Blockchain's Triple-Entry Accounting: A Potential Shift for Banks
According to PANews, the fundamental nature of both banks and blockchain revolves around ledgers, yet they differ significantly. Banks today face a choice similar to that of newspapers and magazines in the past: embrace the internet and transform into new media or remain with traditional methods and risk obsolescence. The advent of stablecoins further accelerates this trend.
While many banks are beginning to adopt cryptographic technologies, the underlying question is why encrypted ledgers might eventually replace traditional bank ledgers. This involves the method of accounting.
Traditional banks primarily use double-entry bookkeeping, a system invented in medieval Italy and widely adopted globally. This method requires every transaction, such as deposits, loans, and transfers, to be recorded in at least two related accounts with equal amounts, ensuring dual verification. For instance, a debit entry must correspond to a credit entry, maintaining the balance of assets, liabilities, and equity, and facilitating audits.
When depositing 1,000 units of currency into a bank, the bank records a debit of cash and a credit of customer deposits. However, traditional double-entry bookkeeping relies on independent records, which can be altered or reconciled inaccurately. Essentially, the money in a bank account is just a number in the bank's ledger, which theoretically can be modified. Trust in the bank's integrity, third-party audits, and regulation is necessary to ensure accuracy, as demonstrated by the Enron scandal in 2001.
In contrast, blockchain introduces triple-entry bookkeeping, which adds a 'third entry': a shared, immutable record. This is achieved through a trustless, intermediary-free blockchain, highlighting the benefits of distributed ledgers.
The third entry is often an encrypted receipt or timestamped block, requiring network consensus for validation, such as Bitcoin's Proof of Work (PoW) or Ethereum's Proof of Stake (PoS) mechanisms. This method addresses the trust issues of double-entry bookkeeping, as it is tamper-proof and eliminates reconciliation discrepancies. Blockchain acts as a 'third-party' arbitrator, ensuring transactions are trustworthy and auditable.
Ethereum, for example, functions as a distributed ledger where each transaction is recorded in both the sender's and receiver's accounts, akin to double-entry bookkeeping, with an additional network consensus mechanism creating an immutable 'third entry': an encrypted timestamped block.
Triple-entry bookkeeping creates unalterable records, offering higher efficiency than double-entry systems, without the need for intermediaries, reducing audit work. Essentially, double-entry involves both parties keeping a record, while triple-entry adds a 'smart lockbox' that automatically stamps and witnesses transactions across the network, making them tamper-proof and instantly verifiable.
Ultimately, for banks, adopting blockchain means transitioning from double-entry to triple-entry bookkeeping. Once privacy (ZK proofs) and compliance (KYC) issues are resolved, moving banking operations onto the blockchain could significantly enhance efficiency, eliminating the need for maintaining outdated financial systems and shifting to a new, non-disruptive encrypted chain system.
Embrace or face marginalization—this is one of the most critical challenges financial institutions will encounter in the next two decades.
