Blockchain technology has the potential to upend entire industries. Especially the financial sector may undergo disruptive change. Although this technology caught the attention of many of the largest financial institutions, use cases still remain in the experimental phase. This white paper lays out the benefits of the blockchain technology for specific use-cases in accounting across industries.
Blockchain networks can be categorized based on their permission model, which determines who can maintain them (e.g., publish blocks). If anyone can publish a new block, it is permissionless. If only particular users can publish blocks, it is permissioned. In simple terms, a permissioned blockchain network is like a corporate intranet that is controlled, while a permissionless blockchain network is like the public internet, where anyone can participate. Permissioned blockchain networks are often deployed for a group of organizations and individuals, typically referred to as a consortium.
1. Permissionless
Blockchain networks are decentralized ledger platforms open to anyone publishing blocks, without needing permission from any authority. Blockchain platforms are often open source software, freely available to anyone who wishes to download them. Since anyone has the right to publish blocks, this results in the property that anyone can read the blockchain as well as issue transactions on the blockchain. Any blockchain network user within a permissionless blockchain network can read and write to the ledger. Since permissionless blockchain networks are open to all to participate, malicious users may attempt to publish blocks in a way that subverts the system. To prevent this, permissionless blockchain networks often utilize a multiparty agreement or ‘consensus’ system that requires users to expend or maintain resources when attempting to publish blocks. This prevents malicious users from easily subverting the system. Examples of such consensus models include proof of work and proof of stake methods. The consensus systems in permissionless blockchain networks usually promote non-malicious behavior through rewarding the publishers of protocol-conforming blocks with a native cryptocurrency.
2. Permissioned
Permissioned blockchain networks are ones where users publishing blocks must be authorized by some authority (be it centralized or decentralized). Since only authorized users are maintaining the blockchain, it is possible to restrict read access and to restrict who can issue transactions. Permissioned blockchain networks may thus allow anyone to read the blockchain, or they may restrict read access to authorized individuals. They also may allow anyone to submit transactions to be included in the blockchain or, again, they may restrict this access only to authorized individuals. Permissioned blockchain networks may be instantiated and maintained using open source or closed source software.
Permissioned blockchain networks can have the same traceability of digital assets as they pass through the blockchain, as well as the same distributed, resilient, and redundant data storage system as a blockchain networks. They also use consensus models for publishing blocks, but these methods often do not require the expense or maintenance of resources.
Unlike the bitcoin blockchain and other public networks, permissioned blockchain networks are typically developed by companies for their own private commercial use. Organizations may develop their own network or customize a basic network previously developed by a vendor. In some cases, a group of companies in an industry may collaborate to develop and share a proprietary network to facilitate transactions among them, such as the R3 blockchain consortium, which offers a blockchain system for financial institutions.
Commercial transactions using blockchain technology share certain key characteristics, including:
1. Real-time records. Distributed ledgers are updated in real time as transactions and other events occur, with software automating the process. These features ensure that each network participant has its own up-to-the-moment record of transactions, which reduces opportunities for fraud. The automated process and lack of a centralized record keeper also increase efficiencies and generate cost savings.
2. Immutable records. Blockchain technology enables entities to create permanent, immutable transaction records. This ability offers an obvious commercial benefit, but it can also raise regulatory risk for some parties. Regulators can be given permission to access full transaction histories in the event of an investigation involving transactions recorded to a blockchain, making it more difficult for parties to argue that they lack adequate transaction records (see below Counseling Clients on Blockchain Investigations). Additionally, maintaining a permanent record of certain transactions and users through a blockchain can implicate data privacy regulations, particularly as regulators increasingly focus on protecting consumer privacy.
3. Anonymity. Blockchain technology makes it easier for network users to be pseudonymous, which has ramifications for operators of networks subject to anti-money laundering (AML) and know-your-customer (KYC) regulations (see below Anti-Money Laundering and Counter-Terrorist Financing Compliance).
4. Cybersecurity risk. For a variety of reasons, blockchain networks have proven to be favorite targets for hackers. While no blockchain has been successfully hacked or manipulated, the companies and technology surrounding it have been. Security incidents have ranged from mundane service disruptions to more serious thefts of sensitive data and valuable cryptocurrencies, although the decentralized structure of blockchain networks makes them more resilient against network-wide attacks or tampering.
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