Blockchain and the Introduction of Single-Entry Bookkeeping

Mar 27, 2016 · 6 min read
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Greg Simon, CEO & Co-Founder, Loyyal (

My day job at Loyyal keeps me insanely busy. Too busy unfortunately to spend enough time thinking about one of the more exciting and disruptive impacts of blockchain technology; the breakdown of double-entry bookkeeping. In a previous life I was once a CPA. Now as I am also a CBP I’ve been wanting to put some of these thoughts out there for a while. I still see few people talking about this despite it potentially bringing into doubt effectiveness of the most fundamental foundation of commerce today.

Tried and True Double-Entry Bookkeeping

Double-entry bookkeeping is the basic foundation of how we account for value today. For 2000 years it has served as an unquestionable given in commerce. There are two columns, the debit column and the credit column. There are two entries. The first entry is to record what you have, and the second entry is to record how you got it. E.g. Debit Cash, Credit Sales — therefore I have cash because I completed a sale. If these don’t equal we know counterparty exposure has not been properly accounted for, prompting an audit and a correction. It mandates the accounting of counterparty exposure for every single movement of value. It is a beautiful system in it’s simplicity and effectiveness.

But what happens if the counterparty exposure is not known? What if we don’t know who owns, or is liable for, the value of assets recorded on a ledger? In the old paradigm this was simply an impossibility. Counterparty claims to assets were always known because to receive or send an asset of value it must be received by or sent to a counterparty! It seems so basic and fundamental one would think this could never be questioned, until now.

Permissionless and Permissioned Blockchains

Enter Blockchain. A blockchain is a single-entry bookkeeping ecosystem. Well, technically a permissionless blockchain is a single-entry bookkeeping ecosystem. A permissionless blockchain is an ecosystem where, obviously, permission is not required to participate. On the other hand, there is the permissioned blockchain. My company Loyyal uses a permissioned ledger as it’s platform. In the permissioned blockchain ecosystem permission is required for a user to participate. The degree of permission can vary from ecosystem to ecosystem. Permissioned blockchains have come about to facilitate enterprise adoption of blockchain technology If you want to know why, it’s all about counterparty risk.

A pure permissionless blockchain ecosystem is a type of DAO, or Distributed Autonomous Organization. In a DAO there is no central authority running the show. Control is decentralized across anonymous users in the distributed network and anyone can participate as a user. The blockchain doesn’t know or care who the users are. It introduces the real potential for true universal and global financial inclusion.

This is great! But wait, the road to utopia isn’t that simple. An ecosystem of anonymous users means transactions with counterparties of unknown identity. In other words, it means we no longer know the identity of who has ownership of, or creditor claims to, the assets on the ledger.

Double-Entry Bookkeeping in Legacy Banking

When we deposit money into a bank account, we are transferring value to the bank as custodian of our asset. We still own the asset in our account and at some point the bank is required to return the asset back to us. On the bank’s ledger this transaction will result in a debit to cash, an asset account on the left hand side of the ledger, and a credit to demand deposits, a liability account on the hand side of the ledger. Easy-peasy double entry bookkeeping!

Single-Entry Bookkeeping in a Permissionless Blockchain

When a user acquires access to (not ownership of — keep reading to know why) a permissionless blockchain native token, it is effectively doing the same thing as above. It is transferring, or depositing, value into a ledger wallet. In this case, the bank is replaced with network nodes performing as custodians of a distributed ledger. The depositor and the custodians can both also be anonymous. On the permissionless blockchain distributed ledger this transaction is recorded as a debit to the user’s wallet, an asset account on the left side of the ledger, and a credit to…what?

To answer that question, we need to figure out who is actually liable for the distributed ledger. Well, the network nodes should be as they are our custodians of the ledger and therefore of the value contained within it. Furthermore, since every network node is of equal importance and authority, then in theory every node should equally share the custodianship liability of the assets recorded in the left hand column of the ledger.

Anonymous Counterparties

We have two problems here. In this ecosystem, both the users and the network nodes are anonymous. Not only are the network nodes anonymous, but because it is a DAO there is no centralized owner/operator of the ledger to approach for access to network node identities.

The Introduction of Single-Entry Bookkeeping

Because the user’s network node counterparty is anonymous, it is impossible to record it as the entity liable for the asset. A search for ledger ownership in the form of a capital account won’t be any more fruitful either. Remember, this ledger is a DAO. By definition, no single entity owns or operates it. And just like that, with nobody to account liability to and nobody to account ownership to, the right hand side credit column disappears. Double-entry bookkeeping collapses. What’s left behind is a single column ledger in a single-entry bookkeeping ecosystem.

I omitted one part of the bank deposit example out of the blockchain example, “we still own the asset in our account and at some point the bank is required to return the asset back to us.” It was omitted because possibly the user can never really own value embodied as a blockchain native token. First, the user’s identity may be anonymous. Second, even if the user chooses to reveal its identity the value it claims ownership of always resides within the blockchain ledger. It is literally impossible to have physical possession of the value. To do so would require a counterparty to request the returning of the user’s value to it!

Paradoxically, the deeper one’s understanding of double-entry bookkeeping is the more difficult it may be to understand all of this. More than once I’ve spent over an hour trying explain this to university accounting professors and professional practicing CPAs. They are so close to double-entry bookkeeping asking them to question it is something like asking a physicist to question gravity. It’s like they say, don’t try this at home kids!

Entirely New Challenges and Risks

Cognitive dissonance aside, blockchain has introduced a new age of single-entry bookkeeping. With this it has opened up a Pandora’s box of entirely new challenges and risks brought about by undefinable asset ownership/liability and unquantifiable counterparty risk. These are not just new challenges and risks for the transaction counterparties but also for the regulators mandated to oversee it all.

Challenges for Enterprise Adoption

If the user is an individual, as sole proprietor of it’s person can make these decisions of risk exposure on behalf of itself. But can a corporate director? Can a corporate director authorize the use of shareholder capital for an anonymous counterparty transaction in a single-entry ledger ecosystem without violating its fiduciary duty to those shareholders? Can a regulator determine with confidence a regulated entity in the same transaction is not in violation of KYC/AML or anti-terrorism financing laws? These are very important questions that are yet to be answered and that risk managers must be demanding answers to.

Entirely New Accounting Standards Are Needed

Once considered the boring bedrock of commerce, accounting as a discipline is now entering an era of uncertainty at the most fundamental level. This will force us to redefine how value is accounted for. With this brings new opportunities, as we will soon see single-entry bookkeeping emerge as a new discipline of study and research.

There will be a real market need to innovate new standards that allow us to account for value in the new paradigm. This probably terrifies the accountants out there. But in reality it is good, as it is human innovation itself that is true source of wealth creation.

If I’ve sparked an interest, feel free to reach out! You may very well be a pencil-pushing geek just like me.

Greg Simon, CPA, CBP

CEO and Co-Founder, Loyyal

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