Content:

I. Accounting 101
II. Profound changes to the financial industry
III. How the financial services sector will change
IV. Private blockchains
V. Blockchain IPO
VI. Prediction markets
VII. Current development in the Blockchain Space
VIII. Conclusion

Modern accounting sprang from the curious mind of :

Luca Pacioli
Italian mathematician
15th century

His deceptively simple invention was formula known as double-entry accounting, where every transaction has two-effects on each participants, debit and credit onto the balance sheet, the ledger of corporate assets and liabilities. by codifying these rules, Pacioli provided order to an otherwise ad hoc practice that prevented enterprises from scaling.
this led to the birth of the term "accounting magic":

1. Calculating depreciation
2. Valuing inventories
3. Allocating on-costs

I. Current Problems with modern accounting:

1. Current regime relies upon managers to swear that their books are in order
2. Human error is a leading cause of accounting mistakes
3. New rules such as Sarbanes-Oxley have done little to curb accounting fraud
4. Traditional accounting methods cannot reconcile new business models
5. Most audit software allows for 2 decimal places, useless for micro transactions of any kind

Accounting - the measurement, processing, and communication of financial information is not the problem, it performs a critical function in today economy. however, the implementation of accounting methods must catch up with the modern era. what if audits were done daily?

The financial reports for a company would become a living ledger - auditable, serachable, and verifiable

Read all about Triple-Entry Accounting here:

http://iang.org/papers/triple_entry.html

Start up:

Balanc3 is leading the accounting initiatives in the blockchain industry
https://www.balanc3.net/#/

II. There are 6 Key Reasons why Blockchain Technology Will Bring About Profound Changes to The Financial Industry:

1. Attestation

• Two parties who neither know nor trust each other can transact and do business

2. Cost

• on the blockchain, the network both clears and settles peer-to-peer value transfers, and it does so continually so that its ledger is always up to date.

3. Speed

• the shift to instant and friction-less value transfer would free up capital otherwise trapped in transit, bad news for anyone profiting from the float

4. Risk Management

mitigate several forms of financial risk:

• settlement risk - risk that your trade will bounce back of some glitch in the settlement process
• counterparty risk -risk that your counterparty will default before settling a trade
• systemic risk - total sum of outstanding counterparty risk in the system

5. Value Innovation

• others are looking to leverage the bitcoin blockchain's size and liquidity can be called "sidechains"
• sidechains - blockchains that have different features and functions from the bitcoin blokckchain but leverages bitcoin's established network and hardware infrastructure without diminishing its security features.
• Sidechains interoperate with the blockchain through a two-way pegged.
• two-way pegged - cryptographic means of transferring assets off the blockchain and back again without a third party exchange

6. Opensource

• As open source technology, blockchain can constantly innovate, iterate, and improve, based on the consensus in the network.

III. The Golden 8: How the Financial Services Sector will Change

*1. Authenticating Value
*2. Moving Value
*3. Storing Value
*4. Lending Value
*5. Exchanging Value
*6. Funding and Investing
*7. Insuring Value and Managing Risk
*8. Accounting for Value

Financial service companies will most likely utilize the so-called permissioned blockchains, also known as private blockchains

IV. Private Blockchain

• Require users to have certain credentials, giving them a license to operate on that particular blockchain.

Advantages:

• Costs can be kept down as transactions need only validation from the member themselves
• removing the need for anonymous miner who use lots of electricity
• all parties are trusted, 51% attack is unlikely
• easier for regulators to monitor

Disadvantages:

• The easier it is to change the rules, the more likely a member is to flout them
• Prevent the network effect that enable a technology to scale rapidly
• intentionally limiting certain freedom by creating new rules can inhibit neutrality
• no open value innovation, the technology is more likely to stagnate and become vulnerable

*company's financials are one of its most guarded secrets. furthermore, many companies want to ensure that management has a certain degree of flexibility in how it accounts for certain items, such as how to recognize revenue, depreciate asset, or account for a goodwill charge.

*However, increasing transparency is a huge opportunity for managers everywhere:

• uphold the highest standards of corporate governance
• seize the mantle of trust as corporate leaders

V. Blockchain IPO

The process of raising equity capital - through private placements, initial public offerings,secondary offerings, and private investments in public equities has not changed significantly since 1930s

thanks to the new crowdfunding platforms, small companies can acess capital using the internet

Still participants couldnt buy equity directly, these intermediaries is the ultimate arbiter of everything, including who owns what.

The blockchain IPO takes the concept further. Now companies can raise funds on the blockchain by issuing tokens, or cryptosecurities, of some value in the company.

• Anyone in the world - even the poorest and most remote people could become stock market investors, or in this case, token investors

VI. The Market for Prediction markets

A decentralized prediction market platform that rewards users for correctly predicting future events, sporting events, election results , new product launches, and so on. it brings the spirit of the market to bear on the accuracy of predictions.

Augur Relies on "The wisdom of the crowd" , scientific principle that a large group of people can often predict the outcome of a future event with far greater accuracy than one or more experts.

Innovation:

• Prediction markets could complement and ultimately transform many aspects of the financial system. Consider prediction markets on the outcomes of corporate actions - earnings report, mergers, acquisitions, and changes in management.
• Prediction markets would inform the insurance of value and the hedging of risk, potentially replacing esoteric financial instruments like options, interest rate swaps, and credit default swaps.

VII. Current Blockchain Development in the Financial Industry:

• R3 Consortium: https://www.r3.com/

9 of the largest banks (Barclays, JP Morgan, Credit Suisse, Goldman Sachs, State Street, UBS, Royal Bank of Scotland, BBVA, and Commonwealth Bank of Australia) - announced a plan to collaborate on common standards for blockchain technology.

• Hyperledger Project: https://www.hyperledger.org/

Not a competitor to R3, but counts R3 as its founding member along with (Accenture, Cisco, IBM, Intel, Mitsubishi UFJ, SWIFT, Wells Fargo). Hyper Ledger is an open source project that has tasked a community to develop a "blockchain for business"

VIII. Conclusion

Blockchain technologies will impact every form and function of the financial services industry - from retail banking and capital markets to accounting and regulation. they will also force us to rethink the role of banks and financial institutions in society.

"Bitcoin cannot have bail-ins, bank holidays, currency controls, balance freezes, withdrawal limits, banking hours".

• Andreas Anotonopoulos

We believe that the unstoppable force of the blockchain technology is barreling down on the entrenched, regulated, and ossified infrastructure of modern finance, their collision will reshape the landscape of finance for decades to come. we would like to finally form an industrial age of money machine into a prosperity platform.