Getting A Handle on Blockchain
The community of financial professionals needs to take a place at the table with other stakeholders around the emergence of blockchain (used here synonymously with distributed ledger technologies, or “DLT”) as an enabling technology. The profession’s formal leadership on reliable blockchains has the possibility of being as important, if not more important, than our informal role in establishing the spreadsheet as the core of all we do, some 40 years ago. Like the spreadsheet, blockchain – and smart contracts in particular – has the potential for much benefit, but also great error when we underestimate the risks.

Blockchain, the underlying logic for the development of Bitcoin and most later cryptocurrencies, has great potential beyond Bitcoin or even the more recent craze of non-fungible tokens (NFTs), where art and other digital collectibles are being snapped up for huge amounts of money. In particular, many observers believe blockchain, in conjunction with smart contracts, can revolutionize business-to-business interactions as no human intermediary could.

Smart Contracts Are Key
The International Organization for Standardization (ISO) defines a smart contract as a “computer program stored in a DLT system wherein the outcome of any execution of the program is recorded on the distributed ledger,” noting “[a] smart contract can represent terms in a contract in law and create a legally enforceable obligation under the legislation of an applicable jurisdiction.”
The website supported by the Ethereum Foundation says that a smart contract is “a collection of code (its functions) and data (its state) that resides at a specific address on the … blockchain ... they have a balance and they can send transactions over the network … not controlled by a user … can define rules, like a regular contract, and automatically enforce them via the code.”

So, smart contracts are code, written onto an “immutable” blockchain, which can autonomously act as an enforcer between parties and make entries to the blockchain on their behalf.
What’s the Problem?

So, what’s the problem? As we know, looking back on 40 years of spreadsheets, we have never learned our lesson on taking programming seriously. I would like to focus on two major issues. Spreadsheets are still getting us into trouble, and the “immutable” nature of the blockchain means fixing errors isn’t going to be as easy as it is with spreadsheets.

1983-2021: Spreadsheets are still getting us into trouble
Spreadsheets brought a lot of power into the hands of managers, and financial professionals led the way with spreadsheets and PCs 40 years ago. But, despite great guidance and frameworks for evaluating the risks and concerns, we still get them wrong.

Lotus 1-2-3 was released in January 1983. I was there. The partner asked for a financial projection, and the staff person created one. “Things are looking good,” the partner said. “Add a new line for management bonuses of $100k each month.” The staff person added the new line, and the partner was pleased. “Make sure this is right.” I reviewed the spreadsheet and found the staff person had not extended the summation formula to include the new bonuses. Of course, it looked great.

We are far past the 1-2-3 days, and Microsoft builds in many checks into Excel to look for things like added lines that aren’t included in the summations. Yet we hear about major problems related to spreadsheets all the time. The Institute of Chartered Accountants of England and Wales (ICAEW) has an Excel Community, which has developed materials and methodologies such as “Twenty Principles for Good Spreadsheet Practice,” “Spreadsheet Competency Framework” and the “Financial Modelling Code.” They recently issued a “Call for comments – How to review a spreadsheet.” And they recently cited an October 2020 PR failure as a Public Health England’s spreadsheet “error could have resulted in 125,000 additional infections and at least 1,500 additional deaths.”

This despite many calling for the community to understand how the power the spreadsheet brought to users comes at a cost of the loss of formality and rigor. Professor Ray Panko of the Shidler College of Business has been calling attention to the risks for a quarter of a century. Nevertheless, the concentration of issues related to human error of the 1980s has largely gone unheeded.

605 BC-2021: Laws are still getting us into trouble
It is more than just the errors you might find in a spreadsheet that is the problem here. Smart contracts are, by design, implemented within blockchains and, therefore, inherit many of the blockchain's properties: As far as a blockchain is immutable, smart contracts can never be revised or changed.

Generally, law can be changed. Perhaps you’ve seen the highly parodied 1976 video from the television show “Schoolhouse Rock!” on how a bill becomes law in the US. But there is one famous story of laws that cannot be changed.

In the Old Testament book of Daniel, faithful young man Daniel has risen to a place of high position, as King Darius knew he could trust Daniel’s stewardship; King Darius would have made him responsible for his entire realm. Others were jealous, but finding no way to accuse Daniel of wrongdoing, they tricked the king into making a decree to catch Daniel in his devotion to God. The rivals forced Darius to punish Daniel, noting that, once the King has made a law, it cannot be changed. Daniel’s well-known time in the lion’s den was the outcome.

Immutable laws created by people like us seem to be a very bad thing. I have been unable to find proof that it is, or was, illegal to eat ice cream on Sunday on Bank Street in Ottawa, and the restriction against whistling in Petrolia, Ontario is only from 11 p.m. and 7 a.m. and when used for selling or advertising purposes, but there are many other outdated laws on the books. Why put something in motion that can never be stopped – not by agreement of the parties involved, nor the law, nor anyone else?

Need To Collaborate
The financial professional community needs to collaborate to assess what a blockchain-enabled future
can look like, and to consider the pitfalls, hurdles and barriers, both over the short and long term.