The magic in this space is what we sometimes hear called triple entry, which is highlighted by the bitcoin block chain’s success in mounting an independent currency over a shared ledger.
We all know how insubstantial internal ledger entries are, and how we can really only rely on them to the extent that we trust our internal processes (e.g. who can forget the Enron events of 2007 leading to a popular view that accounting and audit have failed us).
On the other hand, we also see how solid payment systems are. Whether bank- or Government- or private-run, payments generally work. When these multi-party activities do not work, all hell breaks loose, and people run, sometimes quite literally, to other systems.
When accounting ledgers break, we sigh and move on. Triple entry, via Block Chain Ledgers takes us from the unreliable fantasy of the accounting entry to the hard concrete reality of the payment: the secure distributed Block Chain Ledger is as solid as a bitcoin payment.
Quite simply, the basics of accounting have not changed for hundreds of years.
Today, the many well known issues are trying to be addressed by formulating new rules, employing more auditors and investing in more IT infrastructure. This is the wrong approach.
I believe most of the above are solvable by doing four things;
- Make accounting of a business activity an integral part of that activity. Instead of treating it as a separate process. What if the invoice was the journal?
- Sharing data between entities. Any business transaction involves an agreement of value by one or more parties. Privacy is not a problem as all parties should be recording the same data.
- Using cloud accounting ledgers. Enterprises maintain simple private ledgers. Cloud APIs allow for easy integration and the development of APPS.
- Securing each ledger, with private block chains, brings existing accounting systems into today's digital world, without throwing away everything ( like bitcoin has done).
This doesn't mean that bitcoin should replace double entry,rather it augments the traditional accounting system ledger by providing a way for parties to share certain transactions as if they were as solid as payments.
E.g., when Alice Ltd wants to pay Bob Ltd, Alice will no longer rely on its accounting systems alone to describe this situation, and neither will Bob. Both of these parties will share a “receipt” that is cryptographically signed by some party that has mediated it (could be an existing bank such as ANZ, the Reserve Bank of Australia, or it could be VillageMall).
Triple entry accounting is very simple, as shown above, there are three parties, each holding a copy of the same receipt, hence the label "triple entry". In the Bitcoin world, that middle inter-mediator is the bitcoin block chain and the two other parties are the Wallets.
The receipt or public book above, itself is strong because it is cryptographically authorised by the payer, and cryptographically signed off by the mediator (as a minimum). It represents such solid evidence that it is practically irrefutable in terms of the facts on record, and it is trivially automated in audit terms.
Holding this entry is far more flexible than Alice and Bob relying solely on their double entry systems because firstly you can build the double entry systems out of the collection of receipts any time you need them, and secondly, it is so strong that it can be used as evidence to create derivative claims. E.g. it’s a set-up for securitisation or loaning contracts or other more advanced uses. And, it’s a lot easier to audit because it is such solid evidence.
Back to bitcoin and its block chain. This is the first social experiment in a large scale triple entry issuance. In part, seeing what happens on the block chain generates excitement because we perceive an ability for any company to turn its stalled internal assets into contracts that are then dynamically mediated through cryptographic receipts.
Once one can issue all the accounted assets into a triple entry arrangement that others will instantly respect, finance will democratise.
Savings for every Accounting Ledger
According to Santander (2015), "distributed ledger technology could reduce the banks' infrastructure costs attributable to cross-boarder payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022".
So where are we at today?
With the release in 2004 of commercial Block Chain Ledgers the double entry accounting of each party Alice and Bob can now be secured, and audited via their individual "Private" Block Chain Ledgers. With the introduction of a intermediary or Public Block Chain Ledger (public ledger above), and communications based upon existing bitcoin block chain protocols, today we have a full implementation of a commercial "triple entry accounting".
Where each end accounting system and the intermediary public block chain provide a "secure" distributed triple entry ledger.
This concept can be expanded, Bob above can maintain a local ledger containing all its adjustments, however it can also maintain a distributed ledger which contain details of all transaction or contracts. As the distributed ledger is agreed upon by all participants and there are digital signatures to provide a degree of non-reputability, Auditors can rely on this ledger. The auditors job starts getting easier, finally the digital world helps to secure old world double entry systems.
Worked Purchase Contract Example:
1. Alice -> Purchase Widget from ->Bob.
2. Bob ->Ships Widget and Invoice -> Alice
3. Bob -> Posts journal DR Account Receivable, CR Income to Private BCL
4. Posts Transaction, with unique TxnId to Public Block Chain Ledger(PBCL)
5. Alice-> Posts Transaction DR Expenses, CR Accounts Payable to Private BCL
6. Post transaction with same TxnId to Public Block Chain Ledger(PBCL)
7. PBCL-> combines messages 4, and 6 along with their signatures (Contract)
8. PBCL-> countersigns and timestamps the combined message 7, along with transactions (i.e DRs and CRs) and posts to the PBCL.
Worked Payment Contract Example:
1. Alice -> Pays ->Bob.
2. Alice-> Posts Transaction CR Bank, DR Accounts Payable to Private BCL
3. Posts Transaction, with unique TxnId to Public Block Chain Ledger(PBCL)
4. Bob->Receives Payment->From Alice
5. Posts journal CR Account Receivable, DR Bank to Private BCL
6. Posts Transaction, with unique TxnId to Public Block Chain Ledger(PBCL)
7. PBCL-> combines messages 3, and 6 along with their signatures (Contract)
8. PBCL-> countersigns and timestamps the combined message 7, along with transactions (i.e DRs and CRs) and posts to the PBCL.
I believe that while the above could represent a practical Public Block Chain Ledger, the commercial reality is likely to drive a range of specialist PBCL, i.e. each focused on a specific use case. Collectively these will form the globally decentralised Public Block Chain Ledger. Each segment of the PBCL is navigated using Internet DNS entries, within the domain blockchainledger.net. An example of a reference specialist "payments" PBCL is provided at the end of this article.
6. Posts Transaction, with unique TxnId to Public Block Chain Ledger(PBCL)
7. PBCL-> combines messages 3, and 6 along with their signatures (Contract)
8. PBCL-> countersigns and timestamps the combined message 7, along with transactions (i.e DRs and CRs) and posts to the PBCL.
I believe that while the above could represent a practical Public Block Chain Ledger, the commercial reality is likely to drive a range of specialist PBCL, i.e. each focused on a specific use case. Collectively these will form the globally decentralised Public Block Chain Ledger. Each segment of the PBCL is navigated using Internet DNS entries, within the domain blockchainledger.net. An example of a reference specialist "payments" PBCL is provided at the end of this article.
The fully distributed Global Public Block Chain Ledger is the record of truth, and available to all, the atomic nature of all Block Chain Ledger transaction, allow instantaneous transfers to occur.
In fact when the PBCL is applied to P2P payments, we do not see why all payments should not be free, as our analysis shows the incremental cost is close to zero, and each Private Block Chain Ledger can easily support its part of the decentraliced PBCL. The same could be applied to all commercial transactions which are capable of being processed though an accounting system,virtually everything.
An enhancement within the Block Chain Ledger over bitcoin, allows each and every block to have a unique private ECDSA key and the digital time-stamped signature, is applied atomically to each transaction block, This enhancement allows instantaneous sealing of each block and all transactions in time, plus traditional bitcoin identification of each block (address) and hence the ability to instantly post to the PBCL, this also supports detection of duplicate transactions, as the private Block Chain Ledgers cannot be changed or altered in any way by either Alice or Bob, the PBCL can request the parts of the block chain necessary to validate each Private Block Chain Ledger before signing the triple entry.
The public block chain ledger provides a real-time, atomic transaction, and reporting system.
The atomic transaction is completed once the PBCL entry in 8 above is posted to the PBCL, each party Alice and Bob and anyone else can verify the "Contract" or transaction, with a deterministic level of non repudiation.
An auditor can request all transaction data, and if required can counter sign, a Block within the PBCL and hence bind parts of both Alice and Bob's private Block Chain Ledger and also the PBCL in time (see BlockAuth detached time-stamp signature specification).
The point is that if one is inherently happy about Transactions then the accounting and audit process becomes much more simple; no need for reconciliation's or for an auditor to mess about with 3rd party confirmations (which are almost never returned!). An auditor can also gain 100% assurance into existence and completeness of transactions with counter-parties – this is the holy grail of audit.
As mentioned in the above comment, this is super useful, not only for audit. Due diligence, tax reporting, generating data for financial reporting also benefit, in fact almost everything benefits form this approach.
Bitcoin already contains a set of protocols which will allow interaction between each Private Block Chains and the Public Block Chain, with minor tweaks, this existing code and network, allows a kick start to a more commercial set of Block Chain Applications, that in most part have nothing do with digital money. Additionally as the Block Chain Ledger is based on traditional double entry accounting systems a mixture of P2P and more traditional Public Block Chains can be utilised. As above the Reserve Bank could run an inter banking Block Chain Ledger, that has all of the existing frameworks, but in this case actually secure and suitable for the modern "digital" world we all work in.
Welcome to the Internet of Value.
The intermediary Block Chain Ledger is in fact "signing off" or witnessing, both sides of the block chain ledgers transaction, this is in fact the "Contract" process, the ledger Transactions could be stock trading, property sales, or in fact anything that can be processed though a standard double entry accounting system.
The Internet of Value’s ubiquitous, seamless, comprehensive and secure method of transferring value allows for the distribution of value in all sorts of novel ways.
Some obvious use cases:
- syndicated loans
- trade finance
- supply chain provenance
- asset provenance
- clearing/settling
- cross boarder payments
- inter-bank payments
- identity/data authentication
- private stock/equity issuance
- contracts
- global P2P payments
Implementation example.
Theory, is fine, but one also needs concrete commercial examples, one such implementation is The Cognition Cloud Accounting Engine, which due to the design, as a modern Cloud based double entry Accounting Engine; which is required to process high volumes of transactions, the internal design is consistent with the design requirements of a Private Block Chain Ledger, in fact each cognition ledger has a fully integrated Block Chain today, using existing bitcoin technologies.
The BlockAuth Detached, Time Stamped, Signature , has already been implemented in commercial Private Block Chain Ledgers, such superannuation funds in 2015.
The building blocks are here today, allowing companies to run their own secure private block chain ledgers, and also allow future integration with a public Block Chain Ledgers.
Reference Implementation
In the reference implementation, using a commercial hash keyed database, ~10,000 blocks per second could be processed. This is for each of the distributed Public Block Chain Ledger(PBCL) node within the PBCL's. Hence the total processing of the PBCL is practically unlimited. The reference implementation supported ~ 5,000 read operations, this asymmetry is typical of commercial databases. This performance is relatively independent of the number of transactions in the distributed PBCL
Performance
Comparison:
·
Bitcoin 7 tps
·
PayPal 115 tps
·
PBCL 10,000 tps for each BPCL node, unlimited
across the global PBCL
·
Visa network 56,000 tps
Storage Comparison
·
Bitcoin, at very high transaction rates each
block can be over half a gigabyte in size
·
PBCL typically less than 10 KB per
transaction
Update 2016.
We have released the first Block Chain Ledger Payments Rail, which implements "tripple entry" accounting as described in this article. In addition the worlds first Bank International Settlements defined DvP Model 1, atomic cross ledger settlement..
See The Holy Grail of Settlements
Details:
The Global Block Chain Payment Rail
The Global Block Chain Securities Settlement Rail
Also see
1. Free hardware generated and protected Bitcoin Private key and key-chain.
2. Identity Theft and the Digital World..
3. Navigating the Public Block Chain Ledger
Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.
