Cryptocurrency remains a hot topic as the industry continues to evolve and grapple with concerns about regulation, transparency and tax issues. Investors and the public alike are becoming more informed about crypto, from its myriad use cases to its potential to upend our financial systems.
Noah Buxton, who heads Armanino’s Blockchain & Digital Assets practice, has become a leader in the drive to build industry standards to ensure transparency and build trust.
Could Crypto Become a Monetary Standard?
With the heat turned up and digital assets continuing to make headlines, governments and central banks are entering the crypto race. Some countries have banned crypto entirely, while others are issuing their own forms of digital currency. El Salvador recently became the first country to make bitcoin a form of legal tender, and other nations are exploring a future that embraces multiple forms of currency or crypto as the monetary standard.
While the world considers whether crypto will be a new base layer for monetary systems, a payment utility, a digital gold or all of the above, companies will inevitably need to adapt to a transformational overhaul of the financial system as we know it. How will they accept or pay in crypto? What are the benefits of bitcoin as a treasury asset? Could tokenization future-proof the business model? What will crypto mean for financial accounting and tax liability?
The jury is still deliberating whether bitcoin will become a new base monetary layer embraced by sovereign states. What is clear is the industry still has building to do. One area of multibillion-dollar import? The centralization of digital asset custody on crypto exchange and lending platforms, which has increased access but decreased the transparency, auditability and decentralization inherent in public chain digital assets.
Noah is leading his team on the charge to ensure transparency and build trust in crypto. Their simple goal: Build an infrastructure of trust better than what’s available in traditional markets today so the power of digital assets can be fully realized.
An Audit Engagement Spurs a Movement Toward Regulatory Guidance and Transparency
As Armanino began to work with clients involved in crypto, Noah became increasingly involved with industry peers through the Chamber of Digital Commerce, the leading trade association for the digital asset and blockchain industry. Armanino’s early 2020 specialized audit engagement for a major crypto exchange garnered the attention of several members of the Chamber and spurred a new effort to bring major change to the industry.
The proof of reserves concept Armanino used in this audit engagement wasn’t new, but the additional steps we included in the process were. Proof of reserves helps bridge a serious gap in consumer and regulatory transparency, allowing the public to make sure crypto exchanges, custodians and lending platforms hold and adequately back customers’ digital assets.
Originally, proof of reserves theory posited the use of cryptographic proofs to allow customers to check whether a crypto exchange held enough assets to back its customer liabilities. Armanino’s approach took the concept of openness and trust further. We introduced attestation standards and provided independent CPA reporting, and also developed a user-friendly, Armanino-hosted validation tool that gives customers a new way to participate in holding exchanges accountable.
Through this enhanced framework and taxonomy, Armanino demonstrated the potential to simplify proof of reserves and develop meaningful best practices that will lead to the kind of trust and transparency we take for granted in our current financial and banking system.
With support from the Chamber’s policy and advocacy arm, Noah and other industry leaders officially kicked off the Chamber’s Proof of Reserves working group. The working group went a step further and developed a framework and taxonomy for understanding proof of reserves concepts for asset-backed token issuers, including those who issue stablecoins (tokenized dollars) or tokenized commodities such as gold. They also explained how proof of reserves concepts can be extended to issuers of crypto-backed securities, such as issuers of exchange-traded notes backed by cryptocurrency.
Noah then wrote an outline on proof of reserves concepts that eventually became a paper, “Proof of Reserves: The Practitioner’s Guide to an Emerging Standard for Increasing Trust and Transparency in Digital Asset Platform Services.”
The paper immediately made waves in both the accounting and crypto industries. The Financial Accounting Standards Board (FASB), which establishes accounting principles and standards, may use it to help shape federal regulations in the digital assets space. Financial regulatory bodies are also taking note, and Noah’s leadership through the Chamber in this area has regulators and lawmakers interested in licensing and other compliance requirements.
Proof of Reserves Leads to a More Transparent, Trustworthy Future for Crypto
For many firms, crypto remains an unknown and raises numerous questions around tax situations and business operations. Noah and his team’s work on proof of reserves is leading to answers for these questions. The standards he’s advocating for will shape how businesses use digital asset platform services and how institutional users assess counterparty risk.
Proof of reserves standards also clarify accounting methodologies and cement best practices, offering companies a roadmap for crypto as part of their operations. New standards will help lead the way to the future of finance and capital markets. Bitcoin is paving a path toward asset digitization — something our team sees happening now and anticipates will continue to be supported by public blockchain networks.
While many of the big players are currently in the finance world, the revolution toward digital assets is becoming mainstream, and an emerging regulatory environment could transform business in general.
As transferring value digitally becomes the future of money itself, the shift holds the potential to disrupt or vastly improve many different industries and raises complicated questions for businesses. Beyond the issue of establishing consumer trust, companies must understand the corporate and international tax implications of digital assets and ensure they comply with regulatory guidance.
Proof of reserves standards can bring mechanisms of counterparty trust that eclipse those available in traditional banking and finance today. The infrastructure of trust and regulatory clarity will open the market for more players to get involved beyond speculative investment in crypto.
A Future of Trust and Openness Across All Industries
Proof of reserves standards help pave the way for digital assets to become more widely used and adapted. With guardrails and guidance for the crypto industry, we may finally see the realization of digital assets built on public blockchains, with decentralization and transparency for all. Standards would allow individuals to participate in validation, democratizing finance and improving consumer trust in digital assets and the businesses participating in the crypto ecosystem.
The Chamber’s working group, with Noah and key collaborators at the helm, continues to generate dialogue and listen to feedback to guide the digital assets industry to a more transparent, more properly regulated future.