Blockchain Technology and Its Potential Effects on Accounting: A Systematic Literature Review

Atik, Asuman; Kelten, Goksal Selahatdin Article Blockchain Technology and Its Potential Effects on Accounting: A Systematic Literature Review Istanbul Business Research (IBR) Provided in Cooperation with: Istanbul University, Business School Suggested Citation: Atik, Asuman; Kelten, Goksal Selahatdin (2021) : Blockchain Technology and Its Potential Effects on Accounting: A Systematic Literature Review, Istanbul Business Research (IBR), ISSN 2630-5488, Istanbul University Press, Istanbul, Vol. 50, Iss. 2, pp. 495-515, https://doi.org/10.26650/ibr.2021.50.806870 This Version is available at: https://hdl.handle.net/10419/250270 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc/4.0/ REVIEW ARTICLE Istanbul Business Research Istanbul Business Research, 50(2), 495-515 DOI: 10.26650/ibr.2021.50.806870 http://ibr.istanbul.edu.tr/ http://dergipark.gov.tr/ibr Submitted: 07.10.2020 Revision Requested: 12.05.2021 Last Revision Received: 30.06.2021 Accepted: 23.08.2021 Published Online: 22.10.2021 Blockchain Technology and Its Potential Effects on Accounting: A Systematic Literature Review Asuman Atik1 , Göksal Selahatdin Kelten2 Abstract With the growth of the business world, autonomous software programs such as MRP, ERP, and SAP have been used to synchronize different units and departments since the 1960s. There have been great technological developments in the last decades, such as Blockchain, the Internet of Things, artificial intelligence, and machine learning. The attention of the accounting world has also been on those technological developments, especially on Blockchain Technology. Accounting academics and professionals have been trying to understand how blockchain technology can affect accounting and what kind of changes might be brought about by that technology. Therefore, the purpose of this study is to make a systematic literature review in order to foresee the potential effects of blockchain on accounting. Selected keywords were searched for on the Scopus database. The results show that most of the studies in this area focus on technical issues and the development of software applications, and a small number of studies make a connection between blockchain and accounting. Although most of the authors are very optimistic about blockchain technology and claim that this technology may change the double-entry accounting system completely and radically, some have discrete approach and express critical views. Keywords Blockchain, Cryptocurrency, Accounting, Auditing 1 Corresponding Author: Asuman Atik (Assoc. Prof.), Marmara University, Faculty of Business Administration, Department of Accounting and Finance, Istanbul, Turkey. E-mail: [email protected] ORCID: 0000-0001-7727-4585 2 Göksal Selahatdin Kelten (Res. Asst.), Pamukkale University, Faculty of Economics and Administrative Sciences, Department of Accounting and Finance, Denizli, Turkey. E-mail: gk[email protected] ORCID: 0000-0002-7273-7613 To cite this article: Atik, A., & Kelten, G. S. (2021). Blockchain Technology and Its Potential Effects on Accounting: A Systematic Literature Review. Istanbul Business Research, 50(2), 495-515. http://doi.org/10.26650/ibr.2021.50.806870 This work is licensed under Creative Commons Attribution-NonCommercial 4.0 International License Introduction There are many important milestones in mankind’s history. The invention of writing, the industrial revolution, the development of firearms, and geographical explorations are examples of these milestones. The discovery of money also has great importance because it provides a standard measurement of value and it is very difficult to make trade between parties without it. The invention of the Internet also has had a considerable impact on the development of international trade as well as the increase in usage of money in daily life. Furthermore, there have been notable developments in the field of technology in the last century. The widespread use of the Internet has brought digitalization to almost every field. Especially e-commerce Istanbul Business Research 50/2 496 has reached huge volumes and very large-scaled global shopping sites have appeared like Amazon, Alibaba, eBay, and Walmart. The digitalization that started with the Internet has increased the economic interaction between countries and the world is globally integrated by eliminating the borders in the economic sense. Due to the digitalization and globalization in the world, new developments, new rules, and new problems have arisen in the areas of accounting, finance, payment systems, fund transfers, storage, and the transfer of data. Blockchain Technology (BCT) and cryptocurrency1 are two of the most important developments over the last decade. After Nakamoto’s (2008) “Bitcoin: A peer-to-peer electronic cash system” article, BCT and cryptocurrencies gained prevalence. Nakamoto (2008) states that the existence of the trusted party in the electronic payment systems is increasing the cost of money transfers from one to another. Therefore, there is a need for a payment system that enables individuals to transfer money between two parties without a third party. To meet this need, an electronic system was developed, which is “peer-to-peer” and based on cryptology, which allows transacting directly with each other. Blockchain has been embedded in a lot of areas, particularly, the digital platforms based on BCT have been developed and submitted to the banking sector and financial industries. “Stella” is a joint project of the European Central Bank and the Bank of Japan. They have been working on assessing the applicability of Distributed Ledger Technology (DLT) solutions in financial market infrastructures since 2016 and they report the aim of “Stella” as “to contribute to the ongoing broader debate around the potential usability of DLT while not being geared towards replacing existing central bank services with DLT-based solutions” (European Central Bank and Bank of Japan, 2018). Accounting professionals and academics cannot stand unresponsive to the development of the BCT and have been searching for possible usage areas of this technology in accounting. Big accounting firms have started to develop software applications based on BCT and to promote the usage of blockchain. New debates have arisen on the accounting of cryptocurrencies and the requirement for new IFRSs, which will conform to BCT. This study aims to make a systematic literature review to understand the potential effects of BCT on accounting and make some inferences for the future of the accounting profession. In order to increase the understandability of the research topic, blockchain and cryptocurrency concepts are explained in the following part. The research methodology of this study is explained in the third part. The fourth part summarizes the related literature, and the fifth part is the conclusion. 1 The terms “cryptocurrency” and “virtual currency” are often used interchangeably. In this paper, we only used “cryptocurrency” to avoid confusions. Atik, Kelten / Blockchain Technology and Its Potential Effects on Accounting: A Systematic Literature Review 497 Cryptocurrency and Blockchain Technology Human beings used to barter under primitive conditions. When life became more complex and bartering was not sufficient, it became necessary to fix a particular commodity as a “medium of exchange and a measure of value”. This intermediate commodity which is called “money” has appeared in many different forms such as cattle, iron, salt, shells, dried cod, tobacco, sugar, nails, stone, etc. in different times and places (Innes, 1913; Keynes, 1915). Historical records show that leather money was in usage in China approximately 100 B.C. and again the first money which was made from paper also emerged in China in 806 (Central Bank of the Republic of Turkey, 2018) In short, everything can be used as “money” if it has the following three attributions: “mediating to an exchange”, “being used as the unit of account” and “a storage of value” (Asmundson and Oner, 2012; Yermack, 2013). Cryptocurrency is defined as “a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status in any jurisdiction” by Financial Action Task Force in 2014. In other words, cryptocurrencies are neither issued by a central bank nor controlled by a public authority as shown in Table 1, but they represent a value and have been used as an instrument of payment since the beginning of 2009 and have been traded digitally (European Banking Authority, 2014). Table 1 A Money Matrix Form of the Money Physical Digital Legality Regulated Banknotes and Coins E-Money Commercial Bank Money (Deposits) Unregulated Certain Types of Local Currencies Cryptocurrencies Source: European Central Bank, 2012 Cryptocurrencies are generally under the control of their developers and used as “real” money within the members of a specific group. There are three types of schemes as follows: “closed schemes”, “unidirectional schemes” and “bidirectional schemes”. The closed schemes are generally used in online games. There is only one type (in/out), which flows in a unidirectional scheme. The third type of scheme allows cryptocurrencies to act just like fiat money by setting a buy and sell rate (European Central Bank, 2012). The first cryptocurrency appeared in 2009 in the name of Bitcoin. “Bitcoins are digital coins which are not issued by any government, bank, or organization, and rely on cryptographic protocols and a distributed network of users to mint, store, and transfer” (Ron and Shamir, 2013: 6). Since then, lots of cryptocurrencies have been launched in the financial markets. There are 5,903 cryptocurrencies2 in the world as of June 2021, and Bitcoin has the largest market share. Countries have 2 https://www.investing.com/crypto/currencies (Investing.com, 26.06.2021) Istanbul Business Research 50/2 498 different approaches on cryptocurrencies. Generally, cryptocurrencies are evaluated from tax and illegal acts perspectives. While some countries have forbidden the usage of cryptocurrencies, some others accepted them as a legal payment tool (Yıldırım, 2019).3 It is not possible to think of trading activities without recording the transactions, so ledger accounts have been used for record-keeping since ancient times. However, their shapes have evolved from tablets to papyrus, parchment to papers, and bytes over time. A new era has started in the ledger accounts with cryptocurrencies and the algorithmic software DLT has been developed in the last decade (Walport, 2015). Because DLT has been implemented in a variety of industries, it does not have a common single definition. The meaning of DLT differs according to the usage area (Mills et al., 2017). Even if the definitions of DLT are different from each other, the “peer-to-peer network system” and “decentralized” or “distributed” terms are fixed parts of all definitions. Another term that has the same meaning as DLT is “blockchain”. “Blockchain is the ledger (book of records) of all transactions, grouped in blocks, made with a (decentralized) virtual currency scheme” (European Central Bank, 2015). Blockchain or DLT is a kind of database which is based on a “peer-to-peer” network philosophy and it makes the records non-deletable forever (Swanson, 2015) and it is possible to keep records by many people or organizations and no one is superior or inferior to others (Kornfeld et al., 2016). Blockchain is the combination of blocks that can include a large number of transaction data and follow each other. Each block has a hash value. The first block is called a Genesis block and because there is no block before it, its hash value is zero. Each block contains the previous block’s hash code to keep the connectivity of the blocks (Bamakan et al., 2020). Members who want to participate in a particular blockchain use nodes (computer devices), which are connected. When one member creates a block, other nodes have the right to accept or reject it. Members should also make an agreement related to the rights of participants in the blockchain. These agreements are called “consensus algorithms”. The blockchain consensus algorithms developed till now are Proof of Work, Proof of Stake, Delegated Proof of Stake, Proof of Elapsed Time, Practical Byzantine Fault Tolerance, Delegated Byzantine Fault Tolerance, Proof of Weight, Proof of Burn, Proof of Capacity, Proof of Importance, Proof of Activity, and Directed Acyclic Graphs. They differ according to their decentralization and security levels, energy consumptions, degree of difficulty, and participation level of nodes (Bamakan et al., 2020; Yu et al., 2020). According to accessibility and controllability by the network members, there are three categories of blockchain: (1) a public blockchain can be accessed, shared, and controlled by 3 The usage of crypto assets as a means of payment has been prohibited in Turkey with a regulation announced in the Official Newspaper published on 16th of April, 2021, (https://www.resmigazete.gov.tr/eskiler/2021/04/20210416-4. htm). Atik, Kelten / Blockchain Technology and Its Potential Effects on Accounting: A Systematic Literature Review 499 all the members, (2) in a private blockchain, the access can be with the permission of a third party and it is centralized to some extent, and (3) a consortium blockchain is governed by several institutions all of which directly participate in the consensus protocol (Ali et al., 2020; Salimitari et al., 2020). The intermediary functions or the third parties have disappeared with the blockchain. Blockchain uses a decentralized ledger, so that, it enables each user to copy all records onto their computers. However, it is not possible in the existing system which allows only trusted parties to hold all transaction records, especially in bank accounts. Because the BCT makes the transactions immutable and reduces anonymity, government services may also adopt BCT to increase transparency and accountability (Boucher et al., 2017). One of the concepts that cannot be separated from the blockchain, especially when we look through an accounting perspective, is the Internet of Things (IoT). “The Internet of Things (IoT) is set to ubiquitously connect a huge number of devices (embedded with sensors and actuators) to the Internet, digitizing the physical world into computer-based data systems” (Wang et al., 2019: 1). “Built-in blockchain” and “Blockchain as a service” are the two types of blockchain for IoT. In the first one, IoT devices are built-in, which means all IoT devices can operate as blockchain nodes and become part of a blockchain network. In the second one, the data collected by an IoT device is entered into the blockchain by a user (Wang et al., 2019). Although most of the studies focus on the blockchain usage as a means of cryptocurrency transfer, this technology can also be used for non-financial activities, such as supply chain management, voting in elections, healthcare records management, identity management systems, access control systems, decentralized notary and tourism organizations (Boucher et al., 2017; Maesa and Mori, 2020; Rashideh, 2020). Some researchers suggest different types of blockchains. For example, Back et al. (2014) propose “pegged sidechains”, which allow the transfer of coins between multiple blockchains and makes interoperation with each other easier. Wang and Kogan (2018) take a step further and propose a framework design for a blockchain-based transaction processing system for the implementation of blockchain for accounting and auditing fields. They assume a blockchain-based enterprise and represent its assets and resources with different tokens and different side chains. Every digital coin in the blockchain is a token. Vincent et al. (2020) design a blockchain that enables auditors to participate in the client’s blockchains and use them in audit processes. Lafourcade and Lombard-Platet (2020) go even further and test the interoperability of two blockchains. There are also some studies mentioning the drawbacks of blockchain, such as execution and storage costs, energy consumption, global warming, and cybercrime problems. Blockchain systems are expensive and consume a huge level of electricity. Additionally, because Istanbul Business Research 50/2 500 countries have not made laws related to bitcoin and blockchain, when there is fraud, cybercrime, terrorist financing, or any conflict between the parties, it is not clear how to solve these problems (Chang et al., 2020). The Research Methodology of the Study Bitcoin and blockchain, which occupy an important place in the world’s agenda, are mentioned in the article of Nakamoto for the first time in 2008. There are hundreds of studies that have been carried out on Blockchain, Distributed Ledger Technology (DLT), and cryptocurrencies since 2008 in literature. Therefore, this study systematically reviews the academic studies published between 2008 and 2021. A systematic review is a specific technique which reviews all of the existing articles related to a specific research topic and evaluates the data, analyses, and contributions of articles, and synthezes them to report a conclusion on what is known and what is unknown about the topic (Denyer and Tranfield, 2009). It tries to find out what literature inspires the practice of and reveals what is unknown to give a lead for future studies (Grant and Booth, 2009). There are six key phases in the systematic review as follows: “mapping the field through a scoping review”; “comprehensive search”; “quality assessment”; “data extraction”; “synthesis”; and the last stage is “write up” (Jesson et al., 2011: 108). After determining the coverage period as 2008-2021, databases and keywords were selected. In this manner, the keywords: “blockchain and accounting”, “cryptocurrency and accounting”, “distributed ledgers and accounting”, “smart contract and accounting” and “virtual currency and accounting” were searched for on the Scopus database. The categorization of the found studies according to their disciplines is presented in Table 2. When “blockchain and accounting” was searched, 285 different studies were found. When the search was repeated with different keywords, such as “cryptocurrency and accounting” or “virtual currency and accounting”, the results included the same studies obtained with other searches. By using the “save the selected documents to list” feature of Scopus, the results of all keyword searches were integrated, and 334 different studies were listed. 108 of those 334 studies were in the “Business, Management and Accounting” discipline, and we focused more on them. Atik, Kelten / Blockchain Technology and Its Potential Effects on Accounting: A Systematic Literature Review 501 Table 2 The Disciplines of the 334 studies listed by Scopus Subject area # of studies Business, Management and Accounting 108 Computer Science 192 Economics, Econometrics and Finance 52 Engineering 90 Decision Sciences 57 Social Sciences 40 Mathematics 52 Energy 32 Arts and Humanities 5 Biochemistry, Genetics and Molecular Biology 5 Materials Science 15 Multidisciplinary 3 Medicine 7 Physics and Astronomy 19 Agricultural and Biological Sciences 3 Environmental Science 11 Immunology and Microbiology 1 Chemical Engineering 1 Earth and Planetary Sciences 1 Chemistry 2 Psychology 1 Pharmacology, Toxicology and Pharmaceutics 2 Total 699 Source: Scopus Because one study can be categorized under different disciplines, the total number of the studies from different disciplines increased to 699. Table 3 shows the number of studies categorized under different disciplines. As mentioned before, the total number of different studies in “Business, Management and Accounting” discipline is 108, however because one study can be found with other keyword searches, the total number of the studies from different keyword searches increased to 161. Istanbul Business Research 50/2 502 Table 3 Number of Studies Categorized according to Disciplines with Different Keyword Search Subject area blockchain and accounting cryptocurrency and accounting distributed ledgers and accounting smart contract and accounting virtual currency and accounting Total Business, Management and Accounting 92 18 25 20 6 161 Computer Science 172 19 34 43 5 273 Economics, Econometrics and Finance 37 17 11 6 5 76 Engineering 84 6 17 22 2 131 Decision Sciences 54 4 11 7 3 79 Social Sciences 32 9 5 4 2 52 Mathematics 43 7 6 19 176 Energy 27 2 8 7 145 Arts and Humanities 4 110 0 6 Biochemistry, Genetics and Molecular Biology 41010 6 Materials Science 13 12 2 0 18 Multidisciplinary 2 3 0 0 0 5 Medicine 6 104112 Physics and Astronomy 17 3 5 3 0 28 Agricultural and Biological Sciences 2110 0 4 Environmental Science 11 030115 Immunology and Microbiology 100001 Chemical Engineering 2 0 0 0 0 2 Earth and Planetary Sciences 1010 0 2 Chemistry 2 0 10 0 3 Psychology 0 10001 Pharmacology, Toxicology and Pharmaceutics 1110 0 3 Total 607 95 132 138 27 999 Source: Scopus The following figure shows trend of studies by year. The number of studies has started to increase since 2016. However when we examine the percentages presented in Figure 2, we see that only 44% of the studies are articles published in journals and 43.7% are conference papers. Atik, Kelten / Blockchain Technology and Its Potential Effects on Accounting: A Systematic Literature Review 509 Abdennadher et al. (2021) made interviews with accountants and auditors in order to understand possible benefits and challenges of using BCT in accounting and auditing: difficulty in correcting mistakes, information overload, the need for new assurance services and stronger internal audit are challenges that have been mentioned by accountants and auditors. Critical Views on the Integration of Blockchain and Accounting One important study that focuses on the necessity of blockchain belongs to Alles and Gray (2020). They criticize the marketing efforts of big audit firms and say that “the Big-4 aim to persuade clients to hire them to develop blockchain implementations. However, they fail to answer, “What is the problem for which blockchain is the solution?”. Additionally, they point out the “first-mile problem” which is the problem related to the reliability of the data entered into the blockchain system if it is related to the real-life events other than cryptocurrency transfers. Adapting IoT may increase the reliability of the data, however when the parties in the blockchain enter the data, the correctness of the data will always be questioned. Rîndaşu (2019) tries to answer the following question in her study: “Is blockchain usage in accounting an innovation or is just another well-advertised technology that will not bring any kind of relevant benefits?”. She thinks that the BCT may be beneficial for only some companies, and before adopting it, companies should have a well-designed decision-making process. Bakarich et al. (2020) points out the necessity of assessing internal and external costs and benefits of BCT, otherwise companies will not be eager to invest money, time and human capital. Maffei et al. (2020) differentiates their literature review by focusing more on risks and threats of adopting BCT in accounting and auditing practices. They point out the following risks of implementing BCT: underestimating the possible manipulative and fraudulent practices, underestimating the threats of wrong classification and valuation of accounts, lack of expertise while evaluating the business performance, and the risks created by unexperienced IT personnel while adopting and operationalizing BCT. Conclusion Information technologies are developing very rapidly, and accounting information technologies are following those developments and changes very closely. BCT and cryptocurrencies are two of the current discussion topics in the accounting world. Although it has a history of about ten years, the market cap of crypto coins is nearly $1.4 trillion. Moreover, the number of companies that accept payments with cryptocurrencies, the number of crypto money ATMs, and the number of users using cryptocurrency as a medium of exchange are increasing day by day. Istanbul Business Research 50/2 510 Blockchain was a medium used to exchange Bitcoin at the beginning, however, different areas that the blockchain can provide benefit to have also been discovered. The finance sector is affected by those developments most. Researchers from different study areas started to conduct research projects on BCT. Accounting is also one of the areas that are expected to be affected by BCT. Accounting academics, accounting journals, and accounting firms have an increasing interest in those new technologies in order not to stay behind those fast developments. In order to foresee the potential effects of BCT on accounting, a systematic literature review was conducted in the current study. The articles found as the result of database searches are written mainly in the areas of computer science and accounting information systems. Articles in the computer journals focused on the development of BCT and how it can be modified to be more useful in some selected areas. On the other hand, articles that try to connect BCT and accounting have very optimistic assumptions about the usage of BCT in accounting and most of them have the expectation of an accounting system fully based on BCT. The clear point is that, with the increase in the transactions made by using Bitcoin and other cryptocurrencies, there will be an increasing demand to use BCT. However, the replacement of the current software programs with Blockchain is up to the developments in BTC and the elimination of its drawbacks. High costs, the need for hiring new personnel, difficulty in keeping the security of private information, new business risks, and a lack of regulations and standards are the main obstacles to the spread of BCT. The contribution of this study is mainly to accounting regulators, professionals, and academics who want to follow the developments in BCT and its potential effects on accounting information systems. The study may help them to adapt to the changes more easily and foresee the potential risks and opportunities. Accordingly, necessary regulations can be made, new standards can be released, and the necessary education can be given to accounting professionals and accounting students. Lastly, we want to make some suggestions for further research. Conducting case studies to examine the adoption and usage of BCT in accounting and auditing environment will be very valuable. Searching the improvements in usage and adoption of BCT in accounting, internal control and auditing in a particular country setting, such as Turkey, conducting cross country studies and comparative studies between different industries will add much value to the current literature. Peer-review: Externally peer-reviewed. Conflict of Interest: The authors have no conflict of interest to declare. Grant Support: The authors declared that this study has received no financial support. Author Contributions: Conception/Design of study: A.A., G.S.K.; Data Acquisition: A.A., G.S.K.; Data Analysis/Interpretation: A.A., G.S.K.; Drafting Manuscript: A.A., G.S.K.; Critical Revision of Manuscript: A.A., G.S.K.; Final Approval and Accountability: A.A., G.S.K. 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