Accounting of Asset and Accountability through Blockchain Technology[1]
Introduction
Blockchain Technology has the potential to change the future of how monetary / value-based transactions as carried out and records are kept. It is the New Age Record Book. It is our new technology Bahi-Khaata, that no one can tamper with. It has the potential to safeguard our money, properties and the services that we avail. It’s use in public sector may bring in a lot of change in the way books are maintained, accountability is ascertained and data is retrieved. In this article use of blockchain will be dealt with in the critical area of asset management. Blockchain may be a game changer in asset register maintenance and accounting. Before venturing into the application of blockchain in asset accounting, a quick introduction of blockchain would be apt.
The simplest definition of Blockchain is “a system for creating and maintaining records in a way that prevents anyone single entity to have full edit rights.” Originally, blockchain was just the computer science concept for how to structure and share data. The concept was theorised and used in computer science data structure texts as early as 1973 (this is the earliest record generally noticed, but the term may be older). Popularly, 2008 is known as the year of the Blockchain as Satoshi Nakamoto applied it to what was given a nomenclature – Electronic Peer-to-Peer System. Nakamoto is thought to be one person or even a group of people who worked on Blockchains. Developers have since worked on evolving Blockchains and the technology has gained in popularity and trust world over. It's now common to call blockchain as the “fifth evolution” of computing.
Blockchain is not a new technology. Rather, its an innovation away from centralised method of the design to use of distributed database. Due to public interface and fad about digital currency, most of the blockchain is generally confused with Bitcoins. It's a common misperception that has a bearing on the growth and adoption of blockchain technology.
Some Basic Concepts
One must get familiarized with the following core blockchain architecture components:
Node: User or computer within the blockchain architecture (each has an independent copy of the whole blockchain ledger)
Transaction: The smallest building block of a blockchain system (records, information, etc.) that serves the purpose of blockchain
Block: A data structure used for keeping a set of transactions which is distributed to all nodes in the network.
Chain: It is a sequence of blocks in a specific order. A hash that links one block to another, mathematically “chaining” them together. This is one of the most difficult concepts in blockchain to comprehend. It’s also the magic that glues blocks together, forms blockchains and allows for the high level of security and trust.
Hash: The hash in the blockchain is created from the data that was in the previous block. It has a pointer which points towards the previous block. The hash is a fingerprint of this data and locks blocks in order and time.
Consensus (consensus protocol): It is a set of rules and arrangements to carry out blockchain operations. Any new record or transaction within the blockchain implies the building of a new block. Each record is then proven and digitally signed to ensure its genuineness. Before this block is added to the network, it should be verified by the majority of nodes in the system.
Network: The network is composed of “full nodes.” Think of them as the computer running an algorithm that is securing the network. Each node contains a complete record of all the transactions that were ever recorded in that blockchain. Nodes can be located anywhere in the world. When you hear the term “mining” it’s the use of a node and its computing power for the processing of a blockchain algorithm.
Smart Contract: It is autonomous software that can make financial decisions. The blockchain world is abuzz about smart contracts because they’re both amazing and terrifying in their implications for how the world economy operates. Smart contract programming requires a different mindset than standard contract writing. There is no third party to make things right if the contract executes in a way that you didn’t expect or intend.
Applications of Blockchain in Asset Management in Public Sector
Governments are plagued with frequent scams and fraud. How blockchain will help governments in fighting back against cybersecurity threats and safeguard of assets is being discussed widely. This technology may be used to record, facilitate or validate transactions. Transactions may consist of change of ownership of records, goods or services which may be broadly classified as tangible or intangible asset. Blockchain technology records all transactions in a distributed ledger. Distributed ledger is a book of records which is shared across a network consisting of the stakeholders.
Multiple transactions are recorded and placed together in a block. Recording of transaction and sharing of data calls for business logic and rules. These rules are embedded in the ledger via “smart contracts”, which can be triggered automatically and immutably when certain defined conditions are met. These rules and logics are operated through smart contracts. In order to record transactions and make it secure, cryptography is required. Every transaction is made secure through encryption and hash is used as pointers to the encryptions connecting one block with the other and forming a chain. Thus encryption is done and pointers are passed on to next block. These blocks and chains are operated through nodes which are points to facilitate transactions.
Procurement of asset or its creation is an activity done by many government agencies. Since Government of India and States maintain their books on cash basis, book entry of assets is done at the incidence of payment. Subsequent records of assets are maintained through subsidiary reports or records/statements. It is always a challenge to update these records and in the process they are invariably not very reliable. Blockchain can very easily solve this problem.
Any procurement of asset in government is initiated through a proposal or requisition. There are several stakeholders in the process of approval of the requisition/proposal, execution, payment etc. All stakeholders including the office making requisition of the asset, fund providers, budget, approving agencies, execution agency, agency making payments and other potential stakeholders may be dealt as node and become the part of the Chain. As per the existing business rules, smart contract may be designed assigning the roles and responsibilities of all stakeholders and rights assigned to them in the blockchain. Network will capture details and store it in an encrypted form.Therefore, every detail of the asset and process will be recorded in encrypted form at these nodes and any change will be effected only through consensus of all relevant stakeholders, while each node will get an updated and immutable record entry in the ledger of its own. It implies that any change in the status of the asset will again have to follow the same process of providing data to all nodes. Thus at any given time asset related details would be available in the chain with due visibility and verifiability.
Conclusion
With the use of blockchain technology, current format of registers would be supported and same may even be generated in physical form. It will facilitate trust between stakeholders by providing a shared and verifiable history of transactions. Blockchain uses multiple technologies to ensure that after the transaction is recorded it cannot be modified. Further, data can only be appended and old and new data will remain visible to all stakeholders. This will ensure that no asset related data is lost or tampered with. Use of blockchain will definitely improve and change the asset management in public sector.
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