future Opportunities and Challenges13.1. Introduction 13.2. Health Services 13.3. Energy Sector 13.4. Maritime Industry 13.5. Governmental Agencies 13.6. Vulnerabilities 13.7. Threats to the Development of Blockchain 13.8. Opportunity – Amalgamation of Technologies 13.9. iography 287Index 291
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FOREWORDSaurav Dutta’s The Definitive Guide to Blockchain for Accounting and Business: Understanding the Revolutionary Technology is a timely tour de forcefor blockchain business understanding. It’s crisply written with clear concisenon-technical explanations of the key concepts that business professionalsneed to understand around the technology. But it’s not a technical primer,rather it stands out as a seminal work in bridging the gap between technology and business. By first building or solidifying the reader’s understanding of the core foundational concepts of blockchain and distributed ledgers,Saurav provides a graceful onramp into an exploration of the implicationsfor business and accounting professionals. Through the highlighting ofemerging business models built on these new technologies, then exploringthe implications for careers in accounting and internal controls, the reader isprovided an unbroken view of the whole region surrounding and supportingthe emergence of one of the most important technologies of the twenty-firstcentury.David DeputyPresident, Accounting Blockchain CoalitionDirector, Strategic Development and Emerging MarketsVertex, Inc. (U.S.A.)xv
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ABOUT THE AUTHORProfessor Saurav Kumar Dutta is the Headof School of Accounting at Curtin University, Australia. He previously was the Chairman of the Department of Accounting andBusiness Law at the State University of NewYork and has held faculty appointments atRutgers University (New Jersey, U.S.A.) andthe City University of New York. He holdsa Bachelor of Technology from the IndianInstitute of Technology, Bombay (India),and a Ph. D. from the University of Kansas(U.S.A.). He was awarded the 1989 Robert Beyer Silver Medal for securingthe second highest total score in the CMA examination and was also therecipient of the National Talent Search Scholarship awarded by the Government of India.Throughout his academic career, spanning over 25 years, he has engagedin high-impact research which has greatly informed industry practices. Hehas influenced public policy in his role as an Academic Fellow in the Officeof Chief Accountant at the U.S. Securities and Exchange Commission (SEC).In that role, he helped implement the Dodd-Frank Act and other measuresfrom ‘lessons learned’ during the 2008 global financial crisis. While at theSEC, Saurav also served as a liaison with FASB, PCAOB, IASB and IAASB,all of which are critical standard-setting bodies that affect the accountingprofession.Saurav has been engaged by the New York State Attorney General’s Officeto investigate billing practices for a multi-national wholesale distributor. Hewas also engaged by the SEC to determine appropriateness of derivativeaccounting of a Fortune 50 insurance company and treatment of consolidation accounting of a Fortune 500 company resulting in settlement andxvii
xviiiAbout the Authorimposition of monetary fines on the companies. Under the purview of theUnited States District Court of the Southern District of New York, he wasinvolved in designing statistical procedures to aid in the disbursement ofamounts ranging between 500 million and 6.1 billion for settlements ofMCI-WorldCom, Global Crossing, Cendant, and HealthSouth. He was alsoinvolved with the reparations of more than 400 million Swiss Francs fromthe Swiss banks to Holocaust victims, under the purview of the U.S. DistrictCourt of Eastern District of New York. Recently, he was engaged by AppleComputers as a defense expert in 600 million lawsuit under the jurisdictionof the U.S. District Court in the Northern District of California.Saurav has authored a book, Statistical Techniques for Forensic Accounting, published by Financial Times Press in 2013. He has also authored WhitePapers and Course material for the Institute of Management Accounting. Hehas published more than 40 academic papers in reputed U.S. and international journals and has presented his work in numerous national and international venues.
ABOUT THE CONTRIBUTORSRoger M. Benites (Chapter 7)Roger has been in the finance sector since2010, starting in Fort Lauderdale, Florida,and then moving to Lima, Peru in 2012.Roger was introduced to Bitcoin andBlockchain technologies in 2013 due tothe Argentinian and Venezuelan economiccrisis. Roger assisted in establishing oneof South America’s first cryptocurrencyexchanges. In 2017, Roger assisted statelegislators in drafting Connecticut’s first blockchain bill. Most recently hehas been working with the Bitcoin Center, featured on Netflix’s “Banking onBitcoin”, developing blockchain education and incubator programs.Phillip G. Bradford (Chapter 7)Dr. Bradford is the director of the computer science program at the University ofConnecticut, Stamford. He worked for General Electric Asset Management, BlackRock,Reuters Analytics, and he co-founded a firm.He also was on the faculty at Universityof Alabama School of Engineering and atRutgers Business School. Phil was a postdoctoral fellow at the Max-Planck-Institutfür Informatik. He earned his PhD in computer science at Indiana University,an MS in computer science from the University of Kansas, and a BA inmathematics from Rutgers University.xix
About the ContributorsxxGerard (Rod) Brennan, CFE, MBA, Ph.D. (Chapter 12)Rod is the Audit Technologies Director forLukka, based in New York, New York. Heis the former Audit Director and NorthAmerica Risk & Internal Control Officerfor Siemens Corp. and an Adjunct Professorat Rutgers Univ. Rod is an audit practitioner,frequent speaker and published researcheron the topics of blockchain, continuousauditing/monitoring/analytics, Rod continues to speak and do research in the area of automated audit and reportingfor applications on DLT / Blockchains.Mike Rogers, CPA (Chapter 8 and 10)In 2018, Mike founded Millennials InBlockchain (MIB), a globally es as the head of MIB Consulting, aNew York based digital transformationfirm. Mike’s tokenization research has beendistributedbynumerouscorporations,including Securitize, Inc. and Deloitte. Mikeformerly worked in financial services atErnst & Young and The Blackstone GroupL.P. He holds a B.S. in finance and a M.S.in accounting from The University at Albany, where he graduated SummaCum Laude.Lee Williams (Chapter 9)Dr. David Lee Williams MD CCBOM isMinespider’s regulatory expert with 15years of experience in industrial raw material policy. He was previously the occupational health and safety regulatory expert forMichelin and chair of the technical group forthe Cobalt Reach Consortium. He has beeninvolved with blockchain since 2016.
About the ContributorsxxiNathan Williams (Chapter 9)Nathan Williams is a Canadian blockchainentrepreneur, based in Berlin, Germany.He is the Founder & CEO of Minespider,a decentralized protocol for responsiblysourced raw material data. Nathan hasbeen featured in Forbes, Bloomberg, CNBC,Huffington Post, and Wired Germany. He isa UNECE/CEFACT Expert with a focus onblockchain and traceability related matters.He has his B.Sc. in computer science fromMcGill University, and his MBA from Concordia University in Montreal,Canada.
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1INTRODUCTIONA decade back, the words cryptocurrency, Bitcoin, blockchain, etc., wererelatively unknown; however, over the past decade, cryptocurrency hasgained popularity in both academia and popular culture. As one of the mostsuccessful cryptocurrency, Bitcoin’s market capitalization in early 2020 wasaround 120 billion. It had reached a maximum of 237 billion in the fourthquarter of 2017, up from 70 billion the previous quarter. The almost 300%gain in value over that quarter didn’t go unnoticed and public interest incryptocurrency and its technology grew. Since then, in about two years,1 thenumber of blockchain wallet owners increased from less than 17 million inthird quarter 2017 to around 45 million worldwide.With increased popularity of Bitcoin, blockchain the infrastructure supporting Bitcoin also received extensive attention. The features of blockchainin maintaining detailed and trusted records were recognized to have manyuseful features. Over the past few years, 2017 onwards, blockchain-basedapplications are proliferating in many industries, and not just in financialindustry. While there still remain challenges to be overcome, blockchain’spotential currently seems unbounded, as evidenced by increased worldwideinvestment in its development.Worldwide, the spending on blockchain solutions almost doubled from 1.5 billion in 2018 to 2.9 billion in 2019. The spending on blockchain development is expected to continue to grow at the same pace, projected to be about 15.9 billion by 2023 (see Fig. 1.1).2 The financial sector leads the spending inblockchain solutions by investing more than 1.1 billion in its development,followed by the manufacturing sector and the distribution sector, each investing upwards of 600 million. The United States had the largest blockchain1
Saurav K. Dutta2Fig. 1.1: Projected Worldwide Investment in Blockchain (Billions of US ).3181614121086420201820192020202120222023spending at 1.1 billion, followed by Western Europe and China. In October2019, President Xi Jinping gave a speech saying China needs to “seize theopportunities” presented by blockchain, in what appeared to be one of the firstinstances of a major world leader backing the technology. Xi said blockchain isan “important breakthrough in independent innovation of core technologies.”4This great interest and large investment in blockchain technology is notwithout prospects. According to a leading research firm, Gartner, “by 2025,the business value added by blockchain will grow to slightly more than 176billion, then surge
Saurav Dutta’s The Definitive Guide to Blockchain for Accounting and Busi - ness: Understanding the Revolutionary Technology is a timely tour de force for blockchain business understanding. It’s crisply written with clear concise non-technical explanations of the key concepts that business professionals need to understand around the technology.
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