Triple-Entry Accounting & Blockchain: Reimagining Corporate Books
Double-entry bookkeeping was invented in the 15th century by Luca Pacioli. This method of writing credits and debits was perfect for paper-based ledgers; it neatly displayed the movement of value in and out of a company’s account. It was designed in a world where value was held in physical things like coins and before anyone could even conceive of an idea like digital commerce.
Modern companies now deal with transactions in the millions where value is stored on databases and transferred through networks. This requires entire departments dedicated to reconciling accounts across multiple systems and correspondents. This system can result in fraud opportunities and opaque financial trails.
Triple-entry accounting through a blockchain provides a viable solution that reduces reconciliation and mitigates against fraud and financial opacity.
In modern banking, institutions maintain accounts that mirror transactions happening at a correspondent institution and then reconcile the balance and entries with the correspondent to ensure both parties agree. With triple-entry accounting, the two correspondents do not need to each maintain separate entries but would instead use a third cryptographically signed receipt written to a shared ledger.
Since the third entry is accessible by both parties and immutable, there is no need to reconcile with each other. This provides more consistency for the entries.
Blockchain technology makes this possible because it eliminates the need for the two parties to trust one another.
Smart contracts can be written to enforce transaction structures and payment conditions such as ensuring both parties provide a signature before an entry becomes final.
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Institutions could decide to use public chains, for full transparency, or private chains to maintain some privacy. A private chain could still address transparency by providing permissioned access to third parties such as regulators or auditors.
Once corporations have switched to triple-entry systems, the can then further automate their systems through smart contracts and programmable wallets to provide balance sheets in real-time, automated accruals, and near-instant payments. All of this while also eliminating reconciliation across exchanges, banks, and departments.
For corporate payments and treasuries this means all outgoing payments would create a shared ledger entry accessible to all counterparties. This reduces the time spent on reconciliation allowing for faster settlement and clearing.
For exchanges and custodians, deposits can be monitored through automated tools and withdrawals processed immediately. Smart contracts could be developed to monitor things like counterparty risks, liquidity risks, and operational risks.
Supply chain management could be improved with smart contracts that automatically release products for delivery upon receipt of payment. The movement of products from factory to intermediaries and ultimately consumers could be managed through smart contracts that track triple-entry receipts.
Payrolls could be automated and paid directly to an employees wallet. Companies could even start to change the payroll interval paying their staff daily or even hourly.
Triple-entry accounting would mean a faster movement of value and this could mean more potential for growth.
From a regulatory point of view, these entries would be on an immutable log with full transparency. Systems could be designed to continuously audit the ledgers to ensure compliance. Regulators could be provided with real-time visibility instead of periodic snapshots.
There are going to be challenges and limitations before this can be realised. The first being that corporations and financial institutions would need to adopt the technology and phase out legacy systems; not an easy nor cheap task. They would more likely integrate triple-entry accounting with their legacy systems in the short term.
Privacy would be a major concern as well. While the transparency for regulators and auditors is ideal, institutions would not want their competitors to have the ability to discern their transactions and activity. Permissioned, private blockchains are one solution while another would be to use zero-knowledge proofs that provide evidence of compliance without providing details of the underlying transaction.
The short term pain of implementing triple-entry accounting would likely be offset by the long term gains in cost savings from reduced reconciliation. Institutions have been looking into blockchain technology for years and are now starting to take stablecoins more seriously. As digital assets become more mainstream, triple-entry accounting could easily evolve to become the default standard for corporate books.
