Notes

"What is a Blockchain? Is it a Hype?" - New York Times

Blockchain Ecosystem evolved, but still early

• In 2017, "the industry landscape was mostly dominated by half-hearted experiments and short-lived proofs-of-concepts - often announced with great fanfare and publicity".
• "[The] hype was gradually given way to genuine development of sustainable blockchain networks that are increasingly being deployed in production environments".
• "77% of live enterprise blockchain networks have little in common with multi-party consensus systems apart from incorporating some of the same technology components (e.g., cryptography, peer-to-peer networking) and using similar nomenclature".
• Attitudes about blockchain may be improving, but 43% [of executives surveyed] still see blockchain as overhyped, up from 39% [in 2018]".

Blockchain and its Impact on Accounting What we will discuss in the remainder of the course:

• Blockchain and accounting: triple entry accounting.
• Blockchain as an auditing tool.
• Blockchain and the future accounting/auditing profession.
• Blockchain and corporate governance, taxation, etc.

Single Entry Accounting A one-sided accounting entry for each transaction. Assets are entered and crossed off as they move in and out. Accounting ledger and the dollar amount is recorded once per transaction. Subject to serious limitations as errors cannot be detected and traced, providing ample opportunities for fraud.

Double Entry Accounting Each financial transaction requires at least two accounting entries (debit and credit). 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. Each debit and credit can be traced back to the original entry and transaction source document. Even if the debits equal the credits, it is possible to do so in a false or misleading manner. 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. Auditing: sampling, timing, costs.

A Payment Transaction in a Double-Entry System

Triple Entry Accounting by Ian Grigg Triple-entry accounting was a process introduced by financial cryptography expert Ian Grigg in December 2005. 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.

A Payment Transaction in a Triple-Entry System

"It's though to lie when everybody is watching"- Ian Grigg 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 demonstrated that a trusted and neutral third-party is NOT required. The third public ledger in Grigg (2005) can be decentralized, immutable, secure and automated using blockchain.

Triple-Entry with a Smart Contract

Key Features of a Payment Record on Blockchain Ledger The payment is made in the form of tokens (cryptocurrency) which disintermediates the traditional bank. 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. This record is not maintained by a centralized server, so security threats are reduced. This record creates a linkage between the internal records of Alice and Bob so it is less prone to errors and fraud. This record is verifiable, creating an easy audit trail.

LUCA by Ledgerium / BlockLedger & A Payment Transaction Using LUCA

Advantages of LUCA

• A clear, specific, and manageable task: design a public ledger with only two main accounts: accounts receivable and accounts payable.
• Increases the transparency and efficiency of the accounts receivable-payable business cycle.
• Integrates with companies' existing accounting software and banking.
• No extensive changes to companies' internal systems.

Challenges of LUCA Privacy concerns

• Only committing to hashes of transactions on the ledger - does not support public verifiability.
• Using trusted third parties to independently verify transactions - content revealed.
• Using cryptographic schemes to hide the content of transactions.

Scalability

• Prevents the mass adoption of blockchain.
• Triple-entry accounting requires both parties to use a common ledger.
• Everybody needs to participate and cooperate.
• This decentralization and the many distributed copies of a blockchain limit the number of transactions per second.

zkLedger -- Privacy preserving auditing for distributed ledgers & A Record of the Transaction

Bank Care about Privacy

zKLedger -- A Private, Auditable Transaction Ledger

• Privacy, it hides transacting banks and amounts.
• Integrity with public verification, everyone can verify transactions are well-formed.
• Auditing, compute provably-correct linear functions over transactions.

How to Audit the Ledger Content

Which Measurements does zkLedger Support

• Ratios and percentages of holdings
• Sums, Averages, Variance, Skew
• Outliers
• Approximations and Orders of Magnitude
• Changes over time
• Well-known Financial Risk Measurements

Advantages of zkLedger

• Privacy, the auditors and non-involved parties cannot see transaction participants or amounts,
• Completeness, banks cannot lie to the auditor or omit transactions.
• Integrity, banks cannot violate financial invariants (Honest banks can always convince the auditor of a correct answer).
• Progress, a malicious bank cannot block other banks from transacting.

Challenges of zkLedger

• Banks might attempt to steal or hide assets, manipulate balances, or lie to the auditor.
• Banks can arbitrarily collude.
• Banks or the auditor might try to learn transaction contents.
• Scalability remains an issue.

COSMOS Network It is a decentralized network of independent, scalable, and interoperable blockchains, creating the foundation.

Pacio Solution "Pacio will lead the world into the next advance in business record keeping - Triple Entry Accounting (TEA) - and associated systems and services to reduce the mid-decade $27 trillion per annum opportunity losses and costs resulting from current accounting and management deficiencies" - David Hartley, CEO of Pacio.

A blockchain ecosystem with triple-entry accounting.

Potential Benefits of Triple-Entry Accounting

• Introduces a public ledger where all participating entities mandatorily host all accounting entries.
• Removes dependency on auditors to verify accuracy and completeness of financial statements.
• Establishes a self-regulated and shared environment amongst all stakeholders.
• Less errors and fraud, tamper-proof and audit trail.
• Streamlines reconciliations and financial recording.
• "Last but not least, with triple-entry accounting, for the very first time, we can seamlessly follow the world's money."- David Hartley.

Blockchain as an auditing Tool One of the main areas where blockchain can be applied in accounting is Auditing. The study of auditing is different from other accounting courses that you have taken in college because...

The Demand for Auditing and Assurance The development of the corporate form of business and the expanding world economy over the last 200 years have given rise to an explosion in the demand for assurance provided by auditors.

Principals and Agents A public company is a company that sells its stocks or bonds to the public, giving the public a valid interest in the proper use of the company's resources.

Principal-Agent Relationship and Demand for Auditing

Auditing Demands Logic, Reasoning and Resourcefulness An auditor needs to understand more than just the accounting concepts and techniques. Auditing is a fundamentally logical process of thinking and reasoning - so use your common sense and reasoning skills. Being a good auditor sometimes requires imagination and innovation. Understanding audit concepts is useful for all business professionals, consultants, etc.

Types of Auditors & Types of Audit Services

Many Regulators and Standard-Setters Affect Auditing

Society's Expectations and the Auditor's Responsibilities The auditor's responsibility is to provide reasonable assurance that the financial statements are free of material misstatement, whether caused by error, fraud, or illegal acts. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected.

Responsibility for the Financial Statements While auditors have important responsibilities, management is primarily responsible for maintaining effective internal control and for ensuring the fairness of the company's financial statements.

Management Assertions

Overview of Financial Statement Audit & Major Phases of an Audit

Fundamental Auditing Concepts

• Materiality: The magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.
• Audit Risk: Audit risk is the risk that the auditor mistakenly expresses a clean audit opinion when the financial statements are materially misstated. Auditing standards make it clear that the audit provides only reasonable assurance that the financial statements do not contain material misstatements. Reasonable assurance implies some risk that a material misstatement could be present in the financial statements and the competent auditor will fail to detect it.

Knowledge Assessment Which of the following best describes the concept of audit risk? A. The risk of the auditor being sued because of association with an auditee. B. The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated. C. The overall risk that a material misstatement exists in the financial statements. D. The risk that auditors use audit procedures that are inappropriate.

• Audit Evidence: The information used by the auditor in arriving at the conclusions on which the audit opinion is based.
  • The Concepts of Audit Evidence
    • Nature of Audit Evidence -- Refers to the form or type of information
    • Sufficiency and Appropriateness of Audit Evidence
    • Evaluation of Audit Evidence

• Audit Evidence Regarding Management Assertions: Evidence that assists the auditor in evaluating management's financial statement assertions and consists of the underlying accounting data and any additional information available to the auditor, whether originating from the client or externally.

  • Relevance - Is the evidence related to the specific assertion being tested?
  • Reliability - Can the evidence be relied upon to signal the true state of the specific assertion being tested?

• Sampling Inferences Based on Limited Observations: Auditors use a sampling approach to examine a subset of the transactions based on previous audits, an understanding of the company's internal control system, or knowledge of the company's industry.

  • It would be too costly for the auditor to examine every transaction.
  • Data analytics will sometimes allow for testing entire populations.

Knowledge Assessment Why do auditors generally use a sampling approach to evidence gathering? A. Auditors are experts and do not need to look at much to know whether the financial statements are correct or not. B. Auditors must balance the cost of the audit with the need for precision. C. Auditors must limit their exposure to their auditee to maintain independence. D. The auditor's relationship with the auditee is generally adversarial, so the auditor will not have access to all of the financial information of the company. Which of the following sources of evidence are more reliable?

1. Inquiry of an accounts receivable clerk regarding the accounts receivable balance - or - Accounts receivable confirmations sent to a sample of customers.
2. Physical examination of lumber inventory performed by the external auditor - or - physical examination of inventory performed by internal auditors.

Examples of Audit Procedures to Collect Evidence

What Can Blockchain Change in Auditing

• Governance, Transparency and Trust: A "truth machine"- unprecedented levels of trust and transparency - (Casey and Vigna, 2018)

  • Peer-to-peer auditing with no institutional intermediation
  • Transparent and immutable accounting records
    • Manipulating and destroying is virtually impossible
    • Disclose off-book and hidden transactions
  • Immediate access to accounting data
  • Differentiated access to information on private, permissioned blockchains

• Continuous Auditing

  • Contemporary audit is labor intensive and mostly retrospective. It requires the approval of transactions and balances at the end of reporting periods. If transactions are recorded and validated in real-time, auditors could move to an "always-on", "real-time auditing", continuously.
  • Blockchain-Enabled Continuous Auditing
    • Monitoring what happens in real time not in retrospect.
    • Combining the processing of transactions with the recording and reconciling > efficiencies.
    • Sampling > up-to-date, immutable historical audit trail of all transactions.
    • Real-time systems highlight anomalies at the time of occurrence > timely fraud investigations.
    • Better auditors' understanding of clients' businesses.

• Smart Contracts

  • Smart contracts extend blockchains' utility from simple record-keeping of transaction entries to automatically implementing terms of multiparty agreements.
    • Allow autonomous recording of transactions in compliance with agreed terms: automatic audit review and verification.
    • Automate transaction reconciliation procedure while providing more transparency to stakeholders.
    • Saves time and human error
  • Accounting rules can be encoded into smart contracts
    • Auditors monitor if transactions are compliant with these accounting rules and highlight cases of mismatch.
    • Smart contracts can revoke transactions if the system detects that rules and standards encoded into the contract are disobeyed.
    • May offer a predicting function, for instance by encoding default or credit rating prediction model, monitoring debtor's default risk based on financial data, and adjust bad debt estimations accordingly.
  • Artificial Intelligence technologies may extend the potential of smart contract applications to the assessment and recording of the physical conditions of goods.
  • In combination with AI, smart contracts could detect and measure damage on inventory and other assets and potentially automate the accounting measurement of those assets.

Transaction Verification "Just because a transacted record is computerized and "blockchained" does not necessarily imply that its physical world counterpart material of commerce has not been tampered with" - (Apte and Petrovsky, 2016).

Are Blockchains completely fraud-free?

• Committing fraud is still possible on blockchains, as "lies encoded on the blockchain are still lies. They're just immutable lies" - (Bradbury, 2015).
• Cannot eliminate fraud completely but may help identify fraud in real-time. - (Wang and Kogan, 2018).

What are the Auditing Challenges in Blockchain?

• Only financial statement audit, not audit of internal controls, compliance.
• Not all assertions.
• Transaction can still be fraudulent, illegal, misclassified, related-parties, side-agreement.
• Record in BC != authenticity.
• No help with estimates, complex confirmations, valuation of complex instruments.

What Blockchain Offers to Auditors

• Distributed ledger:
  • Each user has a live copy of the ledger real time updates and reconciliations.
  • No single point of failure
  • No intermediaries of central authorities
• Immutability and consensus protocols
  • Validated by majority, reply on cryptographic proofs
  • Chronological, tamperproof audit trail
  • Difficult (but not impossible) for fictious and erroneous transactions
• Resilience more security and robustness increased reliability of accounting records.

What Can Blockchain Change in Auditing

• Continuous Auditing
  • Contemporary audit is labor intensive and mostly retrospective.
  • Requires the approval of transactions and balances at the end of reporting periods.
  • If transactions are recorded and validated in real-time, auditors could move to an "always-on", "real-time auditing", continuously.
  • Definition (1999): a continuous audit is a methodology that enables independent auditors to provide written assurance on a subject matter, for which an entity's management is responsible, using a series of auditors' reports issued virtually simultaneously with, or short period of time after, the occurrence of events underlying the subject matter.
  • Monitoring what happens in real time not in retrospect.
  • Combining the processing of transactions with the recording and reconciling > efficiencies.
  • Sampling > up-to-date, immutable historical audit trail of all transacitons.
  • Real-time systems highlight anomalies at the time of occurrence > timely fraud investigations.
  • Better auditors' understanding of clients' businesses.
• Smart Contracts: Smart contracts extend blockchains' utility from simple record-keeping of transaction entries to automatically implementing terms of multiparty agreements.
  • Allow autonomous recording of transactions in compliance with agreed terms: automatic audit review and verification.
  • Automate transaction reconciliation procedure while providing more transparency to stakeholders.
  • Saves time and human error.
  • Smart contracts are "computerized transaction protocol that executes the terms of a contract".
• Accounting rules can be encoded into smart contracts:
  • Auditors monitor if transactions are compliant with these accounting rules and highlight cases of mismatch.
  • Smart contracts can revoke transactions if the system detects that rules and standards encoded into the contract are disobeyed.
  • May offer a predicting function, for instance by encoding default or credit rating prediction model, monitoring debtor's default risk based on financial data, and adjust bad debt estimators accordingly.
  • Artificial Intelligence technologies may extend the potential of smart contract applications to the assessment and recording of the physical conditions of goods.
  • In combination with AI, smart contracts could detect and measure damage on inventory and other assets and potentially automate the accounting measurement of those assets.
  • Smart audit procedure can help reduce the expectation gap between the procedures auditors perform versus those procedures audit inspectors, and investors, expect them to perform.
• Blockchain as an IT System
• Verification of BC reliability and Environment
  • Central locations to obtain audit data & evidence directly from blockchains.
  • Still risk that the information is inaccurate due to error or fraud.
  • This will present new challenges because a blockchain likely would not be controlled by the entity being audited.
  • Need to extract the data from the blockchain and also consider whether it is reliable.
• IT Control Environment
  • With a blockchain consortium, this governance becomes complex.
  • Does the consortium has a steering committee in place, the powers granted to this committee, and the voting power of each member?
  • Resources committed by each member (financial, personnel, or computational), and what evidence that proper controls are implemented and maintained across the blockchain (independent attestation).
• Evaluation of Consensus Protocols
  • Which nodes are authorized to participate in consensus.
  • Distribution of computational power among members.
  • Approach to consensus (e.g., POW, POS, all nodes validate all blocks and consensus is reached when a majority agree on the current state).
  • Balance of computational power among validating nodes.
• Change Management (CM)
  • Changes to systems require a controlled process to request, develop, test, authorize, and implement the update.
  • With blockchain, changes occur with:
    • Consensus protocol
    • Communication protocol
    • Smart contracts
      • May involve a change in a referenced oracle
      • What if change is not accepted by all
    • Decentralized applications, submitted as transactions, virtually unstoppable once loaded.
    • Source code of the chain, chain might pause while updates load
  • CM committee with elected representatives or one official from each member organization.
    • Mechanism to agree on changes is crucial.
• Interface with Other Applications
  • Important to maintain and enhance controls over legacy systems
    • Data is tamper-proof in BC, but vulnerable outside of BC
    • Upstream interface might be particularly critical
  • Connection with third-party oracles
    • Data not compromised, free of bugs
    • Properly linked and coded
    • Physical control of IoT devices etc.
• Application and Infrastructure Access
  • User/node access provisioning (grant/modify/remove)
    • Permission to submit, relay, verify transactions or validate new blocks.
    • Formal request and approval and subject to periodic reviews.
  • Access to manipulate smart contracts, decentralized applications, protocols and source code, who in the consortium provisions/revokes access.
  • If private keys are used. Storage, how to regain control. E.g., access to terminated employees.
  • Robust network security.
• Some IT Risks are Potentially Eliminated
  • Data Backup
  • Disaster Recovery
  • Batch Processing
  • Unauthorized changes to historical data
• New Auditing Roles - Auditors of Smart Contracts
  • Smart contracts embedded to automate business processes.
  • Verification that smart contracts are implemented with the correct business logic. Verify the interface between smart contracts and external data sources.
  • Without an independent evaluation, users of blockchain technologies face the risk of unidentified errors or vulnerabilities.
  • In the context of a financial statement audit, management will be responsible for establishing controls to verify the smart-contract source code is consistent with the intended business logic.
• Service Auditor of Consortium Blockchains
  • Prior to launching a new application on an existing blockchain platform or leveraging or subscribing to an existing blockchain product, users of the system may desire independent assurance as to the stability and robustness of its architecture.
  • Critical blockchain elements (e.g., cryptographic key management) should be designed to include sophisticated ITGCs that provide ongoing protection for sensitive information, as well as processing controls over security, availability, processing integrity, privacy and confidentiality.
• Administrator Function
  • Permissioned blockchain solutions may benefit from a trusted, independent and unbiased third-party to perform the functions of a central access-granting administrator.
  • Verification of identity or a further vetting process to be completed by a participant before they are granted access to a blockchain.
  • This central administrator could validate the enforcement and monitoring of the blockchain's protocols. If this function is performed by a user/node of the blockchain, then an undue advantage could exist and trust among consortium members could be weakened.
  • Create trust for the blockchain as a whole:
    • Legal considerations?
    • How to ensure independence?
    • Can be combined with financial statement audits?
• Arbitration Function
  • Business arrangements can be complex and result in disputes between even the most well-intentioned parties.
  • For a permissioned blockchain, an arbitration function might be needed in the future to settle disputes among the consortium-blockchain participants.
  • Analogous to the executor of an estate trust. Participants on the blockchain may require this type of function to enforce contract terms where the spirit of the smart contract departs from a legal document, contractual agreement or letter.
    • What legal framework would be used to settle disputes?
    • Could this role create unintended threats to independence?
• Auditors Already Have Important Skills
  • Unstructured data
  • Big data, data analytics and data visualizations
  • Efficiency of audits and speed of validation.
  • Computational capabilities: move from sampling to entire population.
• Yet the Profession is Slow to Adapt...
  • Auditor social intelligence: client relationship management, collection of inquiry evidence, and detecting management's intentions to commit financial statement fraud.
  • Business domain still critical.
  • Many audit conclusions are still highly subjective, e.g., "going concern".
  • Other fields (computer science) may start providing audit functions.
• Points of Caution - Auditing Challenges in Blockchain
  • Only financial statement audit
  • Transaction can still be fraudulent, illegal, misclassified, related-parties, side-agreement.
  • Record in BC != authenticity
  • No help with estimates, complex confirmations, valuation of complex instruments.
  • Lack of guidance on risk and audit evidence for cryptoassets.
  • Blockchain environment and reliability.

Corporate Governance is Not New "The directors of companies, being the managers of other people's money rather than their own, cannot well be expected to watch over it with the same anxious vigilance with which (they) watch over their own" - Adam Smith, The Wealth of Nations, 1776.

Financial Scandals and Collapses Enron, Parmalat, Satyam, Olympus Corporation, ...

The Root Cause of Failures

• Consummate greed for money, power or both (self-interest).
• Lack of detection and punishment for unethical actions.
• Lack of individual integrity (knowledge that certain actions are inherently wrong even if they are undetected and left unpunished).
• Lack of consideration for others affected.

Agency Theory

Corporate Governance Definition

• No uniform definition among scholars.
• "A collection of control mechanisms that an organization adopts to prevent potentially self-interested managers from engaging in activities detrimental to the shareholders and stakeholders".

In Other Words... Corporate governance is a set of principles and policies

• By which a company is directed.
• Which influences the rights and relationships among stakeholders.
• And ultimately how a firm is managed.

Some Mechanisms of Corporate Governance

• Board of Directors
• CEO role and compensation
• Regulatory framework of the country
• Audit
• Market for control
• Shareholder activism
• Ethics and tone from the top

Blockchain: Transparency and Trust A "truth machine" - unprecedented levels of trust and transparency.

• Peer-to-peer auditing with no institutional intermediation.
• Transparent and immutable accounting records
  • Manipulating and destroying is virtually impossible.
  • Disclose off-book and hidden transactions.
• Immediate access to accounting data.
• Differentiated access to information on private, permissioned blockchains.

BD as a Ledger for Securities Transactions

• Slow info dissemination on transactions with company's security leads to "empty voting".
• Clearing and settlement as a solution
• Examples of security exchange pilots with blockchain/DLT
  • Depositary Trust and Clearing Corporation (DTCC) finished a PoC of project Ion, an alternative settlement platform that leverages distributed ledger technology.
  • Australian Stock Exchange CHESS - delayed until 2023.
  • Japan Stock Exchange DLT trial - ongoing latest update on pilot in Dec. 2020.
  • Luxemburg Stock Exchange trial for BC-based platform for investment fund industry.

Smart Contracts to Mitigate Conflicts in the Board of Directors

• Shareholders' e-voting
  • Will allow board to focus on strategic matters and less administrative.
  • Selection of board of director replacement members instantaneous.
• Auditing and accounting exceptions as smart contracts.
• Examples:
  • NASDAQ/Estonai e-voting in remote annual general meetings.
  • Central Securities Depositaries (CSD) Consortium for general meeting proxy voting on DLT.

BC in Compensation Schemes

• "Smart contracts could be used to enable employees to be paid on an hourly or daily basis with taxes remitted to a governmental body in real-time".
• "Smart contracts may be used for compensation, and for authentic payments when performance goals are achieved".
• Compensation using BC-based tokens.
• Lack of regulation and still prone to fraud.

BC and Shareholder Activism

• Hostile takeovers may lead to accumulation of shares in a target company which will allow to block certain managerial decisions.
• Visibility, transparency or ownership, immediate market reaction to takeover.
• Abnormal returns due to name change or disclosures related to blockchain.

Governance as a Broader Concept

• Government: the office, authority or function of governing.
• Governing: having control or rule over oneself.
• Governance: the activity of governing. A set of decision and processes made to reflect social expectations through the management or leadership of the government.

Blockchain-Based Governance

• Efficient
• Decentralized
• Consensus Driven

Some Principles of the BC-Based Governance

• State as a Single Point of Failure
• Distributed Architecture and Trust-by-Computation - "Code is Law" - Lessig 1999
• Power of individuals by instant, atomic interactions
• A do-it-yourself public administration
• Borderless, globalized government services
• Authority floating feely and societal maturity

Decentralized Autonomous Organizations (DAO) "... a concept derived from AI. Here, a decentralized network of autonomous agents perform tasks, which can be conceived in the model of a corporation running without any human involvement under the control of a set of business rules. In a DAO, there are smart contracts as agents running on blockchains that execute ranges of prespecified or preapproved tasks based on events and changing conditions" - M. Swan.

The DAO

• Slock.it created The DAO - an investment fund - using the theoretical framework of decentralized autonomous organization.
• The DAO was to be managed by software only.
• The DAO was launched April, 2016 going live with roughly $150 million worth of ETH contained within its contract.
• More democratic investment logic, effective economic decisions, independent of private and public bodies.
• There was an initial two-weeks "debate period" during which the community was supposed to decide how to allocate funds, and which projects were most attractive to the investors.
• Cryptographers and academics warned about flaws in the code.

"The DAO's smart contract code governs the Creation of DAO tokens and supersedes any public statements about The DAO's Creation made by third parties or individuals associated with The DAO, past, present and future".

The DAO Hack

• The DAO was "hacked" on June 17, 2016 by an anonymous "hacker" that used the terms and conditions of the smart contracts in such a way that about 40 to 50 million USD could be diverted from the fund.
• Virtual version of an out-of-control ATM.
• "Using a legal loophole to effect a result that was clearly within the letter of the law, but now within its spirit".
• In response, the majority of the shareholders in the blockchain decided to recapture the funds, thereby actually altering the allegedly immutable code and undermining trust between parties as one of the pillars of the blockchain technology.
• The SEC investigation.

Potential Issues with BC Governance

• Trade-off between network dimension and decentralization.
  • Scalability leads to technical centralization.
  • Secretive operations, collusions, cartels.
  • Private interests.
• Inherent volatility of BC
  • Can be forked or dismissed, becomes obsolete.
  • Invalidates contract and governance services.
  • Reliant on network connectivity.