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Breaking Down the Blockchain

December 18, 2018
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19 minutes read
Breaking Down the Blockchain

By Amalina Anuar

Like artificial intelligence (AI) and the cloud, blockchain has been dubbed a technological wonderkid. Harnessed effectively, it can improve a slew of processes not only within the corporate world but also in the public sector.

Experts at the recent MIA International Accountants Conference 2018 broke down some blockchain basics, including how the public and private sectors can use the technology, in the sessions on “Raising the Bar: How Blockchain and AI Solutions can Enhance the Public Sector” and “Riding the Digital Wave, Leading Transformation”.

What is blockchain?

At its core, blockchain is a distributed ledger technology.

“It’s basically photocopies of data all around the world on computer servers,” explained blockchain session moderator Khoo Hsu Chuang, Producer/Presenter, The Morning Run on BFM. “It’s highly accurate, highly transparent, and it’s very dis-intermediary in nature [which means] it removes by-and-large the middleman.”

Speaking at the first plenary session, Toh Beng Siew, CFO, IBM Malaysia added, “It is an independent system, where if there are changes at any point of time in the transaction, everyone is aware of where it is. That’s why it is called a single source of truth.”

Meanwhile, Hari Haran Iyer, Associate, CIPFA highlighted that people tend to conflate blockchain with cryptocurrencies, but this misperception should be corrected. “Cryptocurrency only uses the [blockchain] technology for generating coins.”

Neither is using blockchain a process devoid of human involvement, pointed out Zhong Yang Chan, Assistant General Manager, Innovation, Digital & Strategy, Securities Commission Malaysia.

“At a fundamental level, blockchain is a ledger and a ledger just records information. In the case of blockchain, it makes [data] very easy to be audited.”

Auditors, therefore, are still very much necessary to ensure that data inputs are accurate and flow through the proper system processes.

It’s also worth noting that there are two types of blockchain technologies: a public ledger and a private ledger. The former allows for universal access of uploaded data, while the latter— also known as a hyper-ledger— is permission-based and requires access granted by the owner of the private ledger.

Why is blockchain useful to the public sector?

Since data is shared and is very hard to manipulate once it’s on the ledger, blockchain acts as a source of immutable truth. Hiding illegal financing activities, for example, becomes a Herculean, if not impossible, task.

“Blockchain is a tool for public good,” emphasised Stephen Darley, CEO Asia Pacific, BDO. “Approximately USD1.5-2 trillion is lost through fraud and corruption in the public sector globally per annum. That represents 2% of global GDP, so we can combat that level of corruption through using blockchain globally.”

“There’s huge potential for public sector use cases,” noted Khoo, “such as government services, procurement, payments, voting and land registration, healthcare and taxation and the eradication of corruption eventually. The UK, Brazil, China and India are all running pilots… and a lot of developed countries, especially from the northern hemisphere, are testing the technology.”

Hari highlighted how blockchain specifically helped Estonia. “Estonia used blockchain technology to process 100% of its public sector transactions, whether it is the electoral register or health records. Blockchain minimises corruption, minimises errors in… and duplication of records, and brings in efficiency.”

Political stability could also be strengthened through blockchain adoption. “If you think about democracy,” continued Hari, “it heavily relies on the accuracy of your electoral register. The minute you lose that accuracy, there’s going to be a… challenge on the validity of election results. Blockchain will enable bringing [more] credibility and reliability of data.”

Having indelible records would also be a boon for public services since shared data such as health records could be accessed regardless of citizens’ changes in location, for instance.

“This is something blockchain could potentially solve,” said Zhong, “which is to help link up some of this disparate data that exists in this country for the betterment of the rakyat.”

There is also potential in cleaning up procurement processes via blockchain in the future.

“There’s going to be some variance from organisation to organisation, but 80% of the procurement process is pretty standard,” noted Hari. “Migrating that procurement process [onto blockchain technology] would to a great extent eliminate the risk of fraud, and introduce efficiency and accuracy of records.”

Hari also surmised that since procurement— excluding the tendering process, which has to be a separate process on blockchain— is non-political, it may also be easier to get wider buy-in from stakeholders.

According to Khoo, blockchain could also be mobilised to bolster states’ fiscal strength if data flows and concomitant e-commerce revenues were uploaded onto the ledger before subsequently being taxed.

“The Starbucks and Googles of the world use international transfer pricing to move from countries where they generate the profits to where there is zero tax rating,” echoed Hari. “With blockchain, the advantages are that once transactions are recorded, they can’t be amended or deleted. You don’t have the luxury of hiding taxable income.

“Therefore,” he concluded, “you don’t have to introduce new tax measures or increase existing tax rates if you can just make [the corporate world] use blockchain technology. Revenue on existing tax measures and tax rates will significantly increase.”

During the first plenary session, Dr. Noel Tagoe, Executive Vice-President, Research and Curricula, CGMA elaborated on how blockchain may further change tax regimes as we know it.

“For key regulators in Asia, Europe and the US, blockchain allows them not to accept accounts as given. They are beginning to ask for access to the database of organisations to construct their own accounts in the banking sector to check if you are meeting prudential requirements or not.”

“Transparency is coming in this particular area,” he underscored. “For the Big 4 and tiers below, you have to restructure tax practices because blockchain and databases like that will change the way taxation and tax authorities deal with you.”

(L – R) Khoo Hsu Chuang, Stephen Darley, Hari Haran Iyer & Zhong Yang Chan

What blocks blockchain’s spread?

Further expanding the reach of blockchain-based processes in Malaysia may not be so easy, however, despite the huge potential for use cases.

More generally, acknowledged Khoo, the rapid pace of technological advancement can leave many potential adopters confused. “It also involves huge environmental costs,” he added, “and it’s disruptive enough that interests might not align in the financial sector.”

Plus, though Malaysia was one of the first in the region to jump on the blockchain bandwagon, blockchain has taken flight faster in countries like Singapore thanks to small populations and political will.

As for early adopters like Estonia and Georgia, explained Darley, “some of these are post-conflict countries where records have been destroyed or there’s a threat of destruction of records. There’s a motivation and political willingness to place these records on immutable frameworks like what blockchain presents for the future.”

The Singapore model is also a tough act to follow simply because of financial constraints, pointed out Zhong. While Singapore can hire technology vendors to solve its problems, he noted that “Malaysia… depends a lot more on private sector initiatives. We depend a lot more on ingenuity, on our people to drive through this process.”

Regulators such as Bank Negara and Securities Commission, added Zhong, “are as facilitative as we can be within the ambits of our responsibilities for investor protection and financial stability, but ultimately, we cannot force the technology down someone’s throat.”

Another hindrance is the decentralised data systems in healthcare records, tax regimes or otherwise— a phenomenon slowing down blockchain adoption even in developed countries such as the US and UK.

It’s very difficult to bring all of them into one standardised platform before you can roll out blockchain type technology,” noted Hari.

The panellists, however, gave assurances that blockchain will be an indispensable feature of the future nonetheless.

“Blockchain adoption,” emphasised Darley, “will rise especially in countries like Malaysia, where there is such a young demographic and there is such a crave for new technology and new initiatives.”

In a couple of years, added Hari, “smaller countries that have implemented blockchain would have derived the benefits and that will also motivate other countries where records are not standardised [to do so].”

Meanwhile, the private sector faces its own challenges in adopting blockchain, and these obstacles can vary depending on the industry.

A big hurdle for the financial services sector, which is the top piloter and adopter of blockchain at about 69% globally, are legacy institutions.

“Due to regulatory constraints,” explained Hari, “[financial service providers] haven’t adapted fast enough in moving in the technology space. They are still operating on dinosaurs like AS400 mainframe systems. For them to come to current technology, it’s a big leap.”

What can the private sector gain from blockchain?

For Hari, the advantages of following the blockchain gravy train are simple.

Blockchain, he noted, is a “fantastic opportunity for accountants to step up [and] adapt the blockchain to move away from the mundane processing tasks into doing more, creating ideas, and coming up with more innovative solutions for your own organisation.”

In Zhong’s view, blockchain could be critical to slashing costs as well.

“From an auditor’s perspective, if you’re seeing your clients doing a lot of reconciliation, that’s probably a good place to start [rolling out blockchain].

“It means there’s an asymmetry of data quality, of data standards, which blockchain can potentially come into the picture and help solve,” he explained. “If we just save on the reconciliation costs… operation costs suddenly shrink down by 20-30%.”

Blockchain has also been imperative for resolving disputes for IBM by up to 90% due to shared and indelible data entries, shared Toh, in addition to speeding up intercompany transactions that require much documentation.

“Blockchain makes life better for auditors as well in dealing with authorities,” continued Toh, “because documentation and everything required is kept within the blockchain.”

Moreover, though blockchain was born with pseudo-anonymity in mind, such as with bitcoin, Zhong was quick to add that this doesn’t mean the technology is ill-suited for integration with a whole suite of financial services.

“Know Your Client, Anti-Money Laundering, Due Diligence, and Counter-Terrorism Financing is still top of the mind,” he said. “The real world still needs these regulations, this compliance to be involved in this process. The technology can adapt and evolve to what we need it to do.”

Of course, opportunities for the private sector— and especially accountants— don’t just lie in adopting blockchain but in helping others adopt it too.  “There’s a huge potential in the standardisation of public records,” emphasised Darley, “and that’s a great opportunity for us as accountants.”

How can organisations adopt blockchain?

Given how blockchain may be a holy grail for technological-based operations, the panellists shared advice on how to put blockchain adoption roadmaps into action.

Chief among their recommendations was to phase blockchain in slowly but surely.

“It’s not about big investments,” counselled Zhong. “The easiest way to understand this technology, to get around this technology, is to just choose an area and start piloting it around your organisation. It’s about taking bite sized pieces of this apple rather than trying to swallow the whole apple.”

Beyond proof of concepts and small pilot projects, Hari added that role models are just as imperative: “Money doesn’t always solve all technological problems or all operational issues. The issue is whether the tone at the top really wants change to happen.”

Rather than obsessing over the technology alone, he continued, getting project management governance right— whether in terms of controls, risk management, or regulatory compliance— is as important as ever. Compared to public ledger-based cryptocurrency projects, which face an estimated 85% failure rate, projects in the hyper-ledger space have better success because of this.

“The [hyper-ledger] project sponsors have good structures in place. They know what they want to achieve. It may or may not necessarily be monetary benefit,” noted Hari.

“They are looking at improving compliance, improving efficiency, [and bringing] a broad-based economic benefit to the organisation and economic benefit to the country. It’s a long-term agenda, a long-term focus, unlike the cryptocurrency agenda which have a short-term focus.”

As for regulatory compliance, Zhong noted that toeing the line of the law works similarly vis-à-vis blockchain despite the nascent nature of the technology.

“It’s not about the technology. It’s about the activity you intend to conduct on the blockchain. Regulators,” he underscored, “are ready to step in when things are not right.”

This is especially the case in an era where competing demands between data privacy and data liberalisation exist.

For governments, Zhong noted that the concept of self-sovereign identities may prove useful such as when dealing with powerful technology companies. “The idea is that you have all this data on the blockchain,” he explained, “but you control who gets access to that data.”

Still, Darley noted that the private sector would rather see less stringent requirements from regulatory bodies at this early stage of the blockchain game.

“The more you regulate something, the more it stifles innovation.” Instead of constraining blockchain use in business, he recommended that “the conversation should be around standardisation of blockchain so it can be used more uniformly globally.”

This would enable players both big and small to reap the yields of blockchain adoption, though panellists pinpointed the need for SMEs to proceed with their size in mind.

Speaking of Google and Amazon Web Services, Hari noted that “for SMEs to embark on blockchain technology on their own is cost prohibitive, so they ought to consider cloud-based solutions.”

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