Blockchain is often associated with cryptocurrency, volatility, and the unknown, however blockchain technologies go much deeper than that. A blockchain is a decentralized, distributed digital ledger that uses “blocks” to record transactions. When one block is filled, another one begins, which builds off the previous block and locks the completed ones in place.
Thus, the decentralized data can never be altered, making it stronger and more efficient. Blockchain technology therefore has the potential to greatly improve financial efficiency, but also presents challenges and a feeling of the unknown.
The origins of blockchain technology are somewhat mysterious, making the idea all the more mythical for some. Blockchain was touched upon by cryptographers in the 1980’s and 90’s, but the first tangible decentralized blockchain was introduced by an anonymous engineer in 2008 who goes by the pseudonym Satoshi Nakamoto.
This was the program that was used for the first and most successful cryptocurrency for which it is synonymous with, Bitcoin. With the recent explosion of cryptocurrencies and NFTs, blockchain tech has been getting a lot of attention, and has the ability to revolutionize the financial planning field as well. Here are the categories which blockchain technology has the potential to transform in relation to FP&A.
One of the biggest blockchain perks is that being a decentralized network, it is able to improve transparency without giving up on security. Because everything is laid out on the network, businesses will be able to have transparency in everything on the value chain. Imagine one decentralized platform with data on every detail from when the product was thought of, on to the supply chain, and down to the customer itself.
The FP&A implications here are tremendous, as instead of having to rely on other company’s data, which may or may not be accurate or organized the way you need, everything on the financial side will be transparent from A-Z. The more data that is on the blockchain, the more transparency there will be in crunching the numbers and improving forecasting. As an FP&A specialist, this has the potential to change financial planning simply by being connected on one transparent, digital network without the hassle of collecting different formats that may or may not be accurate.
However, transparency comes with its challenges as well. Once blockchain technology is more established, then investors and shareholders will want more and more transparency in order to make the most calculated decisions. A lack of transparency can be disastrous for investors, and they want to do everything possible to avoid over evaluated investment fiascos such as WeWork.
The race for the most transparency can create a lot of pressure on the financial teams, even with the increase in automation. In addition, privacy is a concern that has been brought up both in the legal and private sectors, due to the high volume of data being open to the public. Time will tell what legal and regulatory policies will shape how privacy is dealt with in blockchains.
In the age of data and speed, blockchain takes this to the next level. With the potential for close to real time updates and the power of a decentralized network, blockchain can transform the speed of which financial teams analyze and plan.
However there are some aspects that need improvement before blockchain can be implemented in companies’ daily financial lives. One example is that Bitcoin only handles between 4.6- 7 transactions per second. If you compare this to Visa, which handles over 1,700 per second, blockchain transactions still have a long way to go. While transaction speeds will undoubtedly improve, and transactions are not the focal point of blockchain in regards to FP&A, there is another category that falls under speed which is already ahead of the game: Time-saving.
To begin with, blockchain allows FP&A departments to track and manage data with almost zero effort. This results in faster and more effective reporting, which leaves the financial teams more time to analyze and less time reporting manual data. External data will not only be transparent but also be uploaded in close to real time, helping analyze the situations immediately. Many FP&A teams spend close to 75%(!) of their time on manual data entries, while there are many FP&A solution platforms out there for collecting and analyzing data that can reduce this amount with ease.
Just like Transparency, the main challenges for Speed are privacy and regulations. While data being uploaded instantly is a big upgrade for financial teams, there are many aspects that companies don’t want to be open to the public. The need for speed will make it harder to sift through what is a privacy concern and what isn’t.
In addition, it is difficult to predict what laws will be enacted in regards to blockchain technology, and the potential confusion of different countries’ privacy laws will pose a difficulty for blockchain to become a truly worldwide platform.
Blockchain’s main focal point is decentralization. When infiltrating a centralized system, there is a single target point which makes it quite vulnerable. In blockchain technology, the access control, data storage, and network traffic are no longer in a single location, and therefore cannot be hacked. In terms of cyber security, blockchain may be the best and most efficient widespread strategy against cyber threats and one of the biggest reasons for companies to implement it.
Blockchain goes beyond the classic definition of protecting data in a decentralized system. With more and more companies using communication platforms throughout their network, blockchain can be used to form a unified API framework to protect communication amongst the company. In addition, the increase in AI has made it far easier for hackers to gain access to overall systems.
Blockchain can prevent this as well by decentralizing their administration and giving the device the capability of making security decisions on its own without a central command. Protecting DNS (another relatively easy route that hackers take) and overall data transmission, are 2 more examples of how blockchain can increase a company’s security.
Its strength is essentially its biggest weakness as well. Blockchain has become the go-to platform for transferring data and funds amongst criminals, money launderers, and even terrorist groups. Anonymous transactions and a decentralized system have put governments behind on the fight against blockchain crime, with some countries placing heavy bands on crypto and blockchain systems, most notably China. Until the criminal aspect is sorted out more in depth, blockchain may still have a bumpy road ahead until it will be truly accepted worldwide.
A recent EY survey conducted shows that 24% of finance leaders say that blockchain will be the function’s most important technology in five years. That is a significant percentage, especially considering the fact that blockchain was almost unheard of until a decade ago. It is crucial for anyone working in the FP&A field to be aware of how this technology can potentially change financial planning sooner rather than later. That being said, blockchain on a widespread scale will not be imminent until the important hindrances such as government policies, privacy concerns, and transaction speeds are resolved.