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Triple‐entry accounting with blockchain: How far have we come?

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Page 1 of 36 Accounting and Finance

Triple-entry Accounting with Blockchain: How Far Have We Come?

Cynthia Weiyi Cai

Charles Sturt University Study Centres Melbourne

Keywords: Triple-Entry Accounting, Blockchain, Accounting System

JEL Classification: M40

doi: 10.1111/acfi.12405

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TRIPLE-ENTRY ACCOUNTING WITH BLOCKCHAIN: HOW FAR HAVE WE

COME?

ABSTRACT

Although double-entry accounting has been used for more than 600 years (MacKinnon, 1993),

today’s era of disruptive technological change utilising blockchain and FinTech has led to the

emergence of another promising accounting method: triple-entry accounting. This paper

explores triple-entry accounting, from its conception to the current state of play, using three

case studies. We find that: (1) in a blockchain ecosystem, for some accounts, business entities

will only need to perform a single entry internally and the opposite entry will be recorded in a

public shared ledger; and (2) triple-entry accounting is a new and a more efficient way to

address fundamental trust and transparency issues that plague current accounting systems.

Triple-entry accounting with blockchain, when properly implemented, can fundamentally

improve accounting.

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INTRODUCTION

Modern financial accounting has been based on a double-entry system for more than 600 years,

since the time of Fra Luca Bartolomeo de Pacioli (e.g. MacKinnon, 1993, Mann, 1994; Perry,

1996). Companies benefit significantly from this system as it facilitates the creation of accurate

financial reports and reduces errors and fraudulent activities. However, as managers oversee

the double-entry system independently and internally, there are inherent trust and transparency

issues for outsiders (e.g. shareholders and governments). Independent external auditors are

required to verify the company’s financial information to ensure the integrity of financial

information. Current accounting and auditing practices are costly, laborious, and time-

consuming. However, they are still insufficient as a moat against fraud. According to a report

from The Association of Certified Fraud Examiners (ACFE), in 2017 global fraud loss was

estimated at approximately USD 4 trillion and external auditors picked up only 4% of

occupational fraud. An act of fraud typically involves not only the commission of the scheme

itself, but also efforts to conceal the misdeeds (ACFE, 2018). Therefore, one method of

preventing fraud is to make it extremely difficult to be concealed; namely, by increasing the

transparency of accounting information.

There has been a range of efforts to improve accounting information transparency. In particular,

the IFRS Standards aim to bring transparency to financial markets, promoting trust, growth,

and financial stability in the global economy (IFRS, 2019). More recently, integrated reporting

has been developed as a framework to communicate financial and other value relevant

information to investors in an integrated report (de Villiers et al., 2017; Rinaldi et al., 2018).

Legislation regarding how accountants and auditors are held accountable to their duties has

become increasingly severe. Nevertheless, unless we come up with a new accounting recording

method that can solve the fundamental trust issue between insiders and outsiders of the

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company, information transparency can only be improved marginally. Such a new accounting

method sounded impracticable until 2009, when Bitcoin and its underlying blockchain

technology emerged. The key innovation of Bitcoin is its demonstration that it is possible to

transfer value at a distance without a trusted third party who can prove the transaction. Bitcoin

is a revolutionary method of value transfer that utilises a ‘decentralized’ payment transaction,

comprising blockchain and a replicated and shared ledger. As everyone in the Bitcoin network

has a full copy of the transaction ledger and everyone’s ledger remains up to date, all

participants reach consensus regarding a particular transaction without further proof (Brown,

2015). In addition to its original application in currency, blockchain quickly became used in

other industries, including accounting. As a result, another concept termed triple-entry

accounting re-emerged.

The term ‘triple-entry’ was originally coined in 1986 by Yuji Ijiri, an accounting scholar. He

proposed that in addition to the debit and credit entries, a third layer of entries called trebit

should be included with a new set of accounts to explain changes of income. The idea of such

a ‘triple-entry bookkeeping’ system is to provide more momentum financial information to the

organization, enabling better strategic decision-making. In 2005, Ian Grigg, a financial

cryptographer, wrote a working paper on his website titled ‘Triple-entry Accounting’, giving

this term a totally different meaning from Yuji Ijiri’s (1986) momentum accounting

definition. Ian Grigg raised a new concept, ‘the receipt is the transaction’, wherein a digitally

signed receipt backed up by financial cryptograph between two parties can be viewed by a

shared third entry to avoid transaction fraud and reduce redundancies in internal recording. In

2014, Jason Tyra wrote a short article in Bitcoin Magazine suggesting that using Bitcoin

infrastructure, the triple-entry concept proposed by Grigg (2005) is possible and likely to be

highly desirable for both companies and external users (Tyra, 2014). Since then, triple-entry

accounting associated with blockchain has become the generally accepted definition. The

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industry has already witnessed the massive potential of triple-entry accounting with

blockchain. In 2016, Deloitte published a brief article suggesting that the implementation of

triple-entry accounting with blockchain will be a game-changer in accounting (Deloitte, 2016).

Meanwhile, blockchain developers have already taken action to put this ‘theory’ into ‘practice’.

So far, we are aware of at least 7 blockchain projects related to triple-entry accounting: Request

Network; Balanc3; Fizcal; bBiller; Ledgerium; zkLedger; and Pacio1. Despite the fact that

triple-entry accounting with blockchain might upend the entire accounting industry, academic

research on the topic is extremely limited. This paper aims to explore blockchain applications

based on this triple-entry accounting framework. We start by reviewing the theoretical

development of the accounting system from single-entry to double-entry and then to triple-

entry. Two different ‘triple-entry accounting’ theories (Ijiri, 1986 and Grigg, 2005) are

explained in detail. Yuji Ijiri was first credited with using the term ‘triple-entry’ but Ian Grigg

has redefined the term. Nevertheless, the general public and even some scholars and

practitioners are mistakenly thinking Ijiri (1986) is the origin of ‘triple-entry accounting’ which

attracts great attentions in Blockchain community2. In order to avoid confusion, we clearly

distinguish the work of Ijiri from the work of Ian Grigg. Focusing on Grigg’s (2005) concept

of triple-entry accounting, we discuss how blockchain technology might enable the

implementation of this alternative accounting method. Following the theoretical discussion, we

adopt a case study approach to further analyse three on-going blockchain projects which

directly relate to the implementation of triple-entry accounting with blockchain. These three

cases give insights into how far away we are from implementing this new theory in practice

and what are the main issues of implementation we are facing. We find that: (1) in a blockchain

ecosystem, for some accounts, business entities will only need to perform a single entry

1We identify seven projects related to triple-entry accounting /blockchain accounting based on public resources
but acknowledge that there might be more.
2 We will discuss this point in the section of ‘Existing Literature on Blockchain Accounting’.

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internally and the opposite entry will be recorded in a public shared ledger; and (2) triple-entry

accounting is a new and a more efficient way to address fundamental trust and transparency

issues that plague current accounting systems. Triple-entry accounting with blockchain, when

properly implemented, can fundamentally improve accounting.

A study into triple-entry accounting as a potential means of reformation of accounting systems

in the era of disruptive technological change is both timely and critically important. In a global

blockchain survey based on more than 1,000 blockchain-savvy executives, Deloite (2018)

concluded that ‘momentum is shifting from a focus on learning and exploring the potential of

the (blockchain) technology to identifying and building practical business applications.”

While the financial services sector is already leading the way, using blockchain to re-examine

processes and functions that have remained static for decades, the accounting sector instead

remains more reserved and is far behind in terms of blockchain exploration (Deloitte, 2018).

One key reason for the lack of blockchain development in accounting is the knowledge gap

between blockchain developers and accounting experts. On the one hand, accounting

professionals and academic researchers lack adequate training on blockchain concepts and

infrastructures, and hence do not possess sufficient knowledge and skills for effective

engagement. On the other hand, for blockchain to transform business processes (including

accounting), blockchain experts will need more support from the accounting profession and

academia in terms of specific business and accounting knowledge. This paper tries to fill this

gap. Limited to our knowledge, this is the first academic paper which provides a clear overview

of triple-entry accounting with blockchain technology using illustrative cases. Technical

discussions are avoided as much as possible because the main goal of this paper is to raise the

level of general understanding and awareness of triple-entry accounting with blockchain. We

aim to motivate more accounting researchers, practitioners, and regulators to become familiar

with blockchain technology. We are hoping our paper can generate insights on the acceptance

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and use of this promising triple-entry accounting method to inspire more researchers to work

in this area.

REVIEW: DEVELOPMENT OF THE ACCOUNTING SYSTEM

Accountancy is one of the oldest professions in the world, with some of the earliest known

records of commerce dating back to circa 3500 B.C in Mesopotamia. However, ancient

accounting never progressed beyond a single-entry accounting system in its thousands of

years of existence. The single-entry accounting system involves a one sided accounting entry

for each transaction. Assets are entered and crossed off as they move in and out of the

organisation (and hence the accounting ledger) and the dollar amount is recorded once per

transaction. Due to the single record and lack of crosschecking, this system is subject to serious

limitations as errors cannot be detected and traced, providing ample opportunities for fraud.

(e.g. Mann, 1994; Perry, 1996)

During the Renaissance period (late 1400s), merchants in Venice developed a new method for

tracking their businesses transactions: double-entry accounting. In this recording system,

each financial transaction requires at least two accounting entries (debit and credit). One

significant feature of double-entry accounting is that it preserves a verifiable audit trail: as

dollar amounts are recorded twice for each transaction on both sides, the total of debits must

equal the total of credits. If the accounting entries are recorded without error, the aggregate

balance of all accounts having debit balances will be equal to the aggregate balance of all

accounts having credit balances. In case of error, each debit and credit can be traced back to

the original entry and transaction source document. This double-recording system therefore

becomes a firewall protecting the organisation from accidental or intentional errors.

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The double-entry bookkeeping system was a revolution compared to the single-entry system,

and modern financial accounting has been based on this system for over 600 years. However,

this double-entry booking system might be a firewall, but is not a moat against fraud. The

balance check of double-entry cannot prevent cheating; even if the debits equal the credits, it

is possible to do so in a false or misleading manner. Furthermore, as a firm records transactions

completed independently and privately, there is the potential for the creation of fabricated

transactions. To confirm the integrity of a firm’s accounting, shareholders and governments

require auditing on a regular basis. Each audit is a costly and time-consuming exercise,

requiring information verification and reconciliation among different parties. In addition, as it

is infeasible to audit all the recorded transactions, auditors select a small sample for audit based

on assessed level of risk, which is quite judgemental. Another problem is that the presentation

of organisations’ annual accounts (to regulatory agencies or general external users) normally

occurs once a year, leading to a seasonal demand with a significant lag time between the end

of the accounting period and the commencement of auditing. This provides ample time to

manipulate accounts and to commit fraud.

From Double-entry to Triple-entry Accounting

Triple-entry bookkeeping by Yuji Ijir

The term ‘triple-entry bookkeeping’ was coined by Yuji Ijiri in 1986. Ijiri (1986) argues that

the double-entry records the changes in wealth through the income earned during a period, but

every one-dollar income might be earned at a different rate. Ijiri (1986) denoted the concept

‘the rate at which income is being earned’ as momentum, which is measured in monetary units

per period, such as dollars per month. He further designed a third level entry with a new set of

trebit accounts to record the changes of momentum. Essentially, Yuji’s work extended the

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accounting equations from two layers to three layers, coinciding with the derivative/integration

concept in math as follows:

T t  n
assetsn  Incomen   Momentum (n) where n is the time period
T t

Ijiri’s (1986) definition of triple-entry accounting focuses on how accounting information can

facilitate the decision-making of internal management. The goal is to develop an advanced

recording system with more ‘momentum’ information, which will help managers to make

better strategic decisions. Ijiri (1986) is the first publication appealing for consideration of a

move beyond double-entry. Although intellectually interesting, his work has been strongly

criticised as lacking a use case, being difficult to implement and being likely to create

arguments (Fraser, 1993). Whether or not it’s worth pursuing this alternative accounting

method is still up for debate. However, as this framework isn’t currently being used, it is not

the focus of this paper.

Triple-entry accounting by Ian Grigg

In 2005, the term ‘triple-entry accounting’ re-surfaced in Ian Grigg’s working paper with a

completely different meaning. Ian Grigg, with his substantial experience in financial

cryptography, proposed a solution to deal with accidental errors and fraud in accounting,

namely that companies should not be the sole recorders of business transactions. A third-party,

cryptographically secured entry can be recorded at the same time for transactions between

entities. In this third entry, the debit recorded by one entity is the credit recorded by the

counterparty. Grigg (2005) called this new recording method ‘triple-entry accounting’,

replacing the initial meaning of the term coined by Yuji Ijiri.

For example, let’s consider a payment transaction between Alice and Bob. Alice should pay

Bob $100 for rendered services. In a double-entry system, the invoice exists in both Alice’s

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and Bob’s ledgers: Bob’s credit and Alice’s debit. In Grigg’s triple-entry system, Bob writes a

‘receipt’ on a third shared ledger with a signature. At the same time, Alice sees this receipt,

approves, and signs it as well (see Figure 1 for a simple illustration). If such a third entry is

recorded immutably in a shared ledger, neither Alice nor Bob can record something differently

in their own ledgers, nor can they change the internal record later. In effect, the third entry

validates this transaction ‘automatically’.

<Figure 1: A Simple Example of Triple-Entry Accounting>

The Third Ledger on Blockchain: A Distributed Ledger embedded with Smart Contracts

Grigg (2005) proposed a great conceptual advance to the business recording system. At the

time of conception, it was unclear who would act as the trusted and neutral third party to control

the third shared ledger. The emergence of Bitcoin and its underlying Blockchain protocol

emerged three years later, demonstrating that a trusted and neutral third-party is NOT

necessarily required as the third public ledger in Grigg (2005) can be decentralized, immutable,

secure, and automated using blockchain.

What is blockchain? Simplistically, a blockchain is “another type of database for recording

transactions– one that is copied to all of the computers in a participating network” (Deloitte,

2016, p.5). A traditional database requires a centralized administrator to control the

data/records and it is also permissioned, which means the administrator sets privileges

regarding how users can access a database. In contrast, a blockchain database does not require

a central administrator. Non-trusting users directly share all records so that each participant on

a blockchain has a secured copy of all records and all changes so each user can view the

provenance of the data3. That is, a blockchain database is decentralized, replicated, and shared;

3 Bitcoin and other decentralised consensus systems are underpinned by: (1) ensuring everyone has a copy of the
ledger securely; and 2) reaching consensus. Problems associated with these points are not within the scope of

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it is a distributed ledger. The intuition of this blockchain architecture is because every

participant in this blockchain database receives the same copy of the ‘whole’ ledger, there is

no longer a need for a central authority (such as a bank) to keep track of participants’

information. In such a shared ledger, when there is a record of change of ownership of an asset,

the ledger gets updated and will be shared to everyone. Therefore, this distributed ledger fits

the triple-entry mechanism proposed by Grigg (2005), as a business transaction between two

entities can be recorded in this third party public ledger and both entities can ‘see’ this updated

ledger. Ideally, there will be no need to audit and reconcile with others such as banks and the

counterparty of this transaction, if all transactions are recorded in such a third public ledger.

An important concept that further enhances triple-entry accounting (compared to the traditional

double-entry system) is the ‘smart contract’. Nick Szabo coined the term ‘smart contract’ in

1997. In Szabo (1997), a smart contract is defined as an agreement enforced not by law, but

by hardware or software that would “fully embed in property the contractual terms which

deal with it.” Szabo used a vending machine as an existing example. In 2004, Ian Grigg

advanced this concept and proposed a digital version of the ‘smart contract’ called the

‘Ricardian contract’ (Grigg, 2004). According to Grigg (2004), a Ricardian contract is a digital

contract that contains all necessary terms and clauses and is readable both by people and by

computer programs and computer programs may subsequently execute this contract if

required. One of the limitations of the original ‘smart contract’ in Szabo (1997) is that

agreements (instructions code) on such a contract are machine-readable only, so technically the

contract is not a legally binding contract. If something goes wrong, it will be hard to prove the

presence of malicious intent from a legal perspective in a court of law. The Ricardian contract

this paper. This paper focuses on the application of such a system in accounting and is not a technical review of
blockchain applications.

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addresses this limitation by: (1) converting a human-readable legal contract between multiple

parties into machine-readable software code that can be executed with all the features of the

smart contract (Khan, 2018); and (2) digital signatures are required to make this contract legal.

Although the concept of a ‘smart contract’ was developed two decades ago, it is only with the

emergence of blockchain that its tremendous possibilities have been recognised. There is no

clear and widely accepted definition of a ‘smart contract’ within either the industry or academic

community. In general, ‘smart contract’ nowadays mostly refers to any computation that takes

place on a blockchain, not necessarily relating to a contract (e.g. the interpretation in Vitalik,

2017 published by Ethereum Foundation and Cachin, 2016 published by IBM research.) In

this paper, however, we follow a narrow and more specific definition proposed by Richard

Gendal Brown4 in 2015:“A smart-contract is an event-driven computer program, with state,

which runs on the blockchains and which can take custody over assets on that ledger” (Brown,

2015). According to Brown (2015), a smart contract is a digital contract whose terms are agreed

by two parties and programmed into a blockchain. Once they are programmed into a blockchain,

neither party can manipulate these terms due to the immutable feature of blockchain5. Such a

digital contract is ‘smart’ because when certain conditions are met, it executes automatically

(the meaning of ‘event-driven’ in Brown (2015)’s definition). In addition, digital assets (e.g.

blockchain tokens6) can be exchanged automatically between two parties and they can be stored

in a blockchain ledger prior to exchange, working like an escrow account (Coyne and

McMickele, 2017).

4 Richard Gendal Brown is the Chief Technology Officer at R3, one of the world's leading authorities on
distributed ledger systems and architectures.
5 Compared with spreadsheets and centralized databases, a blockchain is designed to be immutable: once a piece

of information is recorded on blockchain, nobody can modify this information.

6 Blockchain tokens are decentralized cryptocurrencies. They allow people to transfer ‘money’ without a

centralized party like a bank. Cryptocurrency is the original application of blockchain technology in the finance
industry and Bitcoin is generally considered the first decentralised cryptocurrency.

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Therefore, with smart contracts embedded, the third ledger built on blockchain is far more than

a simple ledger with recorded information. This ledger can self-execute and/or self-enforce the

agreements signed by two parties. It can also respond and send out information. Even more,

this ledger can potentially work like a traditional bank. This ledger can take custody of

customers’ assets and it can also send out value: instead of transacting in fiat, the systems unit

of account becomes money (in a tokenized form). Therefore, this third ledger integrated with

smart contracts is an ‘alive’ ledger. It acts on its own based on pre-determined ‘program codes’,

sending information, recording information, and executing transactions. Therefore, it

disintermediates the traditional banking system.

A Triple-entry Accounting Example Using Smart Contracts

Let’s reconsider the transaction between Alice and Bob to see how triple-entry accounting may

revolutionize the traditional accounting and audit procedure. In a traditional double-entry

system with a centralized bank as a third party, after Bob performs the services for Alice, Alice

would request the bank to issue a cheque (document 1) to Bob. Once the bank verifies this

transaction, the bank transfers $100 from Alice’s bank account to Bob’s bank account. At the

same time, the bank issues two copies of the receipt (document 2 and document 3) to Alice and

Bob. Upon receiving the receipts, Alice and Bob update their internal entries accordingly. For

such a trivial payment, there is ample room for errors and/or fraud. They mainly stem from two

sources. First, the information is not sufficiently transparent (one party may ‘alter’ the

information and auditors need to therefore verify information via different sources; for

example, instead of the correct amount of $100, Alice may record $200 in accounts payable on

her ledger). Second, malicious activities may occur around this payment (for example, Alice

may not have enough funds in her bank account to make the payment). Therefore, auditors

must check the original documents, reconcile the payment amount with the bank, and verify

the document with the counterparty (see Figure 2 for illustration).

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<Figure 2: A Payment Transaction between Alice and Bob in a Double-Entry Accounting

System>

In contrast, in the triple-entry accounting framework, Alice and Bob pre-determine payment

rules on a self-executing digital contract: Alice is going to pay Bob $100 once Bob provides

the service. Both sign the contract on this third ledger. Once the service is completed, Alice

and Bob sign the contract again, this third ledger updates, and the computer program will send

$100 to Bob (see Figure 3 for illustration7).

<Figure 3: A Payment Transaction between Alice and Bob in a Triple-Entry Accounting

System with Blockchain>

Key features of the payment record on the blockchain ledger include:

(1) The payment is made in the form of tokens (cryptocurrency) which disintermediates

the traditional bank;

(2) This payment transaction is recorded in chronological order and this record is

permanent without change. If there is an amendment, a new record will be required;

(3) This record is not maintained by a centralized server, so security threats are reduced;

(4) This record creates a linkage between the internal records of Alice and Bob so it is less

prone to errors and fraud;

(5) This record is verifiable, creating an easy audit trail.

The example above demonstrates the advantages of a triple-entry accounting system. Building

on blockchain architecture, triple-entry accounting with smart contracts may resolve the

7 This figure is based on the ‘smart contract model’ proposed by Brown (2015).

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fundamental trust and transparency issues that plague current accounting systems. This new

framework may therefore reduce the time required for auditing and associated costs. As a

result, more effort can be directed towards actions to prevent fraud rather than merely verifying

information. This new framework may not prevent all types of fraud (such as ponzi schemes)

but it can dramatically reduce internal fraud and enhance the operational efficiency of a

company.

Existing Literature on Blockchain Accounting

Despite the massive potential of the triple-entry accounting framework in accounting, the

amount of academic research on this topic is limited. Schmitz and Leoni (2019) performed a

systematic review of academic publications on blockchain in the accounting and auditing field

ranging from 2008–2018. 17 papers are identified. We further identify another three papers

that were just published in Australia Accounting Review in the middle of 20198. Among 20

existing peer-reviewed publications, most of them conceptualise blockchain innovations in

accounting and discuss possible practical implications for the accounting and auditing

profession at a theoretical level. Only four papers mention about ‘triple-entry accounting’ with

vague discussions. (i.e. Dai and Vasarhelyi, 2017; Carlin, 2018; Karajovic, et.al, 2019 and

Schmitz and Leoni, 2019). The work of Ijiri has been cited frequently in emerging scholarly

accounting literature of blockchain as a reference to ‘triple-entry accounting’. However, how

would Ijiri’s framework might or might not relate to blockchain is not clearly discussed in the

previous literature. Even more, some scholars mistakenly interpret the Ijiri’s work and thought

Ijiri’ framework is the origin of the ‘triple-entry accounting’ associated with blockchain. For

example, when Schmitz and Leoni (2019) explain the meaning of ‘triple-entry bookkeeping’

based on Grigg (2005), they mistakenly cite Ijiri (1986). One well-cited peer-reviewed paper

8 The additional three papers are Carlin, 2018; Karajovic, et.al, 2019 and Tan and Low, 2019.

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that mentions the triple-entry accounting framework with blockchain in accounting literature

is Dai and Vasarhelyi (2017). In this paper, the authors propose an accounting system that

extends the existing double-entry system with a third blockchain layer embedded into it. Every

transaction would create a record stored in this third blockchain ledger, in addition to entries

that would be recorded in the traditional double-entry system. Entries in this third ledger are

recorded in the form of token transfers between debit/credit accounts. In such a way, each

blockchain account is connected to its corresponding double-entry account in an ERP

(Enterprise Resource Planning) system, comprising an interlocking recording system. They

also argue that tokens in such a blockchain ledger can “also be used as certificates to attest to

obligation or ownership of assets among business parties” (Dai and Vasarhelyi, 2017, p7).

Although Dai and Vasarhelyi (2017) cite the triple-entry accounting framework of Grigg

(2005), their idea of a blockchain accounting framework is not really consistent with the spirit

of triple-entry accounting in Grigg (2005), namely: a third public ledger shared among

business entities. The third blockchain layer proposed in Dai and Vasarhelyi (2017) is more

like a third internal ledger built on a ‘decentralized’ blockchain database, rather than the

traditional ‘centralized’ ERP database. Their framework does not suggest replacing the ERP

system; rather, they suggest adding an additional blockchain-based system on top of the ERP

system.

The Big Four (Deloitte, PricewaterhouseCoopers [PwC], Ernst & Young [EY], and KPMG)

are the largest players in the accounting industry and move much faster than academia

(Karajovic, et.al, 2019). All of these companies have engaged in research and development

within the blockchain space. For example, in 2016 Deloitte set up a team (Deloitte Rubix) that

focuses on payments, rewards programs, and digital banking. In the same year, PwC launched

DeNovo, a new strategy-consulting platform focusing on FinTech innovation. In 2017 EY

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launched EY Ops Chain, which focuses on pricing, digital contract integration, shared

inventory information, invoicing, and payments (EY, 2019). In February 2019, KPMG

announced it had partnered with the enterprise blockchain company Guardtime to offer

blockchain-based services to clients (LLP, 2019). The current state of blockchain exploration

displayed by the Big Four focuses on its implications across different areas such as business,

banking, insurance, energy trading, and many more. These companies also recognise the

tremendous disruptive potential of blockchain to their traditional business: external auditing.

In 2016, Deloitte published an article suggesting blockchain technology with triple-entry

accounting may represent the next step for accounting. Although this five-page article does not

explain triple-entry accounting in detail, it explores the benefits that companies will enjoy if

triple-entry accounting can be implemented: ‘instead of keeping separate records based on

transaction receipts, companies can write their transactions directly into a joint register,

creating an interlocking system of enduring accounting records’ (Deloitte, 2016, p3). This

article also highlights that as information will be accessible via the third public ledger in a

faster and more efficient way, the need for requests and confirmation can be removed and

substantive testing in the audit process will be no longer be needed. Instead, the auditing

process will be more focused on the comprehensive control of all transactions, representing a

major breakthrough.

Given the promise of triple-entry accounting with blockchain for accounting practices, a

number of start-up projects have been established with the goal to implement such a system.

They include: Request Network; Balanc3; Fizcal; bBiller Ledgerium; zkLedger; and Pacio.

After a solid analysis of these projects based on public resources, we select three cases among

them to explore more in detail: Ledgerium, zkLedger and Pacio. We exclude the other four

either because they are not directly relating to the triple-entry accounting framework of Grigg

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(2005) (Fizcal and Balanc3) or because we are unable to know the status of their projects

(Request Network and bBiller). Fizcal describes itself to be the first in developing a “fully

decentralised triple entry framework for bookkeeping and accounting, a concept first developed

by Yuji Ijiri in 1986.” Given Ijiri’s concept is totally different from Grigg (2005), we doubt

whether Fizcal is on the correct direction. Balanc3 started in 2015 and described its goal in

2016 in a video titled ‘Balanc3-Triple Entry Accounting’. However, it seems the focus of

Balanc3 has changed it original intent of developing an accounting system based on blockchain

to ‘an open platform to manage the digital assets, crypto currencies, and tokens’ (STOwise,

2019). For Request Network and bBiller, according to their white papers they aim to develop

triple-entry accounting with blockchain based on the spirit of triple-entry framework of Grigg

(2005). However, due to limited publicly available information, we are not quite clear about

the state of these two projects. The three projects that we select for this study provide diverging

insights into the potential challenges and solutions associated with the implementation of triple-

entry accounting. Analysis of these three cases is mainly facilitated by white papers published

by blockchain developers and organisational websites.

CASE STUDIES

Case 1: LucaTM by Ledgerium (a third ledger to records payment transactions between

business parties)

Ledgerium is a start-up company based in Melbourne, Australia. According to its white paper

published in 2018, Ledgerium aims to create a decentralized ledger through a triple-entry

accounting system with smart contracts. Ledgerium calls this third ledger LucaTM, a cloud-

based platform that records payment transactions between parties utilising blockchain. The

LucaTM project was launched in late 2018 and is currently at the stage of partner testing. Figure

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4 illustrates the operation of this project (Ledgerium, 2019). According to the demo posted on

Ledgerium’s homepage, let’s say ABC Corp. should pay AU$100 to ACME Corp. for rendered

services. ABC Corp. creates the invoice using its accounting software (e.g. Xero9, a cloud-

based accounting software used by more than one million Australian and New Zealand

businesses). This invoice is sent to LucaTM with the hash, details, and terms and conditions of

the transaction proposed, and is encrypted with ACME Corp.’s public key. ACME will be

notified of such a request; it can then verify this transaction, request a hash, and accept the

transaction. Once ACME approves this transaction, blockchains update and a common ledger

between the two parties is completed. LucaTM will then handle the confirmation with the bank

to process the payment. Once the payment is completed, accounts are reconciled in this public

ledger. Auditors can use LucaTM by requesting permission to access this common ledger. After

the request is approved, an auditor can verify the authenticity of a transaction via the hash

stored in the blockchains at the point that each original transaction is created or via each

targeted party (see Figure 4 for illustration10).

<Figure 4: LucaTM by Ledgerium>

As we can see, LucaTM is designed to be a third, decentralized public ledger according to the

triple-entry accounting system proposed by Grigg (2005). The main advantage of LucaTM is

that it has a very clear, specific, and manageable task: design a public ledger with only two

main accounts: accounts receivable and accounts payable. One of the main target clients of

Ledgerium are companies with many debtors and creditors in their database. Managing

accounts receivable and accounts payable is time consuming and costly. LucaTM can greatly

increase the transparency and efficiency of the accounts receivable-payable business cycle.

9Information of Xero is available at: https://www.xero.com/au/

10Figure 4 is based on the ‘Product Demo Video’ posted on the Ledgerium website:
https://www.ledgerium.net/home/

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Therefore, the internal accounts of ‘accounts payable’ and ‘accounts receivable’ may no longer

need to exist. LucaTM also integrates with companies’ existing accounting software and banking

systems. These potential benefits may serve as a key incentive for companies to trial and

potentially adopt this platform, as it does not require extensive changes to companies’ internal

systems.

However, like other ongoing blockchain application projects, LucaTM faces two big issues: (1)

privacy concerns regarding business records on a distributed ledger; and (2) the scalability of

such a ledger. Privacy concerns are significant from a business point of view. Currently there

are several approaches to ensure privacy in a distributed ledger, namely by only committing to

hashes of transactions on the ledger, using trusted third parties to independently verify

transactions, or by using cryptographic schemes to hide the content of transactions (Narula

et.al.,2018). The first approach does not support public verifiability, so it eliminates the benefit

of such a distributed ledger. The second approach, which is believed to be used in LucaTM,

supports public verifiability. However, it also means the content of transactions will be revealed

to the auditor once the auditor gains access permission. This may discourage implementation

of a triple-entry accounting in a company’s existing system because the company might be

wary of giving external auditors such power as some transactions might reveal strategic

information. The scalability concern represents a more technical perspective. Scalability is the

main reason preventing the mass adoption of blockchain, including the implementation of

triple-entry accounting. Triple-entry accounting requires both parties to use a common ledger.

This means everybody needs to participate and cooperate. However, this decentralisation and

the many distributed copies of a blockchain limit the number of transactions per second. For

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example, Ethereum11, one of the most popular blockchain platforms (on which Ledgerium is

built) processes 30 transactions per second (Khan, 2018), whereas Visa processes payments

1000 times faster. A single company hardly reaches this blockchain performance limit, but this

third public ledger only realises its potential if many companies are using it. As Ledgerium is

still developing LucaTM, we are not suggesting that these two hurdles cannot be resolved by

Ledgerium (indeed, they may have already been addressed). As outsiders, however, we would

not possibly know at this stage, as solving these two hurdles are likely to constitute a

proprietary technology for a blockchain developer. Based on publicly accessible sources, we

further identify another two on-going blockchain projects that attempt to provide solutions to

these two hurdles: Pacio and zKledger.

Case 2: zkLedger (privacy-preserving auditing for a distributed ledger)

zkLedger is a public ledger with permissioned blockchains and zero-knowledge proofs

developed by the MIT Media Lab, US. zkLedger is said to be the first system to protect ledger

participants’ privacy and at the same time provide fast, provably correct auditing. In

cryptography, the zero-knowledge proof is a method by which one party (the prover) can prove

to another party (the verifier) that they know a value x, without conveying any information

apart from the fact that they know the value x. The essence of the challenge of zero-knowledge

proofs is how to prove a possession without revealing the information itself or any additional

information. (Bünz et al., 2018).

As mentioned in the previous case study, one main hurdle to the implementation of triple-entry

accounting is data privacy concerns, as current blockchain designs such as LucaTM will need to

reveal the content of transactions to enable auditing by a third-party. Companies may not wish

11 Launched in 2015, Etherum is the world’s leading programmable blockchain platform. Developers can build
applications on this platform. So far, the Ethereum community is the largest and most active blockchain
community in the world.

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to do so, as these transactions might relate to sensitive strategy information. Using the ‘zero-

knowledge proof’ method, there might be a way to preserve the privacy of each transaction

while still allowing an auditor to compute with reliability the correct measurements over the

data in the ledger. Using digital asset transactions among banks as an illustrative example,

Narula, Vasquez and Virza (2018) explain how zkLedger achieves such measurements. For

example, Goldman Sachs reports to have 30 million Euros at the beginning of a reporting

period. During the reporting period, Goldman Sachs has two transactions with two banks: (1)

it sends $3 million Euros to JP Morgan; and (2) it sends $1 million Euros to Barclays. Both of

the transactions are recorded in a zkLedger. The time of the transaction and the type of asset

being transferred are public to whoever has access to this ledger. However, to preserve the

privacy of each transaction, other values including transaction parties, the amount, and

transaction graph are hidden using Pedersen commitments. 12 The auditor has a copy of the

ledger and interacts with the banks to calculate functions on their private data in order to get a

view of the financial system represented by the ledger. At the reporting date, Goldman Sachs

recorded $19 million Euros in its account. An auditor sends a query to Goldman Sachs on this

ledger: “how many Euros do you hold?” and gets a response and cryptographic assurance that

the response is correct. An auditor can ask queries including sums, moving averages, variance,

co-variance, standard deviation, and ratios (see Figure 5 for illustration).

<Figure 5: zkLedger design with Goldman Sachs’ transactions>

zkLedger is said to be the ‘first system to generate cryptographically verifiable answers to

arbitrary analytical queries without revealing confidential information’. MIT Media Lab has

12 Pedersen commitment is C(m,r)=gm⋅hr. m is the secret message that the message sender wants to hide and r is
a random secret. Then we can produce a commitment c= C(m,r) and make c public available. Once the verfier is
given c,m,r, he/she can check if indeed c= C(m,r). This commitment is cryptographic equivalent of secretly
writing m in a sealed, tamper-evident envelope kept by who wrote m. (Pederson, 1992)

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implemented a prototype of zkLedger to evaluate the design. For a transaction per bank to be

recorded on zkLedger, the entry size is 4.5KB, creating an entry requires 8ms, and verifying

an entry takes 7ms. However, zkLedger also has a scaling problem: the cost of a transaction

grows with the number of banks (participants). As the number of banks increase in zkLedger,

the time to create a transaction increases linearly and time to verify transactions increases

quadratically (Narula et al., 2018).

Case 3: Pacio Solution (a blockchain ecosystem with triple-entry accounting)

As discussed in the Ledgiurm and zkLedger case studies, the scalability of blockchain is a

hurdle to the effective implementation of the triple-entry accounting system in practice

(Gountia, 2019). Over the last two years, projects have begun to address the scalability of

blockchain. For example, the Lightning network is believed to be a promising blockchain

implementation with the capacity to handle millions of payment transactions per second (Poon

and Dryja, 2016). Permissioned blockchain like IBM’s Hyperledger has shown a capacity of

100,000 transactions per second, which is consistent with these consortium blockchains.

However, the problem is that they function within a closed ecosystem, which is neither

decentralized nor publicly accessible, so utility remains limited. Another promising upcoming

project is called Red Belly, a collaborative effort between Australia’s National Science Agency

(CSIRO) and Concurrent Systems Research Group at the University of Sydney, Australia. The

project is still in its pilot phase but has shown immense potential, with processing speeds

recorded at upwards of 30,000 transactions per second, matching and at times beating

mainstream players like VISA. Another much more ambitious project, Cosmos, launched its

first blockchain in March 2019 after nearly three years of planning and development (CoinDesk,

2019). According to the Cosmos Network website, the aim of the Cosmos project is to develop

a scalable ecosystem that allows different blockchain applications to interoperate on a single

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form, like an internet for blockchains. The developers believe that Cosmos may contribute to

solving some of the key problems with blockchain, such as scalability and interoperability.

Driven by the promise of Cosmos regarding the possible solution of the scalability problem

that other triple-entry accounting projects are facing, Pacio chose Cosmos to further develop a

standardized, semantic blockchain based application platform. The aim of Pacio is far more

than developing an accounting application based on blockchain technology. It aims to

standardise and simplify the storage, exchange, and comparison of data globally within and

outside entities via a new sematic standard that supports inter-blockchain operations.

According to Pacio, current business applications have their own data sources and each of them

‘speak’ a different language. The vision of this project is to develop a SSIM (Standardised

Semantic Information Model) that harmonises all enterprise data while retaining compatibility

with earlier attempts to organise business data such as XBRL. Once SSIM is developed, the

Pacio platform will allow developers to create tailored triple-entry accounting and management

applications (see Figure 6 for illustration).

<Figure 6: Pacio’s Ecosystem>

A few requirements need to be satisfied to implement triple-entry accounting: a scalable

blockchain ecosystem, a universal data standard for the storage and processing of accounting

data, and a blockchain application dedicated to triple-entry accounting. Pacio believes that if

triple-entry accounting is an isolated blockchain application and has no connection to other

existing and future business data resources, this application will fail. Therefore, Pacio’s

application platform approach aims to link all isolated triple-entry accounting applications to

each other, and to other business blockchain applications and off chain data as well. Pacio

represents an attempt to build a blockchain network that will facilitate global triple-entry

accounting applications.

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DISCUSSION AND CONCLUSION

Since the original application of blockchain technology in Bitcoin, blockchain has now been

explored to different industries as more business leaders and entrepreneurs recognise the

enormous potential of this transformational technology (Cai, 2018). Between February and

March 2019, Deloitte conducted a Global Blockchain Survey among 1,386 senior executives

at companies with US $500 million or more in annual revenue. The 2019 survey shows that

although FinTech remains a blockchain leader, organizations in a range of sectors are

expanding and diversifying blockchain initiatives. A shared recognition has emerged that

blockchain technology is a connecting platform that can enable many business processes. The

question for executives has now been changed from ‘will blockchain work?’ to ‘how can we

make blockchain work for us?’ (Deloitte, 2019). We have the same question for the accounting

profession: “how can we make blockchain work for accounting?”

Coyne and McMickele (2017) study the possibility of accounting using blockchain and

conclude that it is infeasible. They summarize three hurdles that restrict blockchain applications

in accounting: “(1) the desire for confidentiality that renders public blockchains undesirable;

(2) the ability for firms to retroactively manipulate private blockchains; and (3) the limited

transaction verification that the blockchain provides” (Coyne and McMickele, 2017, p101).

The arguments of Coyne and McMickele (2017) are limited due to the limitations of blockchain

development at that time and the fact that their arguments are based on whether blockchain can

be used in a double-entry system. The first hurdle relates to the balance between the openness

and privacy of data among different participants. The spirit of blockchain is to share

information and such sharing can be designed to be either completely open to everyone (public

blockchain) or open with restrictions (permissioned blockchain). Data integrity in a

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permissioned blockchain is contained within the power of nodes13 as opposed to the entire

public. Permissioned-blockchain is likely to be preferable for use in accounting practices, but

Coyne and McMickle (2017) argue that due to trust issues among nodes, the concept of

accounting based on blockchain might be infeasible. We disagree with this argument because

we believe such a concern is currently being addressed. First, it is necessary to build a

blockchain ecosystem so that there will be enough nodes (for example, Pacio). Second, it is

necessary to find a better solution to protect data privacy (for example, zKleger enables

approved auditors to verify transactions without revealing the content of transactions). The

latter two hurdles identified by Coyne and McMickele (2017) become irrelevant if we move

from a ‘double-entry system’ to a ‘triple-entry system’.

Blockchain is viewed as a new technology but it is built on existing technologies that we are

familiar with. As Nolan Bauerle explains, blockchain is the ‘orchestration of three

technologies (the internet, private key cryptography, and a protocol governing incentivisation)

which together results in a secure system which allows interactions without a third trusted

party to facilitate digital relationships’ (Bauerle, n.d.). In other words, it is an alternative

ledger system. This new ledger system may enable a completely new level of information

exchange both within and across industries (Deloitte, 2018). Applications based on blockchain

technology can disrupt how organizations get things done. Such a disruption can be called a

‘democratization of trust’. The very existence of accounting, including the measurement,

processing, auditing, and communicating of financial information about economic entities, is

ultimately for the purpose of ensuring trust and transparency. Although current accounting and

auditing procedures are time-consuming and expensive, in many cases, they are ineffective.

13A node is a device on a blockchain network. The role of a node is to support the network by maintaining a
copy of a blockchain, and in some cases, to process transactions.

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Triple-entry accounting with blockchain is a new and potentially much more efficient way

to achieve trust and transparency and is therefore likely to disrupt the accounting industry. In

this paper, by exploring triple-entry accounting from its conception to current application

projects, we contest the findings of Coyne and McMickele (2017), asserting that triple-entry

accounting with blockchain, when properly implemented, can fundamentally improve

accounting.

Thus far, few triple-entry accounting blockchain products and services are fully live in the

accounting area, but the projects discussed in this paper have already demonstrated great

potential. The barriers to greater adoption of triple-entry accounting are a key area for future

research. These barriers may include regulatory issues, potential security threats, and uncertain

return on investment (Deloitte, 2019). To further explore the practical issues regarding the

development and implementation of triple-entry accounting, the projects discussed above and

other triple-entry accounting projects that are not detailed in this paper should be followed

closely. Research methods can extend to include experiments, surveys, interviews, and case

studies. In addition, in order to provide greater foundational support, the conceptual and

theoretical bases of triple-entry accounting need to be further examined. Also, given the

complex nature of blockchain, more cross-disciplinary studies utilizing technology, economics,

and psychology are required in future research.

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Figure 1: A Simple Example of Triple-Entry Accounting

Alice-Cash Account Bob-Cash Account

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Debit Credit Debit Credit

$100 $100
Public Ledger
(Digital Receipt)
Alice Bob
$100 $100
Out In
Signature Signature

Figure 2: A Payment Transaction between Alice and Bob in a Double-Entry Accounting

System

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Figure 3: A Payment Transaction between Alice and Bob in a Triple-Entry Accounting System
with Blockchain

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Figure 4: LucaTM by Ledgerium

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Figure 5: zkLedger design with Goldman Sachs’ transactions

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Figure 6: Pacio’s Ecosystem

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