Bitcoin and ethereum are popular investment options, but it is the underlying blockchain technology that holds real value in the way we can revolutionize big data and transactions over the internet. The potential of blockchain goes well beyond cryptocurrency. It will remain in the fabric of our technological lives and, hence, entrepreneurs should recognize its power and use it to their advantage.
Blockchain was originally designed to facilitate transactions of the cryptocurrency bitcoin. But bitcoin was only the first large-scale application of the blockchain platform. Blockchain technology has immense potential beyond just cryptocurrency transactions. It could completely change financial and business transactions and real estate deals.
From a tax perspective, blockchain has the ability to disrupt global taxation.
What is Blockchain?
Blockchain is essentially a decentralized transaction ledger, in which digital information can be distributed and viewed but not copied or altered. As a distributed database, it lives across a network of computers, which makes it exceptionally secure.
Blockchain stores transaction records in groups called blocks. Each block is time-stamped and added to a chain, linked to the previous block. It is completely transparent and cannot be changed, eliminating the need for a third party audit.
A transaction can involve money, contracts, records and other information. Therefore, blockchain is not limited to financial transactions but can be used for anything of value.
The Potential Impact of Blockchain on Businesses
Since blockchain technology fundamentally changes how transactions are made and recorded, the accounting industry will likely see the biggest impact. But the disruption will not stop there. Real estate transactions could be greatly simplified using blockchain technology instead of manual paperwork. Distributed ledgers provide an easy way to trace the origins of goods (for example, fair trade products), thus simplifying supply chain audits. In the sharing economy, blockchain could enable true peer-to-peer transactions, thus eliminating the intermediary, like an Uber or Airbnb. Blockchain technology could take crowdfunding to the next level, potentially creating crowd-sourced venture capital funds. Using smart contracts, creators can protect intellectual property and sell creative work directly to their audiences online. Client verification, often a cumbersome manual process, could be simplified through cross-institution verification based on blockchain. This could also have applications in anti-money laundering efforts. In politics and governance, a distributed database could make results fully transparent and publicly accessible.
How Blockchain Could Transform Taxation
Blockchain’s core characteristics give it significant potential for use in taxation.
Transparent Real-Time Information
Businesses could see less cost and more efficiency, as blockchain technology could automate the manual processing of payroll tax, employment tax and any transaction-based taxes. Instead of self-reporting, every single transaction would be recorded and paid immediately, ensuring almost 100 percent compliance.
Blockchain could also help with verifying transfer pricing and valuation. Using this technology would make it easier to value what is the “fair market price” between a willing buyer and willing seller to ensure all related party transactions are valued appropriately. It would help make valuations more of a science than an art and keep these valuations and supportable and up to date.
Increased Security and Fraud Protection
With blockchain incorporated into the tax collection process, audit detection occurs automatically and instantaneously. The digital ledger cannot be tempered with once the data is entered. Any changes are fully transparent to all identified network users, thus limiting the potential for errors and fraud.
Tax authorities would also benefit from that. The transparency inherent to blockchain would change how tax audits are performed. Some governments, such as Luxembourg, have already started to experiment with blockchain-based solutions for tax filings and audits.
While blockchain has its roots in cryptocurrencies, it has the potential and trajectory to profoundly impact financial services, taxation and global business in general. This is something that will impact 2018 and beyond. So the people who get involved now in learning, understanding and developing this technology and these solutions are not only boosting a trend, but impacting our society for years to come.
A version of this post originally appeared here.