EUROPEAN COURT OF AUDITORS: Blockchain for European Union audit
Blockchain technology is relevant for audit. In the near or more distant future, auditors will have to deal with smart contracts executing automatically, with central bank digital currencies (CBDC), with cryptocurrencies and with other digital assets, all of which are based on distributed ledger technologies (DLT). Blockchain-based applications will need to be audited, most probably first by IT auditors. This article is not about auditing blockchain in the future but about its potential use for auditing already now.
The European Court of Auditors and blockchain
The internal reflection in the ECA started already in 2016. Between March and June 2018, the ECA ran on a pilot project for using blockchain to record, verify, and trace documents and any other digitalised audit-related information in a dedicated online environment. The “ECA Registry” has been available since then to showcase practical ways of introducing control by design to audit through a globally auditable, immutable ”notarisation” system, thus enabling all involved stakeholders to maintain fully digital audit trails.
In April 2018, the EU Member States and the Commission established the European Blockchain Partnership (EBP) with the aim of aligning policies and regulatory approaches to blockchain and developing a trusted European Blockchain Services Infrastructure (EBSI) able to deliver EU-wide cross-border public services that would comply with the highest standards of privacy, cybersecurity, interoperability and energy efficiency.
The ECA proposed the “ECA registry” concept for notarisation as a “use case” to EBP in summer 2018 and leads its development within EBSI ever since. With the EBSI notarisation solution it should be possible to notarise a document together with its metadata[1]verify the integrity and authenticity of a document and link together different registrations into a logical chain and give a trusted third party (such as an auditor) explicit consent to notarise on their behalf in a GDPR compliant way. All the key functionalities will be available through a user interface and through an Application Programming Interface (API).
The EBSI provides a trusted and environment friendly blockchain infrastructure operated by the EU Member States and the European Commission that can enable fully digital processes and facilitate the move to the ‘Once-only’ principle.
EBSI notarisation and audit of EU funding
The following diagram illustrates one possible scenario of using EBSI notarisation in the context of the EU funds management.
This is a simplified view as different and more complex scenarios are possible, depending on the storage choice, access rights, confidentiality levels and use of the native interface.
ECA and the European Union SAIs
In November 2019, the ECA setup the Blockchain for Audit (B4A) network as a forum where experts from the EU SAIs and the ECA to follow the evolution and the implications of blockchain on public audit. The B4A network aims to facilitate cooperation through information sharing and coordinated participation in projects at the European level, such as EBSI, or proposed by network members. The B4A network is part of the TINA initiative also launched in November 2019 and aimed at enhancing the cooperation of ECA and EU SAI practitioners on Technology and Innovation for Audit.
State of play and next steps
The first version of EBSI v1 is available since February 2020 and EU Member States could start testing the first very basic capabilities for all use cases. The next priority is to identify suitable pilot projects, involving pioneer Member States. Especially for notarisation, pilots can already use the advanced functionalities of the “ECA registry” now connected to EBSI. These will gradually be moved into the EBSI itself in the form of an open source “sample application” that should be included in the second version of EBSI, the first release of which (EBSI v2.0) should be available in spring 2021.
If you are interested in starting a pilot with ECA registry in the EBSI, learning more about EBSI notarisation or joining the B4A, please contact the authors of this article (email to <name>.<surname>@eca.europa.eu): Principal Manager Spyridon Pilos, Auditor Mirko Iaconisi
See also the articles related to EBSI and TINA on pages 58 and 108 of the ECA Journal 01/20
[1] The notarisation is linked to the identity of the initiator since he/she has to digitally sign the blockchain transaction.
