Have you heard about blockchain? Even if you have not heard
about blockchain, you would surely have heard about bitcoin. Bitcoins are not blockchain but Bitcoins use
the blockchain technology.
Why should a CFO concern about blockchain technology?
The blockchain technology is a big game changer. It can be used to solve many business
problems. While some industries are hugely impacted, others might have minor
impact. Also, since the technology is evolving and maturing new impacts are
getting discovered every day. Ignoring the technology could mean loss of
competitive advantage, inefficient process impacting shareholder value. As the
guardian of the shareholder value, it is of great importance to the CFO to
understand the technology in general and impact on finance function in particular.
Before, we discuss how the blockchain impacts the finance
function, let us understand what blockchain is, what its unique features are,
what are its benefits.
What's the name?
The blockchain technology is also sometime referred to as
DLT i.e. Distributed Ledger technology. While there are minor differences
between the two, to keep things simple, we can assume both are the same.
What is blockchain / DLT (Distributed Ledger Technology)?
As the name indicates the technology uses blocks, chains, is
distributed (i.e. decentralized) and ledgers (list of data). Basically DLT uses
blocks to store data, the data is linked / chained to each other most likely
using cryptology. Apart from data
storage / linkage, in DLT the complete data will be replicated (distributed).
The data in the block chain is stored based on a 'consensus' rule and
blockchain might also have smart contracts, which gets executed based on
certain criteria.

Blockchain / DLT (Distributed Ledger Technology) - How
does it help?
Because of the above characteristics, a blockchain can help
businesses
Speed up business processes - transactions
taking days can be done in seconds.
Reduce costs - as it will enable direct
peer-to-peer interaction without the need for intermediaries.
Reduces risks - as the transactions are
immutable and cannot be changed ones created
Enforces and builds trust - all data is
transparent and additions are through a consensus mechanism.
Maybe the above discussions are very technical, let me
describe a finance use case for better understanding of the technology and the
benefits.
Trade Finance - Use Case - Using Oracle Cloud, Oracle
Blockchain Cloud Service
Trade finance is one of the areas where the blockchain
technology is already in use. Let us imagine a typical bill discounting
scenario. The scenario will have the
following participants - buyer (say 'ABC Electronics'), seller (say 'LG
Electronics'), and financing bank (say HSBC).
Assume we are the buyers, using Oracle Cloud applications.
ABC Electronics buys the goods from the LG, on receipt of
the goods and the invoice from the LG, the details are sent (physical copies of
invoice) to the HSBC bank. HSBC bank verifies the data and then releases funds
to the LG based on the due date.

Note the above process
Might take 3-5 days, probably more
The participants to the process, do not have a
visibility of the status - Are the goods received by the ABC Electronics, is
the invoice received by the ABC Electronics, has HSBC bank got the document,
has HSBC bank verified the documents.
The invoices might get damaged, lost, tampered
with - as they move between the different parties.
How can Oracle Blockchain Cloud Service help here-
With blockchain we can now build a solution whereby
The business process of sending goods, receiving
goods, receiving invoices, sending invoices to the buyer, verification of
receipts and invoices by the buyer, sending the invoice to the bank can be
captured / shared on the blockchain
The transactions on consensus gets added to the
block chain and cannot be tampered with (immutable)
Additions to the blockchain can be done by
automatic process / manual process. Oracle Blockchain Cloud Service offers REST
API's to automatically integrate the Oracle cloud applications with Oracle Blockchain
Cloud Service.
New data can be added based on an agreed
consensus mechanism, which can be built using Oracle Blockchain Cloud Service.
Oracle Blockchain Cloud Service also offers a
front end application, which help the participants to view the status of the
transactions (data transparency)
The physical invoices need not be sent to the
bank, the bank can directly connect via RESTAPI offered by Oracle Blockchain
Cloud Service, to verify the invoices captured by the buyer. ( eases and speeds
up the process)
With Oracle Blockchain Cloud Service, a smart
contracts can be built to automatic transfer amounts to the seller, on due
verification of the invoices (process automation)
Below is the
pictorial representation of how data (block) gets added to each node after each
business event based on consensus between all participants and the same view is
available to all participants.


With the above solution
The data is visible to all participants and is
consistent across all participants.
Physical invoices need not be sent to the bank.
The correct invoice details are confirmed by all
parties and cannot be tampered with (immutable). The ability is only possible
due to the use of blockchain technology.
Smart contracts executed automatically to
initiate supplier payments.
The time to process the payment to the seller
can be done in few minutes instead of days
Are there other Use cases - Impacts on finance function?
While there is a big impact on financial services industry,
crypto-currencies, the focus of this note is to discuss the impact on the
finance function perspective, at a more micro level.
There are many other use cases. As the technology matures,
the way it is implemented is also evolving and new use cases are getting
discovered.
Oracle (in Oracle Open World 2017) while releasing the Blockchain
Cloud Service solution, have listed a good set of questions which will help you
determine the possible use cases for blockchain. Businesses need to check on
below to discover potential use cases
Is my business process pre-dominantly cross
departmental / cross organizational? ( think of intercompany reconciliation,
interparty reconciliations)
Is there a trust issue among transacting
parties? ( think of trade finance scenarios)
Does it involve intermediaries, possibly
corruptible?
Does it require period reconciliations? ( think
of intercompany reconciliation, interparty reconciliations)
Is there a need to improve traceability or audit
trails? (think of bank confirmation letters, third party balance confirmation
letters needed by auditors)
Do we need real time visibility of the current
state of transactions? (think of publishing reports to various stakeholders)
Can I improve the business process by automating
certain steps in it? (think of automatic payment, based on inspections by a
third party).
From above, we can see numerous opportunities for improving
the finance functions. Let me try to list possible use cases by critical
functions of finance.
S Num
|
Function
|
Sub-Function
|
Possible
impacts
|
1
|
Financial Management
|
Ø Strategic Planning
Ø Annual Planning
Ø Rolling Forecasting (Quarterly / Monthly)
Ø Working Capital management
Ø Forex management
|
An internal, permissioned blockchain can be built to
get consensus on the plan, which is transparent to all participants and
immutable.
A permissioned blockchain can be setup to speed up
the funds disbursement process for trade finance
|
2
|
Financial Reporting and Analysis
|
Ø Statutory and External Reporting (GAAP / IFRS / VAT
etc.)
Ø Management Reporting (Scorecard, Dashboard)
Ø Strategic Finance (Scenario Planning. M&A)
Ø Customer and Product Profitability Analysis
Ø Balance Sheet, P&L ,Cashflows
|
A permissioned blockchain can be setup for secured
communication of reports which is secured, tamperproof, quick to publish.
|
3
|
Governance, Risk and Compliance
|
Ø Financial Policies & Procedures (Business Rules
Management)
Ø Tax Strategies and Compliance
Ø Tax Accounting
Ø Audit, Controls and SOX Compliance
Ø Enterprise and Operational Risk Management
Ø System Security and Controls
|
Secured communication of reports to government
authorities.
A permissioned blockchain can be built to get
consensus on the account balances for audit purposes.
|
4
|
Finance Transactions and Operations
|
Ø General Accounting
Ø Managerial Accounting
Ø Accounts Payable
Ø Credit and Collections
|
A permissioned blockchain can be built which is
transparent, immutable and consensus based to capture customer promises for
cash collections.
|
5
|
Financial Consolidation
|
Ø Period end Book closure (monthly, quarterly, yearly)
Ø Currency translation and trial balances
Ø INTRA and INTER company transaction accounting
Ø System of records close ( COA, GL, Sub-ledgers)
|
A permissioned blockchain can be built to share and
agree on intercompany balances.
|
Any pitfalls? What should you check?
There are many potential uses of this technology. As the
technology matures and more Proof of concept projects get executed, new use
cases are getting discovered and old use cases are also getting dropped. As per Gartner Hype cycle, blockchain
technology has passed the 'Peak of Inflated expectation' phase and is likely to
enter in the 'Trough of Disillusionment' phase as POC's start failing before
entering the 'Slope of entitlement' phase.
Considering the hype, there is a risk of trying to force-fit
blockchain in scenarios, where simpler, cheaper, faster options might work
better. While blockchain are immutable, highly secure, there are few exceptions
and special attention is needed to ensure the exceptions are understood and
managed. The government regulation to manage blockchain contracts also need to
be evolve. There are also concerns with data transparency, which might not
always be a good thing.
Conclusion
Blockchain is a big game changer. Its impact on the finance function is
inevitable. As the technology matures, the technology will help the CFO
automate, speedup processes, build internal controls even with third parties
outside the organization. The CFO
organization should start discussion on discovering use cases. It is likely
that new ways of doing processes might be developed, in a way never imagined
before.
The
intention of the article is to give an introduction to blockchain, the impact
on finance function and how Oracle Blockchain Cloud Service can help with build
a block chain quickly.
Continue reading "
Blockchain & Finance - An Introduction for the CFO
" »