As a professional organization, the IMA (Institute of Management Accountants) strives to make certain that the topics covered on the CMA exam continue to be current, relevant and valid. Staying true with this commitment, the IMA has revised its 2020 CMA syllabus to include the topic of blockchain. Why blockchain?
The IMA included this topic since it has been one of the more discussed technologies of the past few years. Big banks have started to invest heavily in it and the CEO and founder of Northwest Passage Ventures Alex Tapscott refers to it as the “second generation of the internet revolution.” Tapscott’s feelings are shared by many in the tech field, so it makes sense that CMA candidates should know what this new technology is all about.
Regarding blockchain, if you study the CMA LOS (Learning Outcome Statements) it mentions that CMA candidates need to be able to “recognize potential applications of blockchain, distributed ledger, and smart contracts.” This is good information to know about blockchain; however, in my own experience, having worked for a blockchain start-up, one of the problems with blockchain is that different people have different interpretations of what blockchain means. Hence, the purpose of this article is to unpack the term blockchain.
Unpacking Blockchain
Blockchain made its debut with the appearance of Bitcoin back in 2009. What’s interesting is that if you check out Bitcoin’s whitepaper, there is no specific mention of the term blockchain. The paper refers to a “chain of blocks” on page 7, and an electronic coin as a “chain of digital signatures” on page 2, but it never put the two words together. The earliest known use of the term that can be found is an email between Hal Finney and the Satoshi Nakamoto Institute on November 9, 2008. In the email, Finney wrote, “it is mentioned that if a broadcast transaction does not reach all nodes, it is OK, as it will get into the block chain before long.”
Since its beginning, blockchain has gone through a transformation, going way beyond being the platform that powers Bitcoin, thus, the difficulty of defining blockchain. Let’s look at some commonly used blockchain definitions.
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Source
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Definition
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Investopedia
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A blockchain is a digitized, decentralized, public ledger of all cryptocurrency transactions. Constantly growing as ‘completed’ blocks (the most recent transactions) are recorded and added to it in chronological order, it allows market participants to keep track of digital currency transactions without central recordkeeping. Each node (a computer connected to the network) gets a copy of the blockchain, which is downloaded automatically.
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Google
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A digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.
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Merriam-Webster
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A digital database containing information (such as records of financial transactions) that can be simultaneously used and shared within a large decentralized, publicly accessible network.
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Marco Iansiti and Karim R. Lakhani
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The technology at the heart of bitcoin and other virtual currencies, blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.
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Now, let’s assess these different definitions with how blockchain has morphed into something different.
Investopedia says, “A blockchain is a digitized, decentralized, public ledger of all cryptocurrency transactions.”
This is Investopedia’s definition, but, if we look at how Mastercard understands blockchain we see a different concept. The company developed what it calls a private blockchain. Mastercard announced in 2017 that it would be “offering the ability to send money over a blockchain rather than swiping a credit card.” Justin Pinkham, a senior vice-president at Mastercard Lab said, “If you do a payment, then what we can do is move those funds in the way that we do today in fiat currency.” Well, we know that fiat currencies are not cryptocurrencies.
Now, let’s look at Google’s definition. According to Google, blockchain is “a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publically.” From the Mastercard example, we see that blockchain does not need to involve a digital currency nor involve mining. We also know that blockchain can be private as well.
Merriam-Webster dictionary says blockchain is “a digital database containing information (such as records of financial transactions) that can be simultaneously used and shared within a large decentralized, publicly accessible network.” A blockchain does need to be digital but doesn’t need to always be decentralized. Also, referring back to the Mastercard example, we see that it doesn’t need to be public. Again, we see that none of the above-mentioned definitions fully cover today’s use of blockchain.
Finally, let’s look at the definition given by Marco Iansiti and Karim R. Lakhan. They are both professors at Harvard Business School. They wrote an article for the Harvard Business Review titled “The Truth about Blockchains.” In their definition, they mention that blockchain is “at the heart of bitcoin and other virtual currencies.” Again, we know that blockchain does not need to involve cryptocurrencies. Further, they talk about blockchain being “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.” However, in the much-publicized UN World Food Programme (WFP) blockchain, there is only one participant - its own database.
In the review of the different definitions, what did we discover? Well, we discovered that blockchain:
- Does not need to involve digital currencies.
- Does not need to involve mining.
- Can be private or public.
- Can be centralized or decentralized.
Key Characteristics of a Blockchain
Unfortunately, the list above does little to help us get to the root of finding the common characteristics of all blockchains. I believe 3 key characteristics separate blockchain from other shared databases.
- Digital. A distinguishing feature of blockchain is that all information has to be digitized.
- Distributed ledger. A distributed ledger is a shared database that is held and updated independently by each participant of the network. An important feature of distributed ledger technology is that the ledger is not maintained by a central authority. This makes the technology ideal for multi-organizational business networks such as supply chains or financial institutions because every time a product changes hands, the transaction is documented, creating a permanent history of the product, from start to finish.
- Immutability. Immutability implies that no one should be able to tamper with data on the blockchain. If a hacker wanted to tamper with one of the blocks on the blockchain, the protocol would recognize that the tampered block doesn’t conform with the rest of the blockchain, so the block would be rejected.
If you go online and research the key characteristics of blockchain, besides the three characteristics we described above, researchers often include two other characteristics: provenance and consensus-based. Provenance is the ability to know the origin of where the information came from. We do not include provenance as a separate characteristic because we believe that it is contained within immutability. If information cannot be deleted or changed, then by default, you know the full history of any item.
Also, we did not include consensus as a separate characteristic because not all blockchains need to have consensus. An example of a non-consensus-based blockchain is government cryptocurrencies, like the El Petro of Venezuela. Venezuela launched the Petro back in February of 2018, but other countries like Sweden are following suit by developing their own virtual currencies. What’s ironic about this situation is that Satoshi Nakamoto developed Bitcoin to be a decentralized, consensus platform, whereas, government cryptocurrencies are “on the opposite end of the spectrum.” “They are as centralized as can be.” The fact that governments have an interest in blockchain to power their own digital currencies necessitates the need for a common definition of blockchain.
Defining Blockchain
If we take the 3 key characteristics of blockchain and try to develop a definition, what would that definition be? I believe blockchain refers to:
“A system where transactions are gathered together in blocks in digital form, and the blocks on the chain are shared across a distributed network using cryptography. The distributed ledger technology is designed to be an immutable means for tracking the ownership and transfer of assets.”
Finding a Common Language
The definition provided above is based on the 3 key characteristics I believe every blockchain should possess. However, at this time, no common definition of blockchain does exist. I have my opinion, others have theirs. This is a problem because terminology matters in any field.
Victoria Lemieux, an associate professor of archival science and head of the blockchain research cluster at the University of British Columbia says lexicon matters, because “without a clear definition, people end up talking past one another.” She goes on to say that “a commonly understood, more accurate and precise lexicon will help make sure that we are talking apples and apples, not apples and oranges, and ultimately, this will help us identify real gaps or areas needing further development or thinking through in the way this technology is applied.”
It should be noted that Dr. Lemieux is leading the effort to develop blockchain terminology standard for the International Standards Organization (ISO). The ISO has launched a technical committee TC-307 on blockchain and distributed ledger technologies. As the person leading the effort, Dr. Lemieux went on to say that the “project’s terminology should be published sometime in 2020.” Stay tuned!
What else is New with the CMA?
Now that I have talked about my favorite topic, let’s discuss more about the changes to the CMA syllabus, starting with Part 1.
Part 1: Financial Planning, Performance and Analytics
The primary changes to Part 1 were adding the topic Integrated Reporting to Section A: External Financial Reporting Decision and adding an entirely new section of coverage - Section F: Technology and Analytics. Unfortunately, to make room for Section F, some of the other sections had to be reduced in size.
For example, Section B: Planning, Budgeting, and Forecasting was decreased from 30% to 20%, and Section D: Cost Management was reduced from 20% to 15% of the total Exam coverage.
In my opinion, these changes show that the IMA is focusing more on a candidate’s analytical skills like critical decision making and data reporting rather than on topics like internal auditing, which was removed from the syllabus. Although internal auditing is an important internal control tool, it seems like the IMA believes candidates need to be more involved in the management of controls rather than auditing them.
Part 2: Strategic Financial Management
The CMA Part 2 exam experienced similar changes as Part 1, insofar as there is new content, and some of the old material has been removed. Let’s break down these changes.
Section F: Professional Ethics was increased from 10% to 15%. This section tests a candidate's knowledge of new LOSs, like business ethics, moral philosophy, ethical leadership, sustainability, and social responsibility.
Section C: Decision Analysis was also increased; however there was no new LOSs added. This section increased from 20% coverage to 25%.
As mentioned earlier, some content was deleted as well. For example, in Section A: Financial Statement Analysis no longer tests off-balance-sheet financing, and its overall content coverage was reduced to 20%.
Section B: Corporate Finance deleted the topics of bankruptcy and tax implications of transfer pricing; however, its overall content coverage remains at 20%.
You will not see any changes to Sections D: Risk Management or Section E: Investment Decisions in terms of content, but Section E will only make up 10% coverage now, rather than 15%.
By far the biggest changes in Part 2 is to Section F. As mentioned, several new LOSs were added however, the requirements of SOX Section 406 – Code of Ethics for Senior Financial Officers was deleted.
The Good News
Even though there have been some significant changes to the syllabus, the good news is that several components of the CMA exam are not changing. For example, the CMA exam format, fees, eligibility, registration, and passing score are remaining the same, and most importantly, the structure of the exam will not be impacted, just its content.
So, now, is the time for you to help your career by becoming CMA certified. Let HOCK Training help you do this.
About Carl Burch
His enthusiasm for blockchain technology is only surpassed by his passion for teaching young business professionals in Moscow, Russia.
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