New kids on the blockchain fintech

1. Electronic copy available at: https://ssrn.com/abstract=2897645
Maria Karajovic
mkarajovic18@schulich.yorku.ca
Harleen Narula
hnarula18@schulich.yorku.ca
Kartiki Pandya
kpandya18@schulich.yorku.ca
Janvi Patel
jspatel18@schulich.yorku.ca
Ibnoor Warring
iwarring18@schulich.yorku.ca
Blockchain: A Manager's Guide
A Report for OMIS 3710
Schulich School of Business
York University
Toronto Ontario Canada
We would like to acknowledge "Information Systems: A Manager's Guide to Harnessing Technology"
by John Gallaugher and published by Flat World Publishing as the source of the look and feel of this
document. The content of the document is, however, completely original.

2. Electronic copy available at: https://ssrn.com/abstract=2897645
1. NEW KIDS ON THE BLOCK…CHAIN
Blockchain – or what used to be known as “block chain” prior to the demise of the dreaded extra
keyboard click – is a peer-to-peer (P2P) public ledger maintained by a distributed network of
computers that consists of three components: a transaction, a transaction record and a system that
verifies and stores the transaction. [1] The cloud concept of blockchain is what the name implies – it
contains blocks that hold valid transactions together. When an individual requests a transaction in
real-time, it gets broadcasted P2P-style in the network through a series of nodes. [2] Blockchain’s
most popular application is its validation of Bitcoin transactions. This is made possible via a set of
algorithms successfully solved by the administrator (a user of the system). The incentive to be a so-
called “miner” that solves these computational problems? The opportunity to get more bitcoins
added to your wallet! The blockchain is combined with other similar transactions to create a new
block of data for the general ledger. Keep in mind that the new blocks will be added to the hash of
the prior blocks that are already in the blockchain. [3] This makes transactions permanent and
immutable. The transaction is then deemed complete and the other party receives their payment.
The blockchain is always added in a linear chronological order. About every 10 minutes, a newly
generated block is created and attached to the blockchain through mining. This, however, raises the
question about the database’s capacity to synchronize and store data in the system as it grows. [4]
Given its disruptive nature, blockchain has ignited an international buzz.
1. Understanding blockchain, its history, its disruptive nature and its future.
2. Develop a comfortable understanding of blockchain’s many applications.
3. Recognize the advantages and disadvantages associated with blockchain.
L E A R N I N G O B J E C T I V E S
hash
Any function that can be
used to map data of
arbitrary size to data of
fixed size, often used in
computer software for
rapid data lookups.
node
Gets a copy of the
blockchain via the
computer of the client
completing the
transaction validation.
FIGURE 1.1
The blockchain process.
Source: "What Is Blockchain Technology? A Step-by-Step Guide For Beginners." Blockgeeks. N.p., n.d.
Web. 29 Oct. 2016.
<http://blockgeeks.com/guides/what-is-blockchain-technology-a-step-by-step-guide-than-anyone-can-
understand/>

3. 1.1 Why it Matters
Blockchain has the potential to be incredibly useful in a variety of fields. See for yourself!
Accounting
Perhaps blockchain’s greatest accomplishment is its potential to prevent trusted professionals from
“cooking the books.” Manual deterrence measures, such as segregation of duties, internal controls
and third-party audits may be insufficient in thwarting bad apples from colluding. Enter blockchain.
Retrospective changes to its data are practically impossible; once data has entered a blockchain, it
cannot be changed – not even by system administrators. Thus, the transactions are immutable. For
accountants, this means that the paper trail would be greatly reduced, if not outright eliminated.
Although an economically-friendly decision, it has been met with the contempt of paper-loving
skeptics. Certain original documents are hard to forge and are prized for their degree of authenticity,
while modifications to electronic files may go unnoticed due to their digitized nature. However, from
a technical perspective, the blockchain hash string solves this problem by creating a “physical
fingerprint of a particular file,” preventing criminals from extracting these transactions and
replacing them with cover-ups. [5] To maliciously alter a blockchain, one would have to
hypothetically alter thousands of preceding and subsequent blocks to ensure the chain is
chronological. Standardization of this process means that auditors will spend less time verifying
data and more time managing complex tasks like assessing ambiguous or unethical transactions,
hence focusing their time on value-adding activities. In fact, companies may no longer need
auditors, since the integrity of financial transactions would be controlled by a blockchain system
internal to the organization. The system also allows for smart contracts to reconcile transactions
and automatically trigger audits.[6] For a profession founded on faithful representation and accuracy
of information, blockchain presents a valuable opportunity for further improvements in the field of
accounting.
Finance
Blockchain has proven to be a reliable instrument, which is likely why it has been endorsed by
financial powerhouses like Wall Street, Pricewaterhouse Coopers and Barclays. Firms wishing to
cultivate the trust of present and potential customers while simultaneously fostering a first mover
advantage may adopt this technology in their quest for transparency. A blockchain available to the
public cultivates a culture of openness and ensures “data consistency and integrity across a
computer network.” [7] Blockchain’s high quality data is guaranteed to be “complete, consistent,
timely, accurate and widely available.” [8] Innovation in industries where intermediaries were
previously imperative will experience faster and cheaper services from these advances. [9] Where
transactions previously took days to clear, users now only need to wait minutes and can have 24/7
access to the service. This empowers users, in a sense, since they are “in control of all their
information and transactions.”[10] Disintermediation brings with it lower transaction fees as a result
of lower overhead costs.
The existing capital market is often criticized for its slow, dependent, and expensive
infrastructure. Blockchain, however can ameliorate this problem by providing an independent,
single location for investments to be traded.[11] Blockchain provides a safe and convenient location
to trade stocks, bonds, and digital currencies. Specifically, instead of companies trading publicly
through a stock exchange like the TSX or NYSE, they would issue stocks using coloured coins.
This would make it easier to track these investments and offers particular potential for the
regulation of intellectual property. One final benefit of blockchain is that it provides a platform to
send and receive other cryptocurrencies through an exchange called ShapeShift. This creates a
gateway for more companies to reach out to a wider pool of consumers.[12]
Today, the blockchain platform has the potential to completely reshape global trade. The
blockchain and bitcoin duo create a standardized unit of account that avoids the need for
conversion. This simplifies trade and also makes valuing transactions more consistent because it
overrides the need to convert to the currency of another country. Naturally, this also reduces the
demand for paper-based currencies and the intermediaries responsible for issuing them. Despite
this, bitcoin prices are still fairly volatile but are nevertheless expected to stabilize overtime as the
pool of users increases. [13] The promising crowdsourced technology that powers bitcoin is secure
enough that it does not need to be centrally controlled. This means that even a financial crisis, such
as the 2007/2008 crisis, would not have as detrimental of an impact on taxpayers and their wallets.
smart contract
Computerized
procedures that enforce
and verify the
performance and
negotiation of a contract.
coloured coins
Open source bitcoin
protocols that allow for
the creation and
management of digital
assets in blockchain.

4. Previous crises may have broken people’s confidence in the financial markets, but decentralization
of the blockchain minimizes these effects because it does not have a central point of failure.
Real Estate
On average, a homeowner places his or her house on the market every five to seven years.
Purchasing a home is usually the biggest investment an individual makes in their lifetime. Yet, there
have not been many developments to enhance the process of home buying. Blockchain’s application
in the real estate sector could signal multiple benefits, including disintermediation, transparency,
and fraud prevention. The process of purchasing a home often requires going through a number of
middlemen, such as brokers, appraisers, banks, and insurance companies. Blockchain, however,
makes it possible to store all required information about a property, including past transactions,
digital addresses and financial, legal, performance, and physical attributes, in a secure database that
is universally accessible. This reduces costs and increases efficiency by providing increased
transparency of information to the average homebuyer. It provides easy and quick verification of a
property and links it to its real owners, thus reducing the likelihood of a property scam.[14]
FIGURE 1.2
Illustrates the speediness and simplicity of trade grâce à blockchain.
In the bag, or hitting the Sach?
Goldman Sachs, the investment banking giant of our time, issued a research report on the
technology of blockchain in May 2016. In the report, it outlined the benefits and disruptions to
certain industries caused by blockchain’s ever-growing presence. The investment bank projects
thatup to $90 million fromcost reductions and$700 million fromIT Improvements could besaved
from adopting the blockchain. Not only has it issued research reports, but the company is even
looking to apply blockchain technology to its own operations. Specifically, as of mid-September
2016, it filed a patent for foreign exchange trading on blockchain. In its application, it identified
the challenges of adopting the new technology, mainly concerns of technical transition,
scalability involving costly initial investments in infrastructure, and potential breaches in privacy
and anonymity. Fundamentally, in its patent, it proposes a blockchain system that identifies
information and performs the know-your-customer (KYC) and anti-money laundering (AML)
checks which it claims will address some of the former issues. [15]
know-your-customer
The process of verifying
and identifying the
identity of a client.
anti-money laundering
Laws, regulations, or
procedures created to
stop income generation
through illicit activities.
Source: James McLean, “Banking on Blockchain” Putting the Progress of Distributed Ledger Technology In
Financial Services,” IBM, January 2016

5. 1.2 Hype or Reality?
Blockchain enthusiasts would agree that the future of blockchain looks bright. Nevertheless, there
are also a fair number of naysayers who argue against its success during this relatively early stage
of blossoming (and perhaps eventual domination). As blockchain penetrates various facets of
commerce, we are left to determine whether this emerging technology is really as promising as it
seems.
Looking back at the applications of blockchain in accounting and finance, it may seem like
an ethical saviour. However, it’s important to remember that every rose has its thorns. Although
bitcoin’s blockchain technology offers great value, it does not completely eliminate fraud. If
malicious transactions are initially recorded, integrity is diminished right away. Therefore,
validated transactions are not necessarily “true.” Although the code that governs the technology
cannot be hacked, humans are still corrupt and one error – intentional or otherwise – can make the
entire blockchain futile. Moreover, blockchain technology does not attempt to verify the reliability
or accuracy of its content. [16]
Users’ trust is paramount in determining the success of this electronic ledger. If skepticism
on security issues and ethical concerns remains high, society may never buy into a promising
system. For some, although the future looks hopeful, the initial capital investment is simply too
costly, despite the future savings in transaction costs and time. Data control problems also arise in
cases where multiple entities have access to the blockchain data, thereby making control of data
much more complex. Although blockchain is deemed an enabler of change, strategy-related issues
may atrophy its momentum. [17]
As an emerging technology, blockchain still has many areas of improvement, including
transaction speeds, its verification process and data limits. [18] Since modern currencies have always
been created and regulated by national governments, uncertain regulatory status may hinder
institutions from adopting this technology. [19] With this phenomenon also comes large energy
consumption, as miners attempt to validate trillions of transactions per second. This computing
power does not come cheap, especially considering its attractiveness to regulation.
Alas, even the most well-intended technologies are met with drawbacks. Thus far, the
blockchain has been able to offer a “novel solution to a number of complex computational and
cryptographic problems” and surpass every security risk, attack, evolution crisis and PR nightmare
which would have otherwise destroyed new technologies. [20] Whether blockchain is the future of
bookkeeping still remains uncertain, but reports indicate professionals in all industries should keep
an eye on this revolutionary disruptor.
1.3 Looking to the Future
According to Accenture, the law of diffusion of innovation curve projects blockchain will reach
law of diffusion of
innovation curve
Theory that every market
has groups of customers
who differ in their
readiness and willingness
to adopt a new product.
Source : James Schneider, “Profiles Innovation Blockchain” Putting Theory into Practice.” Goldman
Sachs, May 2014

6. its “tipping point” in 2018 after the majority of financial services begin to reap the benefits of early
adopters and new emerging models. Blockchain is expected to accomplish the innovative phase in
2016 along with the 13.5% threshold of early adopters amidst financial services. This development
pattern is forecasted to persist until the year 2025, at which point it will become accepted and
widespread.[21]
According to PwC, three trends are highlighted in 2016 pertaining to the blockchain
technology: (1) Potential users’ increasing emphasis on preserving their intellectual property while
discovering new opportunities to interact with stakeholders; (2) Strategic thinking further guiding
technological risk taking in large financial organizations; and (3) Increasing transactional processes
created by market incumbents. [22]
To stay at pace with these trends, blockchain must overcome numerous obstacles if it hopes
to eventually become mainstream. The most notable of these - creating a shift in public perception
towards adopting widespread use of its database. Primarily, it must attain approval from regulatory
committees. Another key issue presents itself in relation to employing blockchain, specifically the
proof of existence. Private organizations might be hesitant to display their monetary figures and
financial data onto a generally accessible and decentralized system so companies are attempting to
innovate and develop their own networks. In response, the permission-based blockchain was
developed, which enabled the technology to only be accessed by the selected authority chosen by
the company rather than being an openly distributed source. However, some say this secrecy goes
against blockchain’s core purpose of decentralization. [23]
So far, numerous companies have attempted to replicate blockchain’s progress. The most
successful competitors of bitcoin’s blockchain include Ethereum Labs and the Eris Industries. While
permission-based
blockchain
Blockchain technology
that can only be accessed
by the selected authority
chosen by the company.
FIGURE 1.3
A look at the law of diffusion of innovation curve.
proof of existence
Anonymously stores any
proof of existence for any
document without being
stored in the database.
Source: "The Future of Blockchain in 8 Charts - Raconteur.net." Raconteur. N.p., 27 June 2016. Web. 07
Nov. 2016.

7. Ethereum’s smart contracts are notable, the system failed for being overly-ambitious. It had many
plans for new features but failed to live up to its own expectations. As a result, this gave blockchain
an opportunity to replicate the smart contract technology before forcing Ethereums out of the
market.[24] While the Eris Industries provides users with the resources and software to build their
own blockchain, it failed to offer an incentive for data miners to perform their complex duties. [25]
Similar to the internet, in order for blockchain to succeed, it must be a generally-accessible and
easy-to-use resource.
3.4 Concluding Remarks
We have seen the diverse perspectives and trends influencing the future rise or fall of this powerfully
emerging database. It is evident that blockchain represents the start of a new digital era and
technological turning point. This “internet of value” has opened up a new world of possibilities
through a peer-to-peer platform that enables personal economic empowerment, financial reporting
accuracy and information sharing freedom. Only time will tell whether this electronic ledger will
truly gain momentum.
K E Y T A K E A W A Y S
Q U E S T I O N S A N D E X E R C I S E S
 Blockchain is a public ledger containing bitcoin transactions.
 Blockchain ledgers bypass centralized infrastructure.
 It has potential applications in numerous fields, including accounting, finance, and real
estate.
 Blockchain can make processes more democratic, secure, transparent and efficient.
However, regulatory, control, privacy and security issues may thwart users from
recognizing its full potential.
 There are numerous obstacles that blockchain must overcome if it wishes to be successful.
Examples include gaining public trust and staying ahead of competitors and industry
trends.
 Although economic theory dictates a promising future for blockchain, it must stay
aggressive and constantly innovate in order to be achieve sustained prosperity.
1. Define blockchain. How is it used with bitcoin?
2. What is a hash? Why is it important?
3. Name one way that blockchain is reshaping the accounting profession.
4. Give an example of how blockchain and bitcoin are working together to redefine financial
markets.
5. Illustrate how home buyers would be affected by the use of blockchain.
6. What are some criticisms that downplay blockchain’s future success?
7. What do economic trends suggest about blockchain’s future growth? What must
blockchain do in order to remain competitive? Defend your answer.

8. ENDNOTES
[1] "What Is Blockchain Technology? A Step-by-Step
Guide For Beginners." Blockgeeks.
[2] Watters, Audrey. "The Blockchain for Education:
An Introduction." Hack Education. 07 Apr. 2016.
[3] Berger, Carola F. "Bitcoin Part 3 – Hashes, Public
Key Cryptography “for Dummies” and the Block
Chain." CFB Scientific Translations and Consulting.
29 June 2015.
[4] "Blockchain." Investopedia. N.p., n.d. Web. 22
Oct. 2016.
[5] A. Lewis, “A Gentle Introduction to Immutability
of Blockchains,” Bits on Blocks, February 29, 2016.
[6] Nicolai Andersen, “Blockchain Technology: A
Game Changer in Accounting?,” Deloitte, March
2016
[7] A. Morrison, “What Are the Limitations of
Blockchain and Where Does the Technology
Break?,” Quora, June 3, 2016.
[8] Stefan Thomas, “Potential Uses of Blockchain
Technology,” WeUseCoins
[9] Nick Caes, Robard Williams, Elena H. Duggar,
Gregory W. Bauer, “Robust, Cost-effective
Applications Key to Unlocking Blockchain’s Potential
Credit Benefits,” Moody’s Investor Service, July 21,
2016
[10] E. Hinchliffe, “The World’s Financial Elite Just
Gave Bitcoin a Huge Endorsement,” Mashable,
August 12, 2016.
[11] James McLean, “Banking on Blockchain”
Putting the Progress of Distributed Ledger
Technology In Financial Services,” IBM, January
2016
[12] J. Boersma and Jeroen Bulters, “Blockchain
Technology: 9 Benefits & 7 Challenges,” Deloitte
Nederland, accessed November 5, 2016.
[13] J. Condos, William H. Sorrell, and Susan L.
Donegan, “Blockchain Technology: Opportunities
and Risks,” Vermont, January 15, 2016.
[14] Stefan Thomas, “Potential Uses of Blockchain
Technology,” WeUseCoins
[15] Ian Kar, “Goldman Sachs wants to put Foreign
Exchange Trades on Blockchain,” The Quarts,
September 13, 2016
[16] P. Manasse, “What Is the Major Limitation of
Blockchain Technology?,” Quora, January 20, 2016.
[17] A. Morrison, “What Are the Limitations of
Blockchain and Where Does the Technology Break?”
[18] J. Boersma and Jeroen Bulters, “Blockchain
Technology: 9 Benefits & 7 Challenges,” Deloitte
Nederland, accessed November 5, 2016.
[19] A. Morrison, “What Are the Limitations of
Blockchain and Where Does the Technology
Break?,” Quora, June 3, 2016
[20] "The Future of Blockchain in 8 Charts -
Raconteur.net." Raconteur. N.p., 27 June 2016. Web.
07 Nov. 2016.
[21] Garfinkel, Haskell, Jeremy Drane, and Cathryn
Marsh. "What’s next for Blockchain in 2016?" PwC
FinTech Jan. 2016: n. pag. Web.
[22] Niloy, Mainul Alam. "Blockchain Technology;
How Does the Future Look Like?" 99 Bitcoins. N.p.,
19 Nov. 2015. Web. 03 Nov. 2016.
[23] J. Condos, William H. Sorrell, and Susan L.
Donegan, “Blockchain Technology: Opportunities
and Risks,” Vermont, January 15,
[24] DeRose, Chris. "Why the Bitcoin Blockchain
Beats Out Competitors." American Banker RSS.
N.p., 2015. Web. 04 Nov. 2016.
[25] DeRose, Chris. "Why the Bitcoin Blockchain
Beats Out Competitors." American Banker RSS.
N.p., 2015. Web. 04 Nov. 2016.