Executive Summary
Bitcoin is becoming more popular in the modern world. Some predict that this cryptocurrency will replace money in the future. However, at present, the use of Bitcoin is associated with numerous concerns related to accounting information systems. One of these problems is the lack of transparency. One of the elements of accounting information systems is data related to organizations and their activities. This paper includes a brief discussion of this issue as well as a recommendation aimed at adding more transparency. The link between Bitcoin and reputable banks is a key element of this strategy.
Introduction
Bitcoin is one of the most famous cryptocurrencies in the modern world. Some see it as a revolution in the world of money since it is not based on any physical object and is completely digital (Raiborn & Sivitanides, 2014). Others argue that this cryptocurrency is a major fraud or that another financial bubble will lead to financial losses. Many Bitcoin enthusiasts claim that it is the currency of the future. However, recent research has determined that Bitcoin use is not growing as fast as other alternative payment methods. For example, mPesa is one of the fastest-growing payment systems in Kenya. The adoption of Bitcoin is twenty times slower than mPesa use (Böhme, Christin, Edelman, & Moore, 2015). Irrespective of these views, Bitcoin is now used in many settings. Therefore, many businesses and policymakers have begun discussing possible ways to update accounting systems to ensure the safe use of the new cryptocurrency. This paper addresses one of the issues related to the use of Bitcoin in terms of accounting information systems (AIS).
Major Peculiarities of AIS
An Accounting Information System “collects, records, stores, and processes accounting and other data to produce information for decision-makers” (Romney & Steinbart, 2015, p. 36). An AIS includes six components: people, data, procedures, software, information technology infrastructure, and internal controls. All these elements are equally important for the effective functioning of the system, and Bitcoin use is associated with certain concerns in many of these areas. For example, it is unclear how to classify this asset or at which point it is necessary to value bitcoins.
This paper will focus on one of these elements. Data on companies and their activities are an important aspect of an AIS, as this information is valuable for partners, investors, regulatory bodies, and the public (Raiborn & Sivitanides, 2014). In the modern world, this information can have a significant impact on business activities as well as the development of the global market. For example, the case of Enron suggests that improper management of this information or the lack of such data can result in a substantial financial crisis affecting many businesses and even countries. Bitcoin is often regarded as a platform for illegal activities, as users’ privacy prevents third parties from receiving information about each other.
Bitcoin Issue Related to AIS
The modern business world is characterized by various regulations aimed at eliminating illegal activities. Therefore transactions related to such activities as terrorism, drug and human trafficking, and the like are forbidden, and banks have various instruments to ensure that money is not linked to any unlawful businesses. Banks verify the identity of each customer, which makes it relatively easy to identify the origins of funds and the destinations of transactions. As far as Bitcoin is concerned, no verification instruments exist. Regulatory authorities still have no tools to ensure the transparency of Bitcoin transactions, which are abused by various criminal groups.
One of the illustrations of these unlawful activities is the operations of Silk Road, a “marketplace for drugs and other contraband” (Böhme et al., 2015, p. 223). Silk Road customers used bitcoins to sell and buy narcotics in different countries. Gambling is another industry benefiting from the use of Bitcoin. Böhme et al. (2015) note that gambling games such as Satoshi Dice utilize Bitcoin. The degree of the problem can be illustrated by the earnings reported by this service. In 2012, it earned over 30,000 bitcoins, or $403,000. Moreover, this gambling game accounted for almost 80% of Bitcoin transactions during several months.
Although transaction security is ensured by the use of sophisticated software, user identities, as well as the origin of funds, can be difficult (or even impossible) to identify (Raiborn & Sivitanides, 2014). Simkin, Norman, and Rose (2014) state that the viability of a new currency is defined by people’s desire to use it. If the currency is used by a small group of people or in a limited number of settings (for example, for criminal activity), such a currency is likely to cease to exist soon. As was mentioned above, Bitcoin is still used by a small number of people. This cryptocurrency is also widely used to finance illegal activities. Therefore its viability is rather questionable. It is possible that regulatory authorities may forbid Bitcoin transactions. Bitcoin supporters emphasize that they have a right to the privacy that is granted by the new cryptocurrency.
Recommendations
Many researchers note that Bitcoin has a reason to exist and even has some advantages, such as the ability to trace all transactions. However, it is essential to ensure the ethical behavior of the users of this cryptocurrency. Identity verification procedures should be introduced. The privacy of Bitcoin users should be restricted, which will deter drug traffickers, terrorists, and other criminal groups. The verification procedures can be similar to the ones already existing. Such documents as identity cards and financial data should be included in Bitcoin accounts. It is possible to use the verification procedures of reputable banks. For instance, bitcoin wallets can be linked to people’s accounts in their banks. It is important to make sure that some of this information can be available to other Bitcoin users. Peer verification will not be effective as existing users’ identities may be faked. Each Bitcoin user should be able to see if their partners are verified by a bank. In order to ensure both confidentiality and anonymity, it would be possible to create a verification group or a bitcoin community consisting of different banks. Thus users would be able to see that their potential partner’s identity is verified in the system, but the exact verifier would still be unknown.
Conclusion
On balance, it is necessary to observe that the increasing use of Bitcoin calls for changes in accounting information systems. One of the most pressing issues is related to the verification of Bitcoin users. It must be acknowledged that a significant number of bitcoins are used to fund illegal activity. Terrorists, drug traffickers, and other criminal groups use this cryptocurrency. In order to address this issue and prevent such major crises as the Enron-related scandal, it is important to develop an effective verification procedure. Bitcoin wallets should be tied to their customers’ bank accounts. This approach can add a certain degree of transparency that is needed in Bitcoin transactions.
References
Böhme, R., Christin, N., Edelman, B., & Moore, T. (2015). Bitcoin: Economics, technology, and governance. Journal of Economic Perspectives, 29(2), 213-238.
Raiborn, C., & Sivitanides, M. (2014). Accounting issues related to bitcoins. Journal of Corporate Accounting & Finance, 26(2), 25-34.
Romney, M. B., & Steinbart, P. J. (2015). Accounting information systems (13th ed.). Harlow, England: Pearson.
Simkin, M. G., Norman, C. S., & Rose, J. M. (2014). Core concepts of accounting information systems (13th ed.). Danvers, MA: John Wiley & Sons.