Views on improving the integrity of global capital markets
18 September 2020

Blockchain and the Consumption of Financial Information — an Investor Perspective

A recent CFA Institute report examines whether blockchain technology can help with the consumption of financing reporting information. Let us start with what users want. Users want to be able to access distributed blockchain information freely. Furthermore, as a report by the UK Financial Reporting Council notes, users need corporate communications to be useful for their analysis and understanding. They also want a credible source of information that has a clear level of assurance attached to it. Having a boundary around this information is important for investors because it provides context and adds credibility. Historically, of course, these boundaries have been established by the physical boundaries of a specific document. An annual report is a boundary that is related to specific reported information with appropriate assurance attached to it.

Disclosurechain

With the increased use of technology, the reporting boundary does not necessarily need to be physical. The FRC report says:

An entity-specific blockchain of individual disclosures not of reports, but of individual disclosures, either in traditional documents or using new mediums, might be a more engaging solution to the boundary issue. By providing a chain of links to disclosed information this “Disclosurechain” would allow an up-to-date picture of a company’s position to be communicated as well as the relevant credibility/assurance and context around it (i.e. users could trust that it had not changed since it was issued and assured). Furthermore, by providing the full history (chain) of disclosures, changes over time could also be understood.

A single-entity blockchain, however, may not be perceived as useful. If the system was set up to connect with audit and regulatory users, it could have more widespread use, including communicating assurance. According to a Deloitte article, “As a technology that facilitates transactions across a network, the value of a blockchain network increases with the number of users.” We agree. There is no benefit in such a system unless it is adopted very widely. For widespread use to occur, however, we need standardization. Investors and other users do not want to access multiple different networks that work differently.

Need for Standardization

Currently, blockchain is not standardized. Different chains are set up and each chain operates differently. This is not efficient for investors. Investors need compatibility because most will not figure out how different blockchains work.

Blockchains need to be standardized. What do we mean by this? Consider a blockchain to be an envelope. Each envelope has contents inside. Those contents need to be standardized — for example, by using XBRL. It is a myth to say that with the advent of blockchain, you don’t need XBRL. In fact, the two need to work together. To be of real value, content and nomenclature must be consistent. For this to happen, regulators need to continue to work with industry and initiatives, such as XBRL and Legal Entity Identifier, to develop consistent naming, taxonomy, and identification for companies and company filings.

This lack of standardization leads to issues of interoperability. Even with the increasing number of companies and suppliers using blockchain, no standard currently allows them to interact. It is not efficient, for example, for a supplier to interact with a different chain for each group of customers with multiple chains. This, in turn, causes issues for those seeking compatibility between the blockchains and their accounting systems, as it may limit any cost savings.

More Collaboration Needed

A number of groups have been formed to increase collaboration in the space and to encourage standardization — something that could address the lack of interoperability between networks. One such group is the International Organization for Standardization that set up the ISO Technical Committee on Blockchain and Distributed Ledger Technologies in 2016. Its objective is to achieve the standardization of blockchains and distributed ledger technologies to support interoperability and data exchange among users, applications, and systems. Various web service providers, such as IBM, Oracle, Azure Blockchain Services, and SAP, also have been vocal in their support for cross-chain platforms.

As more companies realize that they cannot exist in isolation, interoperability for information transfer and data exchange through the use of blockchain technology increasingly is being examined. But when looking at cross-chain systems that include private and public blockchains, the governance structure must be the focus. As the article “Blockchain Interoperability: The Holy Grail for Cross-Chain Deployment” points out,

All interoperability solutions will likely have trade-offs; so it’s a matter of designing systems that find a balance between security, governance, adaptability, and economic incentives that suit their target market.

Private chains operating without distributed consensus are more prone to data manipulation and the integrity of the data/assets being transferred from a private, permissioned and centralized chain to a more decentralized chain could be questioned. Overall, there is no one solution that fits all in terms of being public/private, centralized/decentralized — it is a broad spectrum with specific trade-offs.

We appear to be at the initial steps of forming solutions to the issues of standardization and interoperability. Therefore, we are far from the widespread use of blockchain for corporate reporting purposes. At the moment, this use would not serve investor interests.


Photo Credit: ©Getty Images / Frank Lee

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About the Author(s)
Mohini Singh, ACA

Mohini Singh is director of financial reporting policy at CFA Institute. She represents membership interests regarding financial reporting and disclosure proposals issued by the FASB, the IASB, and others. Singh holds the Associate Chartered Accountant (ACA) designation.

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