Blockchain, Artificial Intelligence and Financial Services

There has been a large amount written and spoken about artificial intelligence, blockchain technology, and the implications that these technology tools will have on the accounting profession in both the near and long term. One just has to look at the frothy and volatile nature of the cryptocurrency, on top of the introduction of hundreds of new coins, for potential evidence of market conditions overheating. Such a large amount of analysis and speculation may appear to some as the symptoms and stages of a bubble or over excitement in the marketplace, but upon further review this does not appear to be the case. While technology has played an important role in the accounting and finance profession since the beginning of the computer age, there are several fundamental characteristics that differentiate these technologies from earlier iterations. What this book attempts to do, however, is to not only breakdown these sometimes amorphous technology concepts, but also analyze the implications of these technology tools and platforms, and to finally project possible implications of these tools on the financial services profession.

It should come as no small surprise, especially to those of you reading this book, that the business landscape at large is in the midst of a technological paradigm shift. That phrase may appear to be to be excessive or perhaps a little buzzworthy, but it is difficult to think of a word or phrase that would be equally appropriate. In addition to the underlying trends that are redefining society and business at large, namely demographic changes, the machinations of global trade, and the increased digitization of information, there are who new areas of business and science being developed as we speak. Even the new technology tools that are the focus of this text, however, it is important to note that the evolution, iterations, and developments of accounting and financial services is not necessarily new; the tools have continued to change rather than the goal of the tools themselves (Winsen and Ng 1976). With every new development, however, comes the proverbial push and pull of innovation and regulation; blockchain and artificial intelligence are not exempt from this market reality. These dynamics, specifically as the relate to the accounting profession, represent forces and changes that must acknowledged and addressed in a proactive manner. Accounting professionals seem to be aware of, from the number of articles and discussions focused around the emerging technology space itself, but action steps still seem to be a work in progress. Specifically, as of this writing, there is no authoritative or definitive guidance issued by any accounting institutions or bodies that have entered into the marketplace. To kick things off and to help frame the conversation, Fig. 2.1 presents a summary and highlight of trends that are changing the accounting profession from its current position to where many experts predict it will end up.

Prior to examining the implications and applications of blockchain technology on the financial services landscape and practitioners employed therein, it does appear appropriate to, at least at first, acknowledge the importance of cryptocurrencies on the broader conversation. Beginning during 2017, and accelerated during the fourth quarter mirroring the rise in price of Bitcoin and other cryptocurrencies, the amount of interest and investment in the broader cryptocurrency area attracted the attention of both individuals and institutions. While the cryptocurrency applications and use cases are only a part of the wider blockchain conversation and analysis, it may very well be the most high profile example of how blockchain entered the market lexicon. Drilling down and taking into account just what cryptocurrencies are, what they are not, and what they may mean for the financial services landscape appears to be an appropriate first step toward understanding how emerging technology forces are driving the profession forward.

It is also worth noting at this point, and before diving into a conversation between the different types of blockchains, it appears logical to discuss just how information is approved, verified, and added to existing blocks to form the blockchain itself (Andolfatto 2018). There are numerous iterations available in the marketplace, and this is not meant to be an all-inclusive listing nor an exhaustive one. Rather, by understanding what these different approval methodologies are, and having a working baseline for what these options mean, will equip financial professionals with the skills and information necessary to discuss and advise on these important issues moving forward.

Classifying cryptocurrencies is already an emerging issue that has attracted the attention of virtually every regulatory agency both in the United States and overseas, and this does not appear to be a passing trend. As the market for blockchain based cryptocurrencies continues to expand and develop in nature, including institutional investment opportunities there is a growing need for price stabilization and clearer reporting requirements.

The dual headed disruption tidal wave of blockchain enabled activities and artificial intelligence will invariably lead to anxiety, stress, and potentially misunderstanding of just what these technologies represent for financial services. Blockchain, hopefully, at this point has been demystified to a certain extent, but the idea of artificial intelligence may appear and seem like a more amorphous concept that is both difficult to understand but potentially disruptive in nature. While artificial intelligence has been featured in numerous media outlets, movies, and T.V. shows, the image that is most often presented to audiences and market actors is one that, almost invariably, has negative connotations and implications for the developers and users. Fortunately, while there have been numerous advances in the development and implementation of artificial intelligence, the limits of current iterations are still substantial. In other words there is no need to fear the Terminator coming for financial practitioner roles. Prior to diving into what the applications and implications of AI may very well be, however, it seems appropriate to first put forward a definition that makes sense in the context of this discussion. Not meant to be overly technical, but rather a working definition to assist financial professionals seeking to understand and explain the implications of AI, a working definition as follows is a workable option:

Artificial intelligence is clearly a disruptive and potentially disruptive technology tool, but it is important to take a step back and observe the overall business environment in addition to the finance and accounting specific applications that have entered the marketplace. Drilling down, and taking a realistic analysis of where both personnel and technology tools are currently positioned in the marketplace it may be logical to conclude that implementing an artificial intelligence platform may not be a practical option at this time. Additionally, and dealing with the reality that some individuals will be less engaged in the technological process than others within the organization, RPA offers several benefits that a fully fledged blockchain or artificial intelligence may not be able deliver at the present time (Fig 7.1).

This book is a wide ranging analysis and conversation around both the emerging technologies and the implications that these emerging technologies will have on different aspects of the finance and accounting. Such an analysis and examination, however, would be incomplete without at least mentioning how these changes are being viewed from a bigger picture and macroeconomic level. Data and other quantitative information are, as has been discussed both in this text as well as numerous others, may very well represent the next competitive advantage for organizations both now and going forward. Stepping outside of the financial services arena for a brief minute this trend is arguably more evident in search, social media, and the entertainment spaces. Technology giants such as Google, Facebook, Alibaba, Amazon, and Netflix have access – and use – the vast quantities of information available to them to generate new insights, improve business models, and increase margins. These advances and business improvements, however, have not come without costs and increased regulatory scrutiny. One need merely to look at the hearings that Twitter, Facebook, Google, and Apple have had to contend with during 2017 and beyond to see that as corporate power increases governments across the globe will become increasingly interested.

As decentralized and distributed services and products continue to enter the marketplace, and the disruption that these tools bring are felt throughout the market and by different actors it will also be important for practitioners and organization to obtain the appropriate mindset. There is a phrase used in the accounting profession, but is one that can apply to different subsets and areas of the financial services profession as well; riches are in the niches (McCausland 2000). Generalized services, lower level tasks, and virtually every aspect of workplace activity that can be automated will be automated and this will invariably cause margin compression, fee restructuring, and the importance of generating differentiated services. This is already underway, and the tried and true solutions of investing in more automation while also reducing employee headcount will simply not be sufficient to compete effectively going forward. Organizations are large and sophisticated as BlackRock, Deloitte, and numerous other firms in other industries are currently dealing with these forces with a combination of investment, hiring of different employees, reduction of current headcount, and launching of digital solutions. That is well and good, as well as being absolutely necessary, but a different tactic will be required going forward.

In most traditional business settings the idea of being comfortable with ambiguity is something that would be appear to be something of a contradiction. Making effective decisions, be it choices linked to investment strategy or audit efficiency, require that the decision makers involved be able to drill down and ascertain exactly which pieces of data are the most important. The simple reality, however, is that as business continues to become more fluid, digitized, and global in nature ambiguity will continue to increase. Especially since it does not look like some of the hard trends – such as changing demographics, political instability, and a rebalancing of how business is conducted on a global basis, will be changing anytime soon, it seems reasonable to expect that the profession will have to evolve in order to keep pace.

Another aspect of the blockchain and cryptocurrency conversation, especially as it pertains to the financial services, that is important to have in a comprehensive way is the discussions around the internal controls necessary for further adoption. It is true that the conversation and analysis that normally surround internal controls may not be one that attracts large amounts of attention or excitement, but it is a critical one for the blockchain and artificial intelligence conversation (Crosman 2018). Put simply, even as technology becomes more integrated within the broader financial landscape and services professions, it will still remain important for financial services professionals to be aware of, and well versed in, developing and implementing internal controls (Fig. 11.1).

With an emerging area such as blockchain and blockchain based assurance and attestation services it is always difficult to know what to include as current news or current use cases, but several trends do appear worth of inclusion as current or topical news stories.

Some of the most high profile work that has taken place, especially as it pertains to the accounting subset of the financial services landscape, is the work that has taken place linked to audit and attestation work. The audit process, as currently constituted, is an almost perfect fit for the increased efficiency and automation provided for by a variety of blockchain tools. Audits, and these similarities tend to exist across geographic and firm lines, tend to contain several of the same core components. An engagement letter is composed, outlining the services to be provided by the external audit organization, including but not limited to the testing of certain assets, verification of financial statement amounts, and then the issuance of an opinion based on these amounts. Even with these tests and analyses, some of which may be quite sophisticated in nature, there is a fundamental time lag issue that usually remains unaddressed despite how efficient the audit process is. Put simply, the amount of time that passes between when the data is actually generated or produced, and the time that the audit actually occurs can stretch into months. Even with interim work, or work performed at different times during the year, there is still often a substantial lag between when data (and potential errors) happen, and when that data and potential errors are reported to management. The figure below represents areas in a financial transaction (trading) in which potential audit and attestation implications will arise, and can be aided by the implementation of emerging technologies (Fig. 13.1).

Integrated reporting, at the basis of the idea, is a comprehensive reporting framework that reflects both the increasing interest from stakeholders in understanding both how an organization generates results, but also how these results are created (Zhou et al. 2017). Without diving too much into the technical weeds and details associated with integrated reporting, it can be summarized as a methodology to report financial and operational data to external stakeholders. The core of this reporting framework, which has been adopted by a variety of organizations across industry lines on an international basis, can be summarized and highlighted via the multiple capital model. Even the name of the multiple capital model itself appears to connect the concept of more comprehensive reporting to the financial services profession, and includes a wide variety of information. Drilling down into the multiple capital model itself is logical, both from a tactical approach for financial services professionals as well as a strategic headset (Fig. 14.1).

A related conversation and potential area of revenue and advisory services that financial services professionals may have traditionally overlooked is the importance of cybersecurity advisory services in a business environment that is increasingly digitized. Cybersecurity policies and training may have, in the past, focused on ensuring that the organization had in place sufficient password controls and safeguard to protect data against unauthorized access to client information and ensuring that anti-virus software was kept up to date. While these are still, rather obviously, still important for every organization, they now simply represent a good starting point in the conversation rather than the end point in the debate. Stated differently, cybersecurity has moved beyond merely an IT or technical concern, and is increasingly a concern for the entire organization at large (McLane 2018). None of this is news, however; every professional is going to be aware of just how important data integrity and cybersecurity it. Let’s connect this trend and topic area to the same topics we have been discussing throughout this book; blockchain, artificial intelligence, and cybersecurity tools (Fig. 15.1).

With the launching of JPMCoin in the early days of 2019 there was a renewed discussion and debate around both the future of blockchain and cryptocurrencies at large as well as the implications that such a launch means for existing options and companies already operating within the broader space. There was an abundant amount of discussion and analysis in the space following the announcement of the new token as well as the blockchain it operates on, but regardless of specifics that have been discussed, it does appear that there are a few core themes and topics that are driving this and other conversations.

Linking back to the initial conversation and introduction of the topic relating data to the financial services profession, this also connects to the subtopics of blockchain, artificial intelligence, and the services that can be constructed off of these trends. The trends of blockchain, increased encryption, and the intersection of greater technology integration with traditional accounting and financial services will, of course, cause disruption within the industry, but will also cause a paradigm shift as to how professionals view and evaluate assurance, audit, and other advisory services. This is an important topic to keep in mind, especially as different technologies and technology tools continue to enter, evolve, and disrupt the marketplace over time. Regardless of the specific tool or platform that is utilized as a component of this process; RPA, AI, blockchain, or other automation tools or processes, the underlying trend is that professional services are going to become increasingly connected to the data that is produced, stored, and disseminated by organizations both internally and externally. No two firms as the same, and the applications and implications of data and information technology will have different end effects depending on the specific vector and business model of the practice.

This transition, from compliance based reporting and analysis of historical financial information, to one more closely aligned with forward looking guidance and advice, is not one that can happen given the current status of technology and education within the financial services landscape. Elevating and becoming more of a strategic partner within the business decision making process will require better integration of technology tools, processes, and procedures and strategies leveraging technology must become a part of the financial services conversation. What makes the current era seemingly different from prior technology trends and forces is the fact that, instead of representing an iteration or step development building on current technologies, blockchain and artificial intelligence are two disruptive tools. Let’s not forget, and avoid getting lost in the technical jargon, just what exactly both artificial intelligence and blockchain might change about the financial services landscape and conversation (Fig. 18.1).

Hopefully by the time of you have finished reading this text and book you feel a little more confident and comfortable about both the emerging technologies themselves as well as the applications and implementation issues that may arise along the way. No single book or manuscript is ever going to be able to cover or effectively address the full scope of how technology or other changes will be changing the profession going forward. The buzzwords of the day do seem to focus on technology and technology applications, including blockchain, artificial intelligence, robotic process automation, and other automation software packages, but that does not mean that these will always be the force driving disruption and change in the financial services landscape. As mentioned previously, if the clock was dialed back to the early or even mid-1990s the terms that are driving change and innovation throughout the business landscape would be more related to the internet or cellular technology.