Tag Archives: anti-terrorism

Blockchain: No More Double-Entry Books?

My day job at Ribbit.me 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 a CPA, and I’ve been wanting to put some thoughts out there for a while. I still see very few people talking about the effect on blockchain on bookkeeping despite its potentially bringing into doubt the 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 2,000 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 and credit sales). If these aren’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 its simplicity and effectiveness.

See Also: What’s In Store for Blockchain

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, someone 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 Ribbit.me uses a permissioned ledger as its 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 distributed autonomous organization (DAO). 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 does not 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 who has 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 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 right 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 what was described 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 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, 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. And 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 will not be any more fruitful. Remember, this ledger is a DAO. By definition, no single entity owns or operates it. And, just like that, with nobody to attribute liability to and nobody to attribute ownership to, the right hand-side of the credit column disappears. Double-entry bookkeeping collapses. What is left behind is a single-column ledger in a single-entry bookkeeping ecosystem.

I omitted one part of the bank-deposit example out of this blockchain example: “We still own the asset in our account, and, at some point, the bank is required to return the asset to us.” This was omitted because there is a possibility that 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, the more difficult it may be to understand all of this. More than once, I’ve spent more than an hour trying explain this to university accounting professors and professional-practicing CPAs. They are so close to double-entry bookkeeping that asking them to question it is something akin to 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. This has opened a Pandora’s box of entirely new challenges and risks that are brought about by undefinable asset ownership/liability and unquantifiable counterparty risk. These are not just new challenges and risks for the transaction counterparties but for the regulators mandated to oversee it all.

See Also: What Is and What Isn’t a Blockchain?

Challenges for Enterprise Adoption

If the user is an individual, as sole proprietor of its person, it can make decisions regarding risk exposure on its own behalf. 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) that 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 have yet to be answered and that risk managers must demand 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. This brings new opportunities — as we will soon see, single-entry bookkeeping will emerge as a new discipline of study and research.

There will be a real market need to innovate 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 have sparked an interest, feel free to reach out! You may very well be a pencil-pushing geek just like me.

Preventing Violent Crime on Campuses

Violent crime, a major and growing problem in this country, is exacerbated by the fact that many crimes go unreported. But there’s a simple fix to the lack of reporting: Make it easier for people to tip off authorities anonymously.

Developments in communications technology and in social media can play a decisive role in increasing reporting, especially among young people. Once authorities have more information, they can not only track down more criminals but can develop a fuller picture of where and under what conditions violent crimes occur, and can develop better prevention programs.

In California, the Visalia campus of the College of the Sequoias has a program  allowing individuals to report suspicious behavior on campus to local police anonymously via text, voice mail or email.

“Our best resource, by far, is the students and faculty right here on campus,” Chief of the Police department Bob Masterson told the student newspaper . “Even if you’re not the victim, you could be a great witness.”

Many students said the program, TipNow, keeps them safer; they also consider it a good idea for all campuses.

Such programs are essential because violent crime remains an unfortunate truth in the U.S. According to the FBI’s national crime statistics, 1.2 million violent crimes were committed in the U.S. in 2012, and  even seemingly safe, self-contained campus environments like schools, colleges, hotels, hospitals and corporations are not immune.

At U.S. hospitals, the violent crime rate per 100 hospital beds rose 25%, from 2.0 incidents in 2012 to 2.5 incidents last year, according to research released by the IHSS Foundation at the International Association for Healthcare Security and Safety (IAHSS). The rate of disorderly conduct incidents experienced the biggest jump, from 28 per 100 hospital beds in 2012 to 39.2 last year (a rise of 40%). A separate IHSS Foundation study found that 89% of the hospitals surveyed had at least one event of workplace violence in the previous 12 months.

The federal Bureau of Justice Statistics’ National Crime Victimization Survey reported the following statistics for workplace violence between 1993 and 1999:

  • While working or on duty, U.S. residents experienced 1.7 million violent victimizations annually, including 1.3 million simple assaults, 325,000 aggravated assaults, 36,500 rapes and sexual assaults, 70,000 robberies and 900 homicides.
  • Workplace violence accounted for 18% of all violent crime.

From  1997 through 2009, 335 murders occurred on college campuses, according to data from the U.S. Department of Education (2010).  Three-fifths of campus attacks in a 108-year span occurred in the past two decades.

Yet many crimes go unreported to campus authorities. A 1997 study about campus violence by Sloan, Fisher and Cullen found that only 35% of violent crimes on college campuses were reported to authorities.

There are various reasons for not reporting crimes. For example, many may regard a crime as too minor a matter to report or may consider it a private matter. Many studies have shown a reluctance to report crimes or other suspicious activities out of fear of the authorities or of criminal retribution.

For instance, in February 2009 in San Gabriel, Calif., two gunmen opened fire inside a coffee shop, killing one and wounding six others, but police had trouble finding witnesses to what appeared to be a gang-related attack even though the shop was crowded with at least 40 people. Sheriff’s spokesman Steve Whitmore was quoted as saying,  “We know people saw something, and we need them to come forward and help us solve this crime.”

Too many Americans are inculcated with the belief that “the authorities will attend to it” – without considering that, in many cases, the appropriate law enforcement agency is unaware of a danger. Although many domestic terrorist events and campus shootings are committed by those whose previous actions were seen by those around them as odd, or even threatening, too often these observations go unreported.

This is why the concept of anonymous reporting is important: to get more information from the campus community. This anonymity is now possible.

TipNow receives tips via SMS/text, email, voice and mobile-app. When the tips hit the TipNow server, the sender’s information is encrypted. The tip is then disseminated to a pre-defined set of administrators on the system via email and SMS/text. The administrators can ask for more information from the tipster, still anonymously. For extra security, the server will delete all identifying information in 24 to 72 hours.

The system looks like this:

TipNow

In a recent interview, an anti-terrorism official (name withheld at his request) expressed his view on prevention: “The ability to gather information, sift through it to find what is useful intelligence – and then rapidly get that information to the right people – can and has made the difference between tragedy and that tragedy being averted.”