Part II: Are CPA’s Critical to the Future “Internet of Value”?
As discussed in Part I of this series, most people in the blockchain/cryptocurrency space already know that the current, “internet of information” will become the, “internet of value.” However, most people, especially CPA’s, have not begun to understand the revolutionary impact this will have on businesses and the related accounting for “exchange of value” transactions.
As I previously mentioned in Part I, everything related to “exchanges of value” in the crypto space needs to be understood by accountants. For example, in addition to consolidating, “on-chain” transactions with traditional “off chain” transactions, accountants are the best suited professionals to assist with “on-boarding” other assets onto the blockchain. Let’s take a deeper dive into these concepts.
When I use the term, “on-chain” transaction, I am referring to any blockchain transaction.
When I use the term, “off-chain” transaction, I am referring to all non-blockchain transactions through traditional payment gateways. This accounts for 99.99% of transactions that occur today.
When I use the term “on-boarding” assets onto the blockchain, I am referring to another concept known as “tokenization.” Tokenization is the process of assigning the value of tangible or intangible assets to a token that is created and traced on a Blockchain. This token is a digital representation of a particular asset that allows for ownership identification, as well as transfers of ownership and custody of an asset, all of which can be traced on a blockchain database. Most importantly this can be done on a blockchain without a trusted third-party intermediary. Imagine, selling your apartment or home to a buyer without a lawyer, real estate agent, title search, bank, etc…? While it is hard to imagine now, in the near future this will be the reality.
Tokenization of assets also allows for fractional ownership. For example, a small portion ($100 share) of a large commercial building or expensive work of art, such as a Picasso, can actually be owned by anyone. This means that someone from below the poverty line has the same potential of ownership as a wealthy business person. This would create opportunities to invest in world class assets that were otherwise limited only to the ultra-wealthy.
The “on-boarding” process consists of verifying the authenticity of the tangible or intangible asset. For example, when you tokenize real estate, someone needs to verify that specific entity or individual does in fact own that particular piece of real estate. The same logic applies for any asset such as a stock, bond, gold, supply chain asset, certificate, patent, copyrights, etc… Although the tokenization of everything in the future might seem a bit extreme, the rest of this article will focus on the tokenization and on-boarding of eggs for supply chain purposes.
Blockchain will allow for visibility of an individual egg from each chicken, including the chicken’s veterinarian records, organic verses non-organic, free range verses caged, and their entire journey from farm to dish. During their journey within the supply chain, each egg will be monitored through RFD chips and other technology to determine the temperatures maintained when in transit to final destination. It’s critical that eggs are maintained at specific temperatures while in transit to prevent bacterial growth, which leads to contamination. There are “smart contracts” otherwise known as “chain code” that need to be audited as well. We will cover this in more detail in a follow up article.
Currently, there are financial statement audits performed by CPA firms on the farmers; packaging, facilities, processors, distributors, and retailers. There are also audits of internal controls, but the internal controls of today within the traditional supply chain process will look nothing like the internal controls of the future with blockchain based supply chains.
There are many steps within the supply chain, each involving various participants. As mentioned in this article, tokenization has to occur at various steps along the way. For example, each chicken will be tokenized so that all future eggs it lays will be properly identified as that particular chicken’s eggs. Also, each egg itself will be tokenized. When this tokenization occurs, we need to make sure the proper internal controls are in place to verify these real-life assets are being on-boarded properly onto the blockchain.
These are the “on-ramps” to blockchain where risk of fraud is the highest. Once an asset is properly on-boarded onto a blockchain, every detail about this asset will live on a blockchain forever in an immutable fashion. Meaning it can’t be altered, edited, or deleted at any point from the beginning to the end of its life cycle or even after its lifecycle ends. Therefore, once on the blockchain, fraud is for the most part, eliminated. However, as accountants, we should view the on-boarding/tokenization of assets as an additional service we can provide. I am also inclined to think this will create an entire new multi-billion dollar industry known as tokenization.
So, do you think that accountants are critical to the future internet of value?
Written by: John W. Masotti, CMA, CPA
