Interesting story in the UK Guardian on December 10, 2017 about Bitcoin making its debut on the global futures market and the fact that contracts rose from $15,460 to $16,000 in the first hours of trading on the Chicago Board Options Exchange (CBOE). The Global Markets’ exchange triggered two temporary trading halts designed to calm the market and Bitcoin futures jumped more than 20%. According to press reports -- the market capitalization of all crypto assets is now above $450 billion with this CBOE event. The Chicago Mercantile Exchange (CME) will start trading its own futures on December 18, 2017 but will use a composite of several bitcoin prices across a handful of exchanges.
Reuters News reported: “Initial volume exceeded dealers’ expectations, while traffic on the Chicago Board of Exchange’s website was so heavy that it caused delays and temporary outages.”
According to Bloomberg News: “More commodity firms and traders, including BP, ABN AMRO, Mercuria Energy Group, Natixis and Trafigura, are adopting blockchain technology to increase efficiency, changing the way they do business.”
Meanwhile the US Securities and Exchange (US SEC) is rushing to provide guidance and possibly enter this new and emerging marketplace as a key global regulator. A growing number of companies are beginning to raise critical funding through “initial coin offerings” or ICO but currently -- Blockchain and cryptocurrencies aren’t regulated as a technology and this is a new area of supervision as various regulators via for oversight depending on the application of this new rapidly-expanding technology.
This is also a global technology that spans across the United States into other countries making pursuing “bad actors” difficult for national regulators. Management accountants are positioned to be one of the key activators of this investment-raising technology revolution and can help prepare companies and organizations involved in this transition.
What is Blockchain and why is this technology expanding so rapidly in the capital markets as a major method of raising capital?
According to Oracle: “Blockchain is an encrypted, distributed database shared across multiple computers or nodes that are part of a community or system. What makes it one of the most exciting technologies around is its ability to reduce the possibility of security breaches by even its own operators. The financial services industry is a pioneer in exploring the uses of blockchain technology for cryptocurrency transactions. Bitcoin uses blockchain as its underlying technology. Eleven banks of the R3 consortium have already connected on the centralized Ethereum-based blockchain network. The Estonian government has used blockchain-based technology (keyless signature infrastructure) to authenticate data in their databases since 2013. Clearly, blockchain has the ability to increase secure data exchange in other industries as well. It also has the ability to make that data transfer simpler and easier between entities. With its promise of providing secure and transparent transactions, blockchain seems poised to be one of the digital world’s key pillars.”
BUT INVESTORS AND MANAGEMENT ACCOUNTANTS NEED TO BEWARE OF RISKS SINCE CRYTOCURRENCIES AND INITIAL COIN OFFERINGS ARE NOT REGULATED.
On December 11, 2017 – SEC Chairman Jay Clayton released a statement on Cryptocurrencies and Initial Coin Offerings to warn the investing public and company management of the risks (See his remarks below).
According to CBS News on December 12, 2017:
The SEC recently created a division to more closely monitor ICOs for potential scams. The unit brought its first charges last week against a Canadian company known as PlexCorps, which was trying to raise $15 million in an ICO promising its investors "a 1,354 percent profit in less than 29 days." Two individuals were charged in the scam.
BLOCKCHAIN, INVOICING, SUPPLY CHAIN MANAGEMENT, XBRL AND ASSURANCE SERVICES
What is clear – Blockchain is upending the world’s financial markets and the rise of bitcoin and now distributed ledgers and smart contracts are poised to be a major game-changer for the accounting profession – especially management accountants.
As has been reported in previous blogs – XBRL (IMA is one of the key founders of this global data reporting standard) will play a major role in allowing individual data elements/KPIs to be extracted from smart contracts/PDFs contained with blockchain for superior data analytics since this data will be structured and linked to common accounting definitions, currencies and languages for instant translation.
On December 18, 2017 the European Securities & Markets Authority (ESMA) issued its final report on its European Single Electronic Filing (ESEF) to the EU Commission. The EU Commission has three months to provide its endorsement of the iXBRL data format that will be mandated for all EU public companies for all their financial statement reporting so specific data points within the financial statement will be in a machine-readable format for instant data analytics and investor risk assessment.
Assurance services can also be applied by the accounting profession that can also enhance investor confidence that it has been reviewed by a trusted, independent third party for these data elements. In other parts of the world, assurance services has been mandated by regulators related to human capital requirements (race, gender, natural resources) and its only logical that these assurance services can be extended to digital reporting. But the accounting profession needs to create guidelines and standards for digital assurance. Right now these ditigal assurance services don’t exist. Hopefully the IMA will play a role in this area as blockchain and distributed ledgers and smart contracts take off as we move more and more away from paper reporting concepts to digital reporting especially as both the US SEC and ESMA have mandated that public companies submit data elements in an electronic single electronic filing format both to the respective regulator and public. Public "regulators" will want to know this data is assured just like the financial statements are in paper format to make better investment decisions driving the fundamentals of the capital markets creating the new economy and future jobs. The capital markets requires transparency and accountability to exist. Investor confidence and public support requires this transparency.
BLOCKCHAIN
Management accountants will also play a major role in analyzing data contained in blockchain. Blockchain technology is moving into trade finance and invoicing as well as supply chain management.
One company quickly moving into trade finance and payment of invoicing using blockchain technology is Populous. Populous is designed to enable P2P payment of invoices using cyptocurrencies. It offers short-term cash flows hence it helps in the growth of annual sales. The company uses smart contracts and utilizes XBRL. The company boasts of having more than 3 million companies on its database.
Besides stock exchanges and financial service companies – blockchain in now beginning to be deployed for Enviornment, Social and Governance (ESG) purposes -- as mentioned above -- for trade finance facilities, tracking of utility bills, also for real estate registration facilities, databases on agricultural receivables and digital assets for water, carbon and methane usage and management. As described above -- it is possible to use blockchain to help make supply chains more transparent by using digital encryption to create an irrefutable history of a products authenticity and ownership. This is being piloted to deal with supply chain issues such as blood diamonds, child labor, human sex trafficking, labor practices, gender issues, conflict minerals which would allow compliance with disclosure requirements under the Dodd-Frank Act in the US. In Sweden, India, Republic of Georgia and Honduras, blockchain technology is being deployed to create land title registries which will help to reduce land title fraud which is a common issue in various countries protecting the rights of the poor or native cultures.
Blockchain will also be a game-changer for business reporting. Regardless of what both companies and securities regulators report to the capital markets -- social media and blockchain technologies are fundamentally altering what companies can report to the marketplace and securities regulators need to move beyond just a financial reporting model. The EU has mandated non-financial reporting requirements for more than 14,500 public companies and the EU Commission is in the process of creating the European Financial Transparency Gateway (EFTG) that will share both financial and non-financial reporting data using Blockchain and XBRL in the cloud across 28-EU member countries and investors around the world. The EFTG will rival the US SEC EDGAR SYSTEM that is currently used to communicate to investors. The US securities model is focused on just financial reporting disclosure (also using XBRL) and does NOT include non-financial reporting data like environment, social or governance data -- key capitals investors are demanding for disclosure. US companies are issuing separate "sustainability" reports with non assurance or regulatory oversight with little meaning to investors. Like the EU -- hopefully the United States Securities and Exchange Commission will move forward with technologies like Blockchain and XBRL and require public companies to also include non-financial disclosure to recognize the growing need from global investors to have this information to make important decisions -- especially with main stream media focusing on issues like child labor and sexual harassment in the workplace in the corporate environment.
Stay-tuned for updates from the US Securities and Exchange Commission moves into this space and updates from the accounting profession related to digital reporting and new assurance services.
If you are an accountant in the area of technology consider joining the IMA's Technology Solutions Practice Committee and be a part of this revolution transforming the profession.
US SEC Chairman Jay Clayton’s Statement:
A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.
Investors should understand that to date no initial coin offerings have been registered with the SEC. The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies.[2] If any person today tells you otherwise, be especially wary.
We have issued investor alerts, bulletins and statements on initial coin offerings and cryptocurrency-related investments, including with respect to the marketing of certain offerings and investments by celebrities and others.[3] Please take a moment to read them. If you choose to invest in these products, please ask questions and demand clear answers. A list of sample questions that may be helpful is attached.
As with any other type of potential investment, if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost.
Please also recognize that these markets span national borders and that significant trading may occur on systems and platforms outside the United States. Your invested funds may quickly travel overseas without your knowledge. As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds.