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. Even since the publication of the first edition of this book in 2020, the cryptoasset marketplace and blockchain adoption have continued to evolve at a breakneck pace. In addition, the entire field and conversation around artificial intelligence—nascent at beset in 2020—has become a recurring topic on earning calls across industry lines. Some might speculate that AI has replaced the excitement that once dominated the blockchain and cryptoasset space that could not be furthered from the case. Bitcoin, even in the aftermath of the scandal, collapse, and fraud at FTX, has traded at new all-time highs in 2024, buoyed by the long-awaited approval of spot Bitcoin ETFs. Additionally, and something that will be expanded upon in further chapters, the institutional adoption and onboarding of cryptoassets continue to accelerate.

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 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 new areas of business and science being developed as we speak. Even with 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 are not necessarily new; the tools have continued to change rather than the goal of the tools themselves. With every new development, however, comes the proverbial push and pull of innovation and regulation; blockchain, cryptoassets, 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 be 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. Even with the legislative and regulatory steps taken by the AICPA, the FASB, and even the SEC (via approval of ETFs), there is substantial work yet to be performed for practitioners to keep abreast and in pace with these technological changes (Fig. 2.1).

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 accelerating (unevenly) since that point, 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 appear 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 that, 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, 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 difficult to understand but potentially disruptive in nature. While artificial intelligence has been featured in numerous media outlets, movies, and TV 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. These limits continue to exist even in the face of rapidly improving versions of ChatGPT, Microsoft Copilot, and numerous other models (Kenney, 2024). 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 full 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 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 and 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.

As decentralized and distributed services and products continue to enter the marketplace and the disruptions 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, which is one that can be applied 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 generation of 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 as large and sophisticated as BlackRock, Deloitte, Fidelity, JP Morgan, Goldman Sachs, Invesco, Bank of America, Citi, 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 appear to be of a contradiction. Making effective decisions, be it choices linked to investment strategy or audit efficiency, requires 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 that 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 (Li & Juma’h, 2022) (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. The deluge of headlines and news around emerging technologies, specifically the 2024 efforts by US politicians to enact (or at least discuss) regulation around blockchain and cryptoassets, is making these conversations even more challenging to have. Implications and trends of any technology are invariably difficult to forecast, as the dot-com bubble illustrated to any analysts/investors in the early 2000s, but the pivot and push toward institutional adoption is evident. With tens of billions invested and entire firms and industries reorganizing service lines around these technologies, financial professionals and firms will need to understand what (1) the underlying trends represent and (2) how best to think of and analyze the implications of the said trends.

Some of the most high-profile work that has taken place, especially pertaining to the accounting subset of the financial services landscape, is the work linked to audit and attestation work. High profile, but an area of the blockchain-as-a-service landscape that has also had a significant share of failures, collapses, and lawsuits as a direct result of lackluster standard development by accounting standard setters. 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. Despite the near-perfect fit, the failure of standard setters and, by default, of audits themselves, continues to cast a shadow of the entire concept of auditing or providing attestation services to blockchain and/or crypto-native organizations (Huang et al., 2024). 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 illustration 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).

Although the field of ESG reporting and analytics has evolved significantly since the debut of integrated reporting and the multiple capital model in the 2010s, the modern ESG landscape borrows inspiration from many of the same factors and faces many of the same challenges that these previous iterations dealt with. Such difficulties also exist as the United Nation Sustainable Development Goals, originally put forward as aspirational goals, continue to mature and be built into a number of sustainability and ESG-related projects due to the robustness and simplicity of said goals (International Financial Law Review, 2023). The emergence of more comprehensive and integrated technology solutions can partially, but only partially, address these issues (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. Compounding the issues connected specifically to how AI and blockchain will impact cybersecurity and cyber insurance is the patchwork of regulation that is emerging, with the EU seeking to regulate efforts by both the United States and China to advance these technologies (Regulatory Update: EU to Adopt Comprehensive Regulation of Artificial Intelligence, 2024). While these are still, rather obviously, 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 JPM Coin 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. Even with Jamie Dimon, the CEO of J.P. Morgan Chase, publicly disparaging cryptocurrencies like bitcoin at every turn, his firm has aggressively invested in building out both an enterprise blockchain (Onyx) and the forementioned JPM Coin for commercial transactions. 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 (Fig. 16.1).

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 are 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 you have finished reading this book, you will feel a little more confident and comfortable about both the emerging technologies themselves and 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.