On The Brink with Castle Island - Noah Buxton and Jeremy Nau (Armanino LLP) on the Proof of Reserve Restoration (EP.212)

Episode Date: May 4, 2021

Noah Buxton and Jeremy Nau from accounting firm Armanino LLP join the show once again to discuss the launch of the Chamber of Digital Commerce's new whitepaper on Proof of Reserves, which they contributed to. In this episode:  What was the purpose of the paper by the Chamber? What problems does it solve? History of PoR and Armanino When did Armanino first get into it? why? What's involved in a PoR? Why include an audit firm? Why exchanges are so reluctant to do PoR How trustless and fraud-proof is the process? what are the pitfalls? What are the prospects for protecting privacy in PoR? Other related engagements that Armanino is undertakin How do you expect the industry to respond to it? Different procedures that PoR refers to The semantic drift of PoR Armanino's PoR Taxonomy Why accounting firms have an important role in PoR

Hello and welcome back to On the Brink with Castle Island. Today is a very special we're releasing on Tuesday, which is a little different for us. The reason being today, the Chamber of Digital Commerce published a white paper called Proof of Reserves, the Practitioner's Guide to an emerging standard for increasing trust and transparency in digital asset platform services. I know that's a mouthful. Basically, it's a white paper on proof of reserves. The chief leadership and the authors behind the paper are Noah Buxton. of Arminino, Patrick South of TRM Labs, Sal Ternolo at KPMG, Amy Kim, at the chamber, and myself.

And a bunch of other people contributed, including my friend Samabasi at Fidelity, Mokiki at KPMG, Bruce Tupper, and Jeremy Now. And so today we have two of the authors of the paper Nobucks in Jeremy Now joining us on the show. You'll probably remember they have joined in the past to talk about their work at their accounting firm, Arminino. I figured that since this white paper was released, and there's a lot to talk about on the proof reserve topic, which continues to evolve, we should have them back on. Now, if you've followed my work, you'd know that I've been working, trying to push the issue of proof reserves in the industry for at least three years now. And so as you listen to the episode,

you'll hear, I am very excited. It's because this has been stagnant for a long time, virtually no one has implemented proof reserve. There's been no traction on this issue. The biggest blip in proof reserve history was in 2014-15 and then really nothing since then. And the purpose of this white paper that we wrote is to try and standardize proof reserve to give custodians and exchanges something to look at when they want to hear about proof reserves and learn about it. And in the past, I've just been able to point them towards sort of old blog posts and things like that. this is really the first ever white paper that is targeted at those custodians and it's designed to make them comfortable with the procedure, which I think is incredibly important. And so I'm really

hopeful and optimistic that we're going to get some traction on it this year. Two of my favorite accountants, Noah and Jeremy, join the show once again to talk about POR. Hopefully you'll be hearing a lot more about it soon. Brought down by bad mortgage investments, Lehman, which has 25,000 employees will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden

people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. B.C. 1494, 2021. What do these things have in common? They are turning points in the world of accounting. 3,000 BC, the Mesopotamians took clay tablets and scrawled, cuneiform representations to describe accounting relationships, and they dried them in the hot, hot sun. Those are primitive blockchains. 1494. Venice. Double entry accounting was invented.

2000. Tuesday, May, whatever the current day is that you're listening to this podcast. It's next Tuesday. Right now we're reporting on Friday. Tuesday, May 2021. Proof Reserve white paper comes out. Chamber of Digital Commerce.

Arminino contributed a lot of the content of the thinking, turning point in the world of accounting, the third revolution of accounting, triple entry bookkeeping, mesopotamian clay tablets, blockchains, immutability, it's all related, it's all the same thing. Here we are. I totally botched that. But anyways, you can tell I'm very excited. This is a special day. We're releasing the first ever sort of platform custodian facing proof reserve rubric the first real initiative to describe proof reserve what is proof reserve it's all in this white paper you guys basically wrote most of it jeremy now noah buxton the indiana jones is of accounting thank you thank you for joining us

this is a special day you guys have done probably the most i would say for proof reserve pushing it forward in the industry uh here you are ready to talk about it once again, second time on the show. Thanks for being here, guys. Thank you, Nick. That was a heck of an intro, man. And now all those folks who like Bitcoin out there know that they're really just fans of the best accounting system the world's ever known. That's really all it is. That's correct. Bitcoin is the fair ledger. It is a truthful ledger. And that's really all it's all about. That's, that's, that's, That's accounting, right?

That's why you dry the clay tablets in the sun. You can't, you know, you congeal the information, and then you can't change it, and it's right there for everyone to see, you know. I can't think of any good Sumerian names right now, but like X, O's Y, you know, 30 bushels of barley or whatever, and it's written there in the cuneiform. That's what Bitcoin is. Anyway, we got this problem. The problem in the industry is we have all the trusted third parties. Bitcoin. What do we do? How do we fix that? How do we resolve that? How do we stop them creating unbacked certificates against the Bitcoin? Proof of freaking reserve. POR, baby. And now the

answers are all there. They're all there. Armino, obviously at the forefront of this, you guys are actually doing the PORs, pretty much the only accounting firm that's like really active and in market there. Anyway, let's talk about it. Tell us about the history of Arminino and How did you even decide to do it? What was the catalyst to get into it? That's a big question. So let's just try and pick it apart a little bit. So thanks for having us. This is Noah Buxton, Harmonino and I got my colleague Jeremy now with me. So give you a quick background. We are a big public accounting firm top 25 in the U.S. and we have a special focus on digital assets. We have a team here that does nothing but this all day, every day. And are lucky

enough to call a number of the household names in the space our clients. We're very proud of. There's more to say than that. But to get to the question, POR, really we got into it as a matter of passion. We sort of identified just as you have that there are real pinch points in these ecosystems and there are real trust gaps, real visibility gaps. And there's been a host of instances of fraud, loss, misappropriation of assets, et cetera. And none of that has been good for Bitcoin. None of it has been good for digital assets generally. It hinders adoption.

It increases regulatory scrutiny in sort of the bad way, right? Not understanding and coming with a negative approach to the asset class. And so that's really it. We're just, we're passionate about this stuff. We wanted to try and solve the problem. We were very inspired by the. by the original concept around proof of reserve for Bitcoin exchanges and wanted to see if we could sort of bring the traditional accounting view methodology, potentially standards to address

this problem. It's interesting. I would say like it's interesting because as Bitcoiners, you know, we all have different skill sets. We come from different kind of industries and we kind of congeal together in this whole Bitcoin ecosystem. So as, you know, no one and I working at an accounting firm, it's what is our way that we can contribute to this ecosystem? So we, lucky for us, we're able to, you know, talk to our firm leadership and they gave us the autonomy to really focus and only serve crypto and digital asset clients.

So, you know, we've obviously been tracking proof of reserves, you know, for I think the first one I've heard of is 2012 or 2013 and been tracking like this would be the perfect avenue. that we can help provide trust and transparency and provide value to the space. So, you know, that really like Noah said, it's driven from that passion and just happy to contribute in any way that we can. Well, I tend to think that this is one of the most important things to do. This is one of the most important unsolved problems. If you're a hardcore Bitcoiner, you care about it because a material fraction of the bitcoins are sitting on those exchanges.

I don't know what the exact number is. I believe that it's somewhere in the sort of 25 to 40% range, frankly. And you can actually get even scarier estimates of intermediate Bitcoin. So those exchanges are basically issuing IOUs against the Bitcoin. That's sort of what your balance is on the Coinbase app when you look at it. It's an IOU and you're creditor of the exchange. And in my view, you deserve a little bit of, transparency and you deserve to have the assurance that those coins are there. Not only that,

if you believe in the Bitcoin supply cap, you believe in that 21 million unit, you want to know that there aren't spurious coins being created, unbacked coins being created by these third parties, such as happened with Gox, for instance. I mean, you could say the Gox event, the insolvency, was an effective inflation of the Bitcoin supply. And so if you care about that supply cap, but you still are a pragmatist, you're realist, you understand and acknowledge that there's going to be these intermediaries, you want to encourage them to undertake these processes

which create genuine trust signals. And that's POR. Now, it's not really, some would say it's, of it's an intractable problem. It's unsolvable because you can't verify everything cryptographically. You know, that's always been the issue with POR, is that, you know, you can't fully solve it with math, basically. That's where the Armininos of the world come in. There's so many things that are... I mean, there's so many things in our financial lives or lives generally that we still have an adequate

a level of trust in, even though it's not cryptographic certainty, you know, to the bite. So I think that, yeah, I think what you said about pragmatism is really important. And that's kind of the approach that we took as well. We looked at the current state of this term, proof of reserves in the marketplace. We kind of, you know, through some of your writings, frankly, right, learned more about that history and kind of realized if POR was a company, I wouldn't invest in it. If POR was a token, I sure as hell wouldn't buy it, definitely not last year, because it was going nowhere. It was going nowhere fast.

It was inconsistent application of whatever this thing is, POR, which I think we should explain a little bit more, a little bit more detail. Inconsistent application of it really led to, also infrequent. So inconsistent and infrequent, right? There's some frequency here that is required to make this whole procedure, this form of proof meaningful to anybody, right? And this is the idea that certainly a Bitcoin exchange on, say, day zero might be able to show, yes, we've got Bitcoin in the wallet, so to speak, to meet every liability that we have. But maybe on the day before that, they were funded by, you know, that that wallet was funded by,

you know, a known party participating or colluding with them. And on day two, the Bitcoin goes back to the first party, right? So there's some temporal nature to this that's important. But maybe can we step back? Can I give kind of a peel the onion back approach on proof of reserves? Yeah, yeah. Okay, so this is the way I thought of it. So what is proof of reserves?

Like, by its very spirit, it's just a way to create trust for market participants in crypto. That's really what it is, is very base layer. More specifically, proof of reserves is truly a process. and it's a process where by an exchange or a custodian of a customer's Bitcoin or other digital assets can demonstrate to those customers that they actually have holdings in the correct amount and particularly in the correct kind like kind to meet those liabilities. And the tacit assumption, I think all of us that hold Bitcoin periodically or other digital assets periodically on centralized exchanges for on and off ramps,

I think we assume that there's a one-to-one custodial relationship. You know, even looking into defy, you can kind of see that that's the case as well, right? These protocols are typically make that promise by code, don't they? You know, going, okay, so then going one layer deeper, this is really about centralized exchanges and how they, and custodians and now even lending providers, how they create liabilities to customers that are really just recorded on centralized databases. And, you know, one of the things that Jeremy and I sort of ideated together is this idea of crypto collateralized claims.

I'm not sure if anyone else has used that terminology, but we definitely, you know, worked with the authorship group at the chamber to expand upon that more. And this idea is really that the centralized exchange, as you said, is creating an IOU, but in this case, it's crypto collateralized or it's crypto-reserved or backed. And we think that's actually an interesting framework. We'll talk about it a little bit more maybe because if you think about these things as crypto-collarized claims, they can apply in many use cases within crypto ecosystems or crypto markets. But really the risk here is recording these liabilities.

So the customers can see them on the app, right? You can see your balance, but you can't, but you don't actually have the assets or the company doesn't have the assets backing up those reserves. and a run on the bank, so to speak, means that all users aren't made whole, right? So going another layer deeper, proof reserves is a process where the exchange can provide adequate or proof of adequate reserves to the customers in a way that has,

we think, two special ingredients. In the recipe, we prefer, there's two special ingredients. At first is the involvement of an independent accountant that can report on the POR. Under recognized attest standards, and that adds the value that we think is required, really, independence in the process, independence from management that's running the exchange

or running the custodian. It also adds peer review, licensing requirements, firm reputation, all of these things that come with preparing an attest report over some subject matter. And also, interestingly, just the ability for the average Joe to, to obtain this report, how many types of attest reports can you receive from Gemini or Binance or WhoOB?

You can't, right? But these are the types of reports that an average user could actually download and read and ingest and grapple with themselves. So we think that's powerful. And then the second ingredient is actually providing these customers the ability to securely and confidentially confirm that in fact their account balances. were included in this proof of reserves assessment. Specifically, their liability number was included in this whole process.

And that's a super powerful check on the exchange. And we think it's orders of magnitude more transparent, more inclusive than audits in sort of traditional finance or traditional custody scenarios. So it's subject to change, but that's one way to peel back the onion on PR. Just a little bit of context on kind of what the risk is in the proof of reserves. Like what is the exchange or the malicious exchange? What are they incentivized to do? Well, they would be incentivized to either overstate their assets or understate their liabilities.

And what Noah mentioned before about a user's ability to actually verify themselves that they were included within the liabilities, included as part of the assessment, that's pretty powerful because the more users that can actually verify that their accounts were included within the proof of reserves, the stronger and stronger, you know, almost herd immunity-like aspect does this, you know, proof of reserves gain. So this certainly benefits from community engagement as well, which is an, you know, an interesting new novel aspect of this approach as compared to other types of audits. it's so interesting because like crypto assets are natively auditable right there I can prove to a third party that I own one and that's unbelievably powerful not only can I prove to a third party that I own it I can verify the integrity of any quantity of Bitcoin whether it's Bitcoin held by me or

literally all the bitcoins in the world obviously not possible with analog commodities like gold, certainly not possible with dollars. With dollars, we basically just have to trust that the Federal Reserve system is doing a good job of sort of, you know, auditing the banks of oversight over those banks. And so it's a very highly centralized, very much top-down situation, very socialized, right? You know, you delegate all of that oversight to, you know, central regulator basically. So this is pretty new, right? I mean, how many other, in what other contexts,

can you as a depositor, as a client of these custodial institutions, actually verify that they have the collateral sitting there? I mean, like it's sort of the equivalent. Like, what's an equivalent? I can't really think of anything. Yeah, I mean, the only thing close, again, would be something seen in the crypto space where you can see, you know, on-chain, like let's say for a lending or trading protocol, liquidity pool protocol, that you can see it on-chain.

But other than that, I mean, I can't really think of a scenario that you get that same type of visibility. I mean, it's kind of like if I'm, you know, holding gold on an allocated basis, you know, with one of those gold money warehouses, I guess they call them, you know, So, Boolean Bank, yeah, where, you know, I don't know, they have like a webcam in the vault. But even then, I mean, it's like a terrible level of auditability. I mean, you don't know that your specific bar is sitting there and that they're not, you know, sort of re-hypothicating it. I mean, you're just trusting the legal context there, the sort of legal contract that you've entered into with that intermediary.

So this is new. This is new and it's underappreciated, totally not taken advantage of. And I think it's a huge failure by the industry, the custodians that are custodying natively auditable assets. And yet, they are just holding in a black box and they're not doing anything to demonstrate their insolvency and the existence of that collateral to the outside world. So they're treating it as if it's something completely unauditable. And yet they're holding this magical commodity, which can generate these trust signals. So to me, that was always one of the great, great paradoxes and great frustrations of the industry, which is the reason we all were here today and we care so much about POR.

Yeah, I mean, I hold them sympathy, right, with the industry because, you know, a lot of these companies are worried about, you know, getting users or keeping the lights on. I was actually just talking to a client the other day, and they had mentioned that they had 600 year-over-year-x year-over-year growth. So like I can't even think about, you know, how much it takes to scale that type of operation. And then, you know, thinking about, okay, this enhanced trust and transparency, of course, it's valuable. But is it at the top of their list of their things to worry about? You know, probably not. So my take, and actually what we're seeing, you know, with the clients that come to us and want to talk about proof of reserves, is that they tend to be on the more mature side of their business operations, right?

Things have settled down a little bit. There's no concern if they're going to be a company in a couple years or not. It's they've really solidified themselves as a market participant and they're looking to take themselves to the next level. Yeah, that's kind of my read as someone that does not talk to those clients, but just outsiders view, you know, it seems that they're competing on different. domains, you know, maybe they're competing on token listings or competing on user acquisition. They're not competing on these credibility domain just yet. Does that explain the full reluctance to do POR? Are there other sort of factors of play there? I would agree.

I think that's a real factor. I think one of the other factors is, well, again, goes back to what is it? What exactly does the exchange do to prove reserves? There's not a robust marketplace of third. party providers where, you know, you can easily research and choose different compliance products that are essentially proof reserves and, you know, have a sort of competitive bidding process. It's, well, you know, it's definitely not that right now. And even if there were, even if there are, and there are a few providers, right, that can do this

process for an exchange, it's still pretty bespoke. And as we've talked about with the guidelines, you know, the POR guidelines from Digital Chamber, that's the whole point. right, is to provide more, more consistency, more definition, more certainty and expectation around what this whole thing is. So, yeah, I think I agree with all of your points, but it's also just been, frankly, not known. I mean, I have to be honest, we've even talked to custody teams at large exchanges that don't really know what a proof of reserves is.

Right. And, you know, addressing those exchanges directly, you guys have a big microphone right now, you know, what's your pitch to them? What are the tradeoffs? You know, what are the privacy considerations? We hear that a lot. You know, presumably they have to like rejigger their sort of custodial arrangement. But, you know, what are the costs of doing a proof of reserve? And, you know, what do you get from it? Yeah, so first off, it's not necessary to sort of rejigger, re-engineer anything. I think generally the procedures that can be done are pretty flexible, pretty adaptable to the exchanges current operation. And, again, are somewhat bespoke in their nature, right? They have to be flexible to meet the needs of the business. Ultimately, the pitch is, it goes to that point that you made, right, is that trust and

transparency is a value in the marketplace. Users are going to start looking for it. And this also can create good hygiene internally. It can create internal control that's beneficial for regulatory reviews as well as financial statement audit. It creates a level of formality in the business that's very valuable. Compliance is always hard to sell, frankly, because nobody likes it. It's costly.

and sometimes the results are hard to measure. But I think in this case, the fact that an exchange can benefit from understanding proof reserves best practices for internal control, internal best practices and hygiene, also getting regulatory comfort potentially and getting market, large counterpart, institutional comfort, and retail customer comfort,

it seems like this is, probably the one of the more valuable compliance products. On the proving liability side, what's the state of the art there? I mean, are we still talking the mercilized method? There's obviously been chatter around zero knowledge proofs, but what do you recommend? What's the current state of affairs there? Want to take on sure?

Yeah, sure. I mean, right now it seems like, the most popular approach is certainly using the Merkel tree approach. And that was what was initially theorized, I think, by Maxwell in the old school chats and papers back in the day. And it seems like there's been some talk about implementing maybe zero knowledge proofs. There are some papers, I think done by some college teams. I think Boise State in particular, they made a paper about zero knowledge proofs in the context of a proof of reserves. but we haven't seen any of those in practice being executed.

But the Merkel trade approach seems to actually, it works and it functions as intended, right? It gives the users their ability to check their own balances and it, you know, you can publish as an auditor you can publish that Merkel route that everyone can see. And it's really visible and frankly more understandable than using a zero knowledge proof scheme, at least as of today. How do you envision this being integrated into exchange workflows? Is it something where there would potentially be even a daily proof of reserve and users would have the ability to verify this?

Or it would happen in the background even? I mean, what do you expect, how do you expect that to develop? I think it's a great question. I didn't know you're going to go there, but I think it's all possible, frankly. So I think we have a little bit of a unique viewpoint on what is possible because we've kind of taken the real-time visibility, real-time transparency thing pretty seriously. As a team, we've built a technology called Trust Explorer, which today provides real-time attest over effectively $5 billion in crypto assets or crypto-collateralized claims between the trust token stable coins and crypto-dolleys. in this world and the coin shares exchange traded products, both physical and XBT provider. And so those are effectively real-time assurance engagements of the first real-time audit

platform in the world. And so from our lens, yeah, real-time is definitely something we're very interested in. There are some technical hurdles to think about, how do you get that much data? When we're talking about user liability lists, it's a significant chunk of data from the exchange. How do you ingest that again in a privacy preserving way, markalyze it and create these proofs on a regular cadence? There's definitely some timing issues there, some technical issues, but theoretically very possible. Yeah. Yeah. So I wanted to talk about the stable coin work, crypto dollar work. That's, I would say adjacent. It's sort of in the

broader family of proof reserves. We had this debate when we were writing the paper, you know, what does the term proof reserves actually refer to, how, what's the tradeoff between the kind of usefulness and the suitability of that definition and language and the precision of that word, of that phrase? I mean, I'm happy to have these linguistic debates all day, frankly. This is your sweet spot. I mean, we, We get into some really, like, I have the same issue with the term, like, begging the question, like, in, you know, in philosophy, that means something really specific. It means, like, engaging in circular reasoning. You know, you'd call an argument question begging if it was circular effectively.

But then, of course, in the colloquial domain, people just say, this begs the question to mean raises the question, right? And so the question is, like, to what extent can you be tyrannical about it enforcing, you know, the original meaning of the term? Or do you just have to float on the tide of, you know, linguistic evolution and let it change? Here's one for you. The proof is in the pudding, right? Which is, I think, an often misused one. But to me, that's the case when it comes to proof reserves. The proof is in the pudding.

The proof is in, look at the state of play today. Look at the results of proof reserves, you know, except for a handful of examples that are much more recent and I think probably the ones we've been involved in. There's been really, again, disparate approaches, inconsistent results, infrequent, so infrequent as to not be meaningful. So if you're on the side of the spectrum

where you say proof reserves has to be Bitcoin only, and it has to be exchanges and it has to be done in a specific way. Well, I don't want to say you're wrong. There's some validity to that, but look at the state of play, right? It hasn't proved out very well. So if you're somewhere in the middle of the spectrum where you believe, hey, these are crypto-collateralized claims that are similar in their qualities to other types of crypto-collateralized claims.

And if we took sort of an umbrella approach and we said, look, can we? we reach the end result here, which is creating consistency for consumers and protection for markets, you know, dissuading fraud, creating auditability, et cetera, could we do all of that if we took a little bit broader approach and define different types of proof reserves? I think we could. And so that's sort of the approach that we landed on, right? So we can be criticized maybe for expanding the scope of proof reserves. But I think at the end of the day, what we get is something that's it's got to be it's more meaningful it's going to be more consistent it's going to be applied more frequently and so it will actually have some meaning we'll do some work in the

marketplace and I think ultimately that's good so so one thing just to close that point is I would definitely encourage folks to this is a long paper it goes from general historical down to technical and what a Merkel tree is and all of that so you don't have to read all of that. But if you do read anything, go in and check out the taxonomy and the structure that we built to explain this. And you've got sort of these, what we explain is really these three types of proof reserves we think are possible. And they're all derived from the type of crypto-collateralized claim. So if you tokenize a dollar, we believe that's a crypto-collateralized claim. If you tokenize or create a liability on an exchange platform and hold a Bitcoin for your customer,

we think that's a crypto collateralized claim. If you issue sort of what would normally be seen as a securities instrument, an equity sort of or a tradable note, and you back it by Bitcoin, we think that's a crypto collateralized claim. And there should be a similar level of trust and reserve transparency around all of those instruments. So what we're saying, that the exchange case is really a proof of platform reserves. The stable coin case is proof of asset reserves and the security instruments or, you know, exchange traded products category is really more of a proof of instrument reserves. And altogether, you could refer to them as proof reserves.

We think it's a fair approach and it's broad enough to capture all of the new stuff that's happening. Jeremy, someone to add. Yeah, I'd say it's like, because we were going through this thought process, right? Thought process as a group. It's like, all right, where is the fence? Like, where do you draw the line of what can be, you know, included as a proof of reservable scenario? And I'm thinking this through.

I'm like, I can't figure out where that line is. So it's almost like you kind of have to include everything and then denote sub-nitches or sub-categories. underneath. And there's also this, like you were talking about, Nick, it's like the term is also taking on a meaning of itself within the industry. It's like kind of the cat's out of the bag, Pandora's out of the box, you know. It's no matter what we do, people are going to use this terminology.

And if we actually try to kind of enforce this term, it's actually going to make, or like in a very narrow context, it'll actually make the work that we've done less valuable because people won't even use it. So it's okay. Well, let's think about like a methodology and a mental model that can actually can be applied to the industry right now and hopefully encompass the new things that are created. I mean, I was just thinking today,

like I was messing around with like multi-chain.x, Y, Z and just thinking like, oh, my gosh, when Proof Reserves was initially created seven years ago, like who could have foresaw this, right? But this seems like a scenario where, you know, proving that that pegged-in asset is actually backed by something on the initial chain, that would be something that's valuable to the community. So something like this broad taxonomy could help include some of those kind of edge cases

that would probably only expand as, you know, crypto and digital assets evolves. Yeah, that's well said. And I think I may have initially resisted the taxonomic change, but I think the compromise that was found makes sense. This is going to sound hopelessly satiric to our listeners I'm now realizing, but that's okay. You know, you define proof of reserve as a family, and then the thing that a lot of people like us know proof reserve as is we reduce that to proof of platform reserves, and we say that's one part of the family and those other procedures. And just one etymological point that occurred to me while you were saying this, you know, the word proof within proof of reserve is actually a fantastic case study in the development of

language, right? Because proof comes from probare, the Latin word, right? And in old English, when it migrated into English, it initially meant, you guys aren't going to believe this, to prove either the truth or falsity of something, right? And so we think of proof is to prove something true, right? Prove it, right? But, but in old English, prove, you could prove something false, right? And it was symmetrical in that way. But today, you know, the meaning maliated and now it means to prove something true. So that word prove within proof reserve has also been through this this ideological journey. And so it's only fair. It's only fair that proof reserve be allowed to mutate from a semantic standpoint.

I promise I didn't prep that ahead of time. That literally just occurred to me as you were speaking. But yes, in conclusion, I've made my peace with the fact that proof reserve is a living term, and its meaning is changing over time. I love it. I'm just imagining, I'm imagining you going down the dead. definitional rabbit hole of proof. I wonder how long, how far that rabbit hole took you, but it looks like it took you pretty far, but very interesting. Thank you for the

yes. I had a very misspent youth. I spent it reading thesaurus and dictionaries. And it wasn't really useful for much, but it's fun for these, for the precisely these debates. It's useful. And I think the new framing is good, makes sense, and rewrote it in a fancy white paper thus making it true. You know, everybody knows that's how it works. Absolutely. Next time you're on CNBC, you can hold up the paper and wave it and it will make it even more true.

I'll have to print it out. I don't have a printer, so I have no way of actually acquiring, you know, physical paper. I don't know how to do that. So speaking of cross-chain comparisons, I completely agree with your view, Jeremy, that we're likely to see that balloon into a huge. element. I don't know if that necessarily strictly involves audit firms. Maybe it disintermediates you, because now we're just comparing, you know, one on-chain balance to a different on-chain balance.

However, you guys are actually already doing this. So tell me a little bit about that. The injection of, you know, sort of audit data into the blockchain itself. Yes. I think proof of reserves at some point has an on-chain or an Oracle component. to it in certain use cases for sure. And yeah, you're right. It takes some explaining, I think, to say what we've done today. But I think we're one of the first to expose off-chain data through off-chain data that's not related to crypto prices to the through the chain link network and to a smart

contract. And we think that those use cases will grow exponentially over time as external sources of data are needed by smart contracts. And so the specific use case that we provided was the collateral data or the number of dollars held in third party custodians, bank accounts, trust companies that collateralize the true USD trust asset, the stable point asset. And we provided that through chain link and can now be used by protocols. So I think the real application for, you know, early on is for risk measures and sort of circuit

breakers. And I think if you think about proof reserves in like wrapped token cases, there's another interesting sort of hybrid where you've got sort of a centralized party, a custodian holding one crypto asset. And he can say, hey, it's on chain, right? Look at wrapped Bitcoin. You know, they publish addresses and they publish signatures on wallets. And so, yeah, theoretically, an individual can go check that information. But it's not programmatically provided on on chain today for again sort of smart contracts to build ingest it and build operations around it so i think that that's an interesting use case that we would love to tackle very tangible and i think there's many more that i'm not smart enough to think of today well to get to your point too nick about

like it's almost like cannibalizing our own business or own profession a little bit and i mean that's going to happen whether we like it or not. I think because like let's just be frank with a little bit of our job, sometimes it's manual in nature. And a lot of the things can be automated. And especially as these things become natively on chain, you know, blockchains are, you know, more secure, more immutable. The data is more available. You know, they're better than accountants at a lot of these things that we have traditionally done in Excel or, you know, on QuickBooks or something. So I mean, as that's what we think of as a firm. It's like, okay, what is this future of accounting? going to look like because blockchains inherently just are simply accounting systems.

So what is this future going to look like and how are we going to play in that? So that's why you see us on the forefront of these things that other accounting firms aren't necessarily doing like providing data on chain or doing proof of reserves or real-time audit because we need to make sure that we solidify ourselves in this new technical future before you know, before Silicon Valley or Miami now disintermediate us as our whole profession. Shout on Miami. That's right. Arminino, the vanguard of the third revolution in accounting, it's happening as we speak. So now that everything is different with the publication of the chamber's white paper on proof

reserve, you know, like the physical world looks much the same as it did yesterday, but we all know that everything has changed now. That's right. because custodians have no excuse now. They have to implement proof reserves because we explained it to them with the white paper, you know, thus making it very clear what their obligations are and how to do it. Now that we are in, you know, the beast, the AD, the year of our Lord won of proof reserves. You know, we've entered, you know, the Neolithic revolution of proof of reserves.

What is going to happen here? I mean, what do you expect the uptake to be like? You know, how optimistic or pessimistic are you about some of these trust holes actually implementing a procedure like this? I'm very optimistic. I mean, I think what you said is obviously true, but also in just. in some ways. So I do want to just acknowledge that there are, there were custodians, right, involved in writing this guidance. There were, you know, some of the top law firms, some of the largest accounting firms in the world participated as well as other mid-market accounting firms,

other practitioners. So, I mean, there's been so many minds that came to the table on this. I think, you know, just to just acknowledge that in its seriousness. But the future, I think is is bright here. I think that frankly, it'll be a slightly slower uptake than we would like, because there's still some bespoke nature to it. And I think there's still a lot of learning to do, even for, well, for management all the way down through technical teams and custody teams. So it'll be a slightly slow uptake. But I think this becomes a norm. Once regulators realize what's possible, they start to bake it into regulation. Wyoming, of course, is a great example of that. actually being very, very specific about proof reserves in the Speedy Bank requirements.

And I think, you know, money transmission licenses across states, this is ultimately what they want for crypto custodians and exchanges. They, you know, this is really what they're driving at in many cases, but don't have the tools. And so, yeah, I think that's what we'll see next is a regulatory enlightenment and then further adoption. And one point I would add is that, you know, an often overlooked kind of beneficiary of a proof of reserves is actually other industry or ecosystem participants. Because as these companies in crypto, they become more bank-like. They all of a sudden now have more counterparty risk, like let's say notes or loan agreements

with other parties in this space. And if, let's say, their counterparty got approved for reserves, all of the sudden, now this person relying on that note receivable has given. more assurances about the solvency or the collateral that is backing that note. So, you know, as a community, it actually helps everyone because everyone is almost relying on each other with these different instruments that are being created. I'm almost building this herd immunity of trust within each other. So I think it's coming.

We're actually, you know, on the ground floor talking to a lot of these folks and there's certainly a lot of interest. And I think the future is bright, but I often think it's overlooked about how, much benefit this actually could provide to the community. Jeremy, it was a very astute point. Look at micro strategy and all the diligence that had to go in to that custodian. Anybody institutional, right, they need these levels of assurance. You know, so I think that's a great point. That's very well said. And I think the regulatory component is also underappreciated.

If I'm a regulator, I probably love that the instruments, the assets, these custodians, some might call them shadow banks, frankly, because they're not regulated as banks for the most part. The instruments they're holding are provable, auditable. I'm not aware of that as a regulator just yet, except in some special cases like Wyoming. To the extent they become aware of this reality, I expect that they will start to ask for it. And prove reserve is such a gesture of good faith from the crypto industry. And it's a, in my view, profound self-regulatory measure. And I am a believer in the power of self-regulation over owner's top-down regulation.

We've already seen reprisals, attempts of reprisals with, you know, things like the various stablecoin acts, which would require, you know, stablecoin issuers to get full bank charters regulate them like that. I think the more we can show good faith and show transparency, demonstrate that consumer protection desire to regulators, the less likely it is that we get adverse regulatory outcomes. And that's the case I've been trying to make. I know you guys have a very important call coming up. Hopefully it's with, you know, an exchange to convince them to do POR, so I won't keep you from it. Any closing statement. gentlemen.

Thanks for your thought leadership on this. You know, you hope to inspire our early thoughts around this with your research. And I think we're at a pretty incredible place today, actually, the fact that we got the leading industry group in crypto, as well as the, again, top players, top accounting firms, knowledgeable people in the space to build a paper that is this detailed that actually goes into real guidance, real technical details on this proof of reserve. is a great place to be. So thanks. Yeah, thanks. Nick, for your time. Much appreciated.

No, you were mentioning all the players that were involved in the creation of the paper. You forgot the one and only Nick Carter. So Nick, of course. Okay. With the authorship phase right on the first page. I did say great minds. I did say great minds. I mean, I didn't really actually contribute that much in terms of the content. That was the actual accountants that actually understand this stuff.

As I said, I'm the cheerleader. But I'm very grateful that we have. have real practitioners like yourselves that are willing to actually push this forward and put these ideas into action because it's one thing to write about them. It's another thing to actually implement them. So thank you. Thank you both. Thank you to Arminino for pushing this forward, for betting on this technology, for believing in this, and frankly for setting an example to the rest of the industry. I'm really, really excited to follow your guys' work, see what you produce here, and hopefully we'll see many more of these exchanges and custodians jumping on the proof reserves train.

Thanks again for your time today, guys. Really appreciate it. Thanks, Nick. See you in Miami, Nick.