Can Blockchain Technology Improve Fund Accounting Software?

fund accounting softwareAs a nonprofit, you most likely have never thought about using blockchain. What is blockchain exactly? It is the technology that provides support for the entire cryptocurrency realm and beyond. Blockchain has become a hot commodity in the world of technology innovations. You may not think that as an accountant, especially one who does fund accounting for nonprofits, that you must consider blockchain. However, the impact from using blockchain technology goes far beyond Bitcoin, Ripple, and all other cryptocurrencies out there.

What is Blockchain?

In 2008, Satoshi Nakamoto published a whitepaper on a technology enthusiasts forum titled: “Bitcoin: A Peer-to-Peer Electronic Cash System,” outlining a new system of value exchange. This peer-to-peer electronic cash system was built upon a strong foundation of mathematical computations that are called blockchains.

Before this paper was published, an electronic transfer system was only dreamt up. The problem that could not be solved, and couldn’t make this dream a reality, was double counting and being able to track securely each transaction. However, Satoshi had discovered a solution to the double counting problem, known as blockchain.

The blockchain is a distributed database of records, otherwise known as a public ledger. A blockchain contains all the transactions or digital events that have been executed and shared among participating parties. When a transaction is made in the public ledger, the majority of participants in the system need to verify the transaction. Once the transaction has been confirmed by multiple people, it will never be erased. Every single transaction on the blockchain is recorded and saved from the moment it started. This allows you to look back in the blockchain to verify transactions.

The nicest part about the blockchain is that it can be easily accessed from any location via the internet. Transactions made between users are verified and added to the global blockchain ledger by “miners” who earn a small transaction fee by contributing their computing expertise.

There are thousands of blockchains, or distributed ledgers, worldwide and each of them running on their own mathematical code. This is what sets them apart from others.

An Example to Explain a Blockchain Transaction

We are going to use bitcoin as an example, since this is the first (and most commonly used) cryptocurrency ever on the blockchain. The first transaction on the blockchain was the transference of bitcoin. In this example, you want to send 1 bitcoin from your account (called a wallet) on an exchange (or place) where fiat currency (such as dollars) can be exchanged for bitcoins.

You want to send this bitcoin to your friend, Mary. In order to do this, you must log into your exchange account and type in Mary’s public bitcoin wallet address. It is important to know that each account has a public address, which looks like a long string of letters and numbers, and a private key, which is kept safe by the account owner. The private key should NEVER be shared with anyone, as sharing this would give anyone access to your wallet.

The next thing you need to do is enter the amount of bitcoin you want to send to Mary and her public wallet address and hit “send.” A signal will then go out through the exchange to all the nodes on the bitcoin blockchain. “Miners” on the blockchain will then confirm two things: that you have the bitcoin in your account and that Mary’s wallet account is authentic. Once these two things are confirmed, the hour to day-long process starts for the bitcoin to eventually arrive in Mary’s wallet. The next step would be for Mary to use her private key, set up on the site hosting her wallet, in order to access her money and either spend it or exchange it for other currency, such as dollars, euros, or other cryptocurrencies.

How Can This Impact Fund Accounting for Nonprofits?

Blockchain technology goes far beyond cryptocurrencies. For example, the government of Sweden has moved all its land titles onto a unique blockchain that has formed a permanent and publically accessible record of every single land title transaction. This highly impacts the real estate market as anyone can do a title search and access records via the internet, in-turn eliminating title search companies that hunt down records.

The Ethereum blockchain offers something called smart contracts which eliminate the middleman in any contract. Think about how this can benefit transactions by eliminating the third party. Real estate and automotive transactions could take place on the blockchain via smart contract.

For accountants, the potentials to improve your nonprofit are still being explored. Just imagine how blockchain could greatly improve your nonprofit and fund accounting software by recording all your nonprofit’s transactions. The blockchain would form a permanent, public ledger. It would eliminate fraud, since multiple people need to be reached to change data on the nodes. This completely eliminates the most common fraud of one person tampering with the books.

Blockchain can be difficult to comprehend, but the potential far outweighs the difficulty of it. Though still new, nonprofits should keep an eye on how it can improve their fund accounting software.

RBP Methods

RBP Methods is a nonprofit software and consulting firm that helps right-brained people navigate a left-brained world. We want to help you understand cloud-based fund accounting software for nonprofits. Whether you’re interested in AccuFund Nonprofit Accounting Suite, Abila MIP Fund Accounting, or other accounting software, we offer information, training, and support to help you manage your nonprofit accounting needs. Contact us today or call 503-648-9054 for more information.