Kip M. Twitchell © 2024 All Rights Reserved. This paper was presented at the 2024 BYU Accounting Research Symposium on September 20, 2024.
Abstract
Today’s shared ledgers are based upon lack of trust between parties, making them less efficient than existing systems. But even proprietary legacy systems involve no trust between parties. As trust is a measure of efficiency, both systems may be improved by focusing on potential uses in high-trust environments. Such use may lead to social commerce platforms, providing many benefits to society.Introduction
While the radical concept of a shared ledger between all stakeholders in a transaction is far-reaching, much of blockchain is about lack of trust between counterparties. The “trustless-ness” of blockchain explains much of its inefficiencies. Trust is one measure of efficiency. A shared ledger in a highly trusted environment has the potential to (1) reduce record keeping costs, (2) increase data quality for all stakeholders, (3) open new efficiencies for the trustworthy participants, and (4) greatly expand the power of record keeping to underserved populations. The proprietary nature of legacy systems means they require no trust; each party to the transaction maintains their own highly secured records. This trustless-ness signals an opportunity for greater efficiency and lower costs over today’s legacy systems. Yet the inefficiency of today’s shared ledgers—and resulting high costs—prevents them from displacing legacy systems. Experimentation with cost-effective shared ledgers in a highly trusted environment may capture all the above benefits. Administration of fast offering funds may provide just such an effective test bed, leading to the development of social commerce platforms to the generalized benefit of society.Legacy System Impediments
In January 2018, thirty years after my BYU accounting program introduction to McCarthy’s REA, I published “A Proposed Approach to Minimum Costs for Financial System Data Maintenance.” During my education, Dr. Eric Denna fired my imagination about potential innovation in financial systems, as I’ve written in chapter 1 of my textbook about the theory: McCarthy’s papers generated a body of academic work over twenty-plus years. could greatly simplify the business information systems architecture of the world. . . . Early proponents went so far as to call for a revolution in accounting systems architecture . . . but the fortress of accumulated lines of code and embedded business processes repulsed the attack. My 2022 paper, “Transformation of Business and Financial Platforms: What We Must Understand to Renew Existing Systems,” documents some of the reasons business ledgers have not been transformed by blockchain—for example, because it lacks fundamental ledger posting processes.Shared Cost Savings
Even with the shortcomings of blockchain, in 2021 the potential power of a shared ledger inspired me to start a non-profit dedicated to exploring the concept, called Sharealeger.org. This collaborative project seeks to reverse the lack of innovation in business systems and to improve society in the process. Doing so requires sharing information about ledgers, regenerating long-forgotten knowledge embedded in all major business systems today, and considering whether sharing data among organizations might spark a new round of improvements. A shared ledger may reduce the cost of recording and increase the accuracy of financial data because proprietary systems must be reconciled to each other to be considered trustworthy. For example, the highest form of audit evidence is independent validation of a balance. Accounts receivable that are not acknowledged by customers are suspect, as are bank account balances with discrepancies and accounts payable not verified by vendors. At its highest levels, transactional record-sharing between parties on a shared ledger may significantly reduce the cost of clerks, as coding, correction, verification, and many other functions would be shared between the two parties. In fact, the number of transactions that may be needed by each party and their respective banks might be reduced dramatically. For example, a typical order of goods can involve ten different transactions recorded by all the parties, which might be reduced to three in a truly shared ledger.Shared Trustless-ness
Systems that are trustless by design are inefficient by design. In a highly trusted relationship, such as in a family, pencil and paper have adequate security to record transactions in a ledger. In a slightly less trusted environment, such as a partnership, one might choose to use pen and ink, making things a bit harder to change. Blockchain is like using a slab of granite anchored in a mountain and a jackhammer. Only in that way would one party have confidence that when they are asleep each night, the counterparty won’t be able to sandblast the slab clean and re-chisel it with a fictitious set of transactions. But this “trust” costs huge amounts of compute capacity to record each transaction all day long. Fundamentally honest people—the “trustworthy”—have a significant competitive advantage over criminals. As I predicted in 2019, “Blockchain in Bitcoin is effective for transactions with criminals but will never replace the efficiency of today’s trusted systems of records.” A trust-based, shared-ledger can make today’s systems of record even more efficient.The Power of Trust
Because the love of money is the root of all evil (1 Tim. 6:10), it is commonly held that unmitigated trust is impossible in financial matters. I find such thinking often indicates a lack of integrity. Money is an amazing technology, generating incredible efficiencies in our societies. As Ralph Waldo Emmerson (1844) said “Money, which represents the prose of life. . . is, in its effects and laws, as beautiful as roses." And yet virtues are even more powerful. In 2011, I faced serious struggles in my work. In a conversation with a senior executive, I wondered aloud if someone who is fundamentally honest is at a competitive disadvantage when negotiating a contract. He found the question interesting and asked what I had concluded. I wasn’t sure yet. The answer came months later: Honesty is a serious competitive advantage, as an honest person can accomplish things a dishonest person could never do, like creating customer agreement with an efficiency that is impossible without trust between the parties. Honesty replaces textbook-size contracts with a simple handshake. The dishonest justify their behaviors by believing no one is truly honest. But fundamentally trustworthy individuals know other trustworthy individuals exist. And when they connect, incredible things happen—things which cannot even be imagined by the dishonest. These insights sparked my study of virtues and creation of VirtueWheel.com to explore the power and relationship of virtues.Integrity in Bookkeeping
Luca Pacioli, who documented bookkeeping said in the first page, “In the business world, nothing is consider more important than the word of a reputable businessman. Promissory notes are honored and accepted based upon a businessman’s reputation. Confidence, faith in reputable businessmen, is what makes the market effective. This is not really strange, for the faith of a Christian in God works in much the same way to make religion effective.” It is very clear that bookkeeping, good bookkeeping, was a means of increasing respect and confidence of others in the businessperson. We all want to do business with people who remember their commitments, who do what they say they will do, who track accurately our interactions, and who correct mistakes quickly if they are made. There is a natural relationship between bookkeeping and measurement of virtues, springing from the same intellectual history, as described by Alfred W. Crosby in “The Measure of Reality: Quantification and Western Society, 1250 – 1600” The book ends by describing the far-reading impact of the invention of bookkeeping, but the origins of that technology started as society developed ways of measuring things. “What can be measured in terms of quanta is not as simple as we…think. For instance, when in the fourteenth century the scholars of Oxford’s Merton College began to think about the benefits of measuring not only size, but also qualities as slippery as motion, light, heat and color, they forged right on, jumped the fence, and talked about quantifying certitude, virtue, and grace. Indeed, if you can manage to think of measuring heat before the invention of the thermometer, then why should you presumptively exclude certitude, virtue, and grace?”The Simplest Shared Ledger
Imagine the simplest shared ledger: a shared online spreadsheet, like a Google Sheet, accessible by all stakeholders to the shared set of transactions. In the highest trust and integrity environment, all parties would acknowledge each transaction, perhaps simply by marking their assigned column with an X. They would never mark in another party’s column. All would commit to never change any transaction so marked. Rather, they would always add new transactions to adjust for errors or other needs, making the ledger immutable through integrity and nothing more. Such an environment would require no mining, proof of work, or proof of stake. The compute costs for such a system would be minuscule. Such a ledger involves no cryptocurrencies, being simply the transaction record of settled currencies or mediums of exchange. But all parties would benefit from increased transparency, accuracy and accessibility of the high-quality financial information.The Power of Consecration
Just like those in a feudal economy could not imagine the efficiencies available in a capitalist economy (even with its limited levels of trust), most in our world today cannot imagine the greater efficiencies possible in what might be termed a consecrated economy. Although religions are effectively hospitals for the morally ill (1 Timothy 1:12-17), they universally strive to educate members about the value of honesty and integrity. While their efforts are not perfect, they may provide a place for testing the value of shared ledgers. The sacred writings of my own religious tradition, The Church of Jesus Christ of Latter-day Saints, contain many references to financial matters. One of the most fundamental is the definition of funds to be used in the Church. Today, members would recognize two major categories of funds maintained by the Church: tithing, and fast offerings. Tithing donations are given to local leaders who transmit them directly to the Church headquarters, where the presiding councils determine uses. Fast offerings are given when members fast and donate the value of the food they would have eaten at a minimum. These funds are distributed by the bishop of the ward (pastor of the congregation) using the following welfare principles: meeting temporary needs; providing goods and services necessary to sustain life that are common to most members of the ward; and providing opportunities to work (to the extent of the recipient’s ability) for the assistance received; Specifics as to how both funds should be managed are described in D&C 104:54–75, which instituted the first “sacred treasury” (or tithing) to be used for the printing of the scriptures. Then verses 67–75 defines a “common consent” treasury, or what today we would call fast offerings. And again, there shall be another treasury prepared, and a treasurer appointed to keep the treasury, and a seal shall be placed upon it; And all moneys that you receive in your stewardships, by improving upon the properties which I have appointed unto you, in houses, or in lands, or in cattle, or in all things save it be the holy and sacred writings, which I have reserved unto myself for holy and sacred purposes, shall be cast into the treasury as fast as you receive moneys, by hundreds, or by fifties, or by twenties, or by tens, or by fives. Or in other words, if any man among you obtain five dollars let him cast them into the treasury; or if he obtain ten, or twenty, or fifty, or an hundred, let him do likewise; And let not any among you say that it is his own; for it shall not be called his, nor any part of it. And there shall not any part of it be used, or taken out of the treasury, only by the voice and common consent of the order. And this shall be the voice and common consent of the order—that any man among you say to the treasurer: I have need of this to help me in my stewardship— If it be five dollars, or if it be ten dollars, or twenty, or fifty, or a hundred, the treasurer shall give unto him the sum which he requires to help him in his stewardship— Until he be found a transgressor, and it is manifest before the council of the order plainly that he is an unfaithful and an unwise steward. But so long as he is in full fellowship, and is faithful and wise in his stewardship, this shall be his token unto the treasurer that the treasurer shall not withhold. With this simple fund administration, members can choose to be fully consecrated. The fund is effectively a collective savings account. I believe members of the Church will have increased opportunities to live the law of consecration, perhaps requiring better financial systems.Begin with Transparency
If the fast offering “treasury” is effectively a collective savings account, then fully living the law of consecration would likely increase donations. Disbursements would also significantly increase, depending on members’ cash management abilities. The current fast offering system is likely challenged to comply with this portion of the commandment, “Until he be found a transgressor, and it is manifest before the council of the order plainly that he is an unfaithful and an unwise steward.” In fact, the current system does not even allow distribution of cash to individuals, thus recipients are not accountable for their use of the funds. But as Giving Directly notes, "Many people (including us) grew up hearing that 'you can’t just give money to poor people.' As it turns out, this view was largely based on anecdote and hearsay; the first rigorous experiments testing this approach (and many others) did not begin until the 1990s. Since then we have learned an enormous amount about the impacts that cash transfers have had on the lives of people living in poverty, with over 300 studies from around the world." This is a problem of transparency that a shared ledger can easily help correct. Imagine if the only change to our existing systems was that instead of disbursing funds to an individual’s bank account, the funds were disbursed to the members’ “stewardship” bank account. The member would have all the capabilities of their personal bank account, but the bishop and any designee would have access to view all transactions. Such a system would immediately provide the information needed to teach members about the processes of financial management. For example, if the member runs a home-based business and purchases supplies at the local convenience store using the stewardship account, an experienced mentor may be able to identify and recommend cost savings by using a lower-cost vendor. Such a system uses the efficiency of existing financial and banking systems (without proof of work or proof of stake costs) but begins to increase the value of the captured data to participants.Next: Better Record Keeping
A well-known quote from Church President Thomas S. Monson is a centerpiece of the missionary handbook Preach My Gospel: “When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates.” In 2017, the Church’s First Presidency issued the Starting and Growing My Business for Self-Reliance manual to help increase member’s self-reliance. Of the twelve chapters, half require some type of financial record keeping. While taking the class amid a period of deep personal R&D work on financial ledgers, I was shocked to consider that although many poor merchants in the world now own computers—in the form of a smart phone—and have access to a plethora of tools for publishing and communicating and a host of other functions, there are no ubiquitous tools for financial recordkeeping. The next step in assisting members includes enhancing the “stewardship” account to provide simple record keeping for small business owners, enabling the power of accurate record keeping.Sharealedger.org Vision Statement
These insights led to the founding of Sharealedger, and collaboration with other like-minded individuals has resulted in Sharealedger’s vision statement: Vision: To bring 1 billion people into the digital economy, not just through transaction payments and receipts, but also with financial management capabilities that allow them to measure what they do well, what they don’t do well, how to contribute to society better, and how to prepare for the future. The types of tools by which this will be done are all effectively known today:- Inexpensive cell phones which are the personal computers for even the world’s poorest
- Internet mobile technology services, similar to Facebook, Google, Twitter, and Amazon
- Mobile payment and receipt systems, like Venmo or Zelle
- Ubiquitous financial tracking databases, available with blockchain
- Financial data is maintained in many places in propriety forms by various intermediaries who provide little help to individuals in financial management.
- Financial data management is tedious, often unautomated, and requires specialized knowledge.
- Categorization of financial data, which is key to understanding finances over time, is a clean-up activity, done post-authorization rather than at transaction time (i.e., payment or receipt).
- Reconciliation with counterparty ledgers (bank, vendors, customers) consumes large amounts of resources if attempted.
- Potentially reduces costs to each party because actions taken by one are shared
- Increases accuracy of the resulting ledgers with the natural check a counterparty
- Demands data be moved from propriety locations, increasing ownership by primary partners
- Eliminates the need for reconciliation and other wasted processes
- The demanding data standard for financial data is accuracy over long periods.
- Reductions in computing costs must not be wasted on inefficient, sloppy code.
- System efficiencies cannot be added later; the system must start with performance at scale.
- Reaching a billion people requires reductions in today’s costs by hundreds or thousands of times.
- Search engines are fundamentally organized around URLs.
- Social media platforms are organized around posts.
- Online retailers are organized around products or SKUs.
- The fundamental data organization for any financial system is composed of a set of balances, which reflect positions as of a point in time, and the full set of transactions which gave rise to those balances.
- Swipe right or left to scroll through a set of balances over time
- See transactions and changed balances in those periods
- Initiate new transactions based upon those balances
- Aggregate balances to create higher-level understandings over time and better comprehend their financial world through consistency of the balances and transactions