Accounting, surprisingly to folks who've never studied it and think it's simple arithmetic, requires judgment, based on rules that are sometimes grey and subjective. When you add in legal complexities, it becomes... well, more complex and therefore open to manipulation.
For instance, Enron was able to hide many liabilities by marking it (in hindsight) below market, since... there was no market for said liabilities. So it was impossible to value them. Furthermore, it hid other debt in obscure subsidiaries that were only tangentially, legally and fiscally speaking, connected to Enron.
The blockchain confirms, with better accuracy than existing systems, "X transaction occurred between Y and Z partners." It does not confirm "X's assets were appropriately valued and marked as such to a non-existent market, and X is most definitely a legal subsidiary and is overseen by the fiduciary duty of A Holdings, Corp."
The blockchain has the potential to be a far more efficient settlement system. But saying it prevents Enron or Madoff is simply not true at all.
The blockchain, rather, represents a better clearinghouse merely by being a decentralized platform to account for payments rather than a centralized one.
OP says this prevents accounting fraud. Not one iota.
>by the use of accounting loopholes, special purpose entities, and poor financial reporting – were able to hide billions of dollars in debt from failed deals and projects.
which you could probably spot if you had access to all their bank accounts including those of the special purpose entities but no large company is going to make all that stuff public. If it's on a blockchain it'll be encrypted some how. The people who are supposed to have access to that stuff and check it are the auditors, in this case Arthur Andersen who screwed up and were destroyed by it going from 85,000 employees to mostly closed.
However, I was really asking for the benefits of blockchains more generally. I've been hearing a lot of smart people say it's the future, and I've seen news articles about numerous companies looking into building their own blockchains, but I don't really see what the general use case is for it. The only example that's ever made much sense to me is the example of cryptocurrency.
* Puts the whole world on the same level of financial freedom and participation -
farmer in Africa without an internet connection permissionlessly invests in a Chinese tractor company via text.
* Solves the problem of ownership - no need for house, car, etc title companies.
* Brings a new level of honesty to the financial world - auditing industry goes away because it's not possible to cook the books.
* Every movement of value becomes near-instant and doesn't require trusted middlemen - elimination of clearing houses.
* Breaks down national borders - vastly improved supply-chain logistics.
It has the potential of reshaping almost every corner of the underlying structures of modern economies. Just like the internet, it's the foundation for a new chapter of innovation. Who knows what will come of it?
The amazing thing is blockchain, specially things like Monero or Zercoin, makes it even more difficult to spot this as Enron would have been able to open accounts as they wanted.
I am writing a piece on blockchain transactions and I still don't understand how this triple account thing applies.
Let me explain how double accounting works - You and I have 100 in Bank A. The Bank A notes:
Bank's Liability to:
You - 100
Me - 100
Total - 200
You - 100
When I pay you 50 out of it, the book shifts:
Bank's Liability to :
You - 150
Me - 50
Both side in balance.
Now this book is obviously internal. Can you use this same example and explain how triple accounting works in blockchain?
And because governments really don't want to admit to their constituents how much they really spend and what they spend it on, the rules are ... less than perfect.
But a blockchain can vouch for the fact that the ledger was made according to the (supposed to be published and fair) rules, and that the rules didn't change except with total agreement.
So enron would have been able to book things in against the rules, but an easily written automated program would have detected such shenanigans, and there would not be anything Enron could do to prevent that program from raising red flags when the transactions don't follow the rules (so it would not be possible to book in such transactions, then not book in payment in full when it's due. If you're wondering how that's possible, consider that in bitcoin there just isn't any credit. So the only way to place an order using a bitcoin directly is to stake they money ahead of time, optionally with an instruction that it'd be paid back if an "oracle" (anyone else on the blockchain) says it's not delivered correctly)
Let's take an example of a retailer. She buys stuff from a company to sell in her stores. And she has How or when does her book it as a revenue? When it is bought? When it is sold? Common sense says after it is sold. What happens if there is a return? There are so many rules to cater to so many things. It's something you can hardcode into program code.
> bitcoin there just isn't any credit.
And far from you belief, it is not a good thing.
> optionally with an instruction that it'd be paid back if an "oracle" (anyone else on the blockchain)
I like how a statement defending cryptocurrencies goes all over the place.
Pray tell, how are "oracles" implemented in "bitcoin"?
Also, why should people not trust the government but random "anyone else on the blockchain"?
That said, I am still waiting for someone to explain me this "triple accounting" thing on blockchain.
Given 2 economic systems. One with credit and one without. The credit based one will crush the non-credit-based one.
Does that mean credit is good ? No, but it makes it a moot point: we will have credit. Point. Bitcoin will not survive, in the long term. I get that.
Because for your bitcoins, that would be "45 minutes or less".