Researchers first described cryptographically secured blocks of records in the early 1990s. But the practical value of these so-called blockchains really became apparent after 2008, when an anonymous individual used the underlying theory to create a new type of digital currency, Bitcoin, which could be reliably authenticated over a peer-to-peer network.
In an increasingly global economy, companies are starting to look at blockchain technology as a more reliable and secure way to record transactions, assign ownership, and reconcile receivables and payables. Blockchain is attractive to these organizations because it can function as a near-real-time distributed ledger for funds, land titles, loans, identities, and other types of information.
“Blockchain is new and not fully adopted,” says Camilla Dahlen, vice president of ISV, cloud, and platform partnerships for SAP in North America. “But it has lots of applicability and value for businesses.”
With blockchain technology, businesses can transact directly with anyone in the world and make global commerce more seamless. Customers also benefit from having more control over their identities and keeping sensitive information anonymous.
Dahlen says blockchain’s enhanced privacy means businesses will have to become more committed to maintaining consumer trust if they hope to collect data for analytics, predictive modeling, and other purposes. Even so, it is likely that some forms of behavior tracking will become obsolete as consumers restrict how their data can be used.
Governments see an opportunity to improve tax collection
Besides security, blockchain records also offer transparency. Participants in a peer-to-peer network can see the data and verify or reject it using a formula called a consensus algorithm. As participants approve data, it is entered into the general ledger and stored chronologically with earlier records. The detailed and unalterable nature of blockchain technology has attracted the attention of governments, which see it as a potentially more efficient way of detecting fraud and collecting taxes.
“If you review how governments operate, their main source of revenue is taxes and fees,” says John Viglione, executive vice president for Vertex, a leading provider of integrated tax solutions. “Digital transformation is hitting these revenue streams by making collections more challenging, which is why they are starting to talk about technologies like blockchain.”
Blockchain promotes transparency and makes it more difficult to sustain tax-avoidance schemes like the infamous double Irish with a Dutch sandwich. With this technique, businesses move profits between subsidiaries in Ireland and the Netherlands and use each country’s tax code to dramatically lower tax payments. Blockchain technology would allow governments to follow transactions across jurisdictions while making avoidance strategies much more difficult to defend.
“Tax authorities have been concerned for many years that multinationals have been using artificial means to avoid paying taxes,” says Rob Kugel, CFO of Ventana Research. “Governments want to be able to pierce the corporate veil and arrive at some objective way of preventing this avoidance from happening. Over 100 countries and jurisdictions are collaborating on standards, regulations, and technologies for using blockchain to create more transparency into business transactions.”
Businesses are already required to report consistent financial and operating data to tax authorities in the countries in which they operate. If blockchain technology is mandated, governments may be able to increase tax payments while restricting abusive tax maneuvers. For their part, businesses are concerned that they may not benefit from giving tax organizations unfettered visibility into their financial records.
Blockchain is a powerful tool for businesses and governments
Businesses often join consortium networks to share costs. Nodes in the network synchronize the member’s computers, locations, and transactions without centralized control. Each member’s distributed ledger consists of transactions received within a specified timeframe. Each transaction block is similar to an entry into a general ledger and related transactions are consolidated together to form a chronological blockchain. All the blockchains associated with a business form its global comprehensive ledger.
Businesses and governments are currently studying blockchain technology, and it seems likely these parties will adopt it in some form to lower costs, improve revenues, and enhance security. Smaller businesses are likely to embrace it as a competitive tool.
“Blockchain opens the door for small and medium-sized businesses to compete and to trade globally,” says Dahlen. “Now, they often do not have the economies of scale or infrastructure to operate internationally. Blockchain is predicted to reduce clearing and settlement costs by 25% to 30%, or about $60 to $80 billion, by 2022.”
Many businesses also will want to use the technology for smart contracts. These self-executing agreements automatically trigger actions or payments once predefined conditions are met. Smart contracts can use real-time information, such as asset GPS data, to trigger a transfer of ownership, payment, or other outcome.
“I sometimes refer to blockchain as the indelible link to the Internet,” says Viglione. “Companies and governments can trust what is being posted. People will be able to refer to it as the system of record and negotiate against it for taxes and tax compliance.”
While blockchain technology has roots in cryptocurrency and the Dark Web, it seems poised to become central to tax policy, financial services, and global commerce in the years ahead.
Want to learn more? Listen to the SAPRadio show: “Global Commerce, Tax, and Technology: Navigating Rough Waters Ahead.” And check @SAPPartnerBuild on Twitter.