Jeremy Nau from LedgerLens on Audit & Attestation Tools for Digital Assets

[00:00:00] Umar: Welcome to the Accountant Quits, brought to you by Harris and Trotter Digital Assets, a UK based firm specializing  in accounting, tax, audit, and advisory services for digital assets serving clients worldwide. 

[00:00:14] Umar: With a clientele of close to 600 crypto native projects, Harris and Trotter is now offering a scholarship and job guarantee to students of the Crypto Accounting Academy and you can learn more at theaccountandquits.com/scholarships, or keep listening to this episode where I share who is eligible and how to apply. 

[00:00:33] Umar: And the Web3 Finance Club, a community of Web3 CFOs sharing best practices on Web3 operations. 

[00:00:42] Umar: On this podcast, we discuss how blockchain will impact the accounting profession and how accountants should prepare themselves for the future of work.

[00:00:51] Umar: My name is Umar, your host, and even if some might refer to me as the accountant gone rogue, my job is to provide you with the blockchain knowledge you need that will be relevant for the accounting industry as a whole.

[00:01:04] Umar: Welcome to episode 72. As the world moves on chain, so too will the need for auditors. With auditors naturally evolving their practices from periodic paper reporting to digitally native, API enabled, Oracle ready, and real time reporting, Blockchain offers the potential for auditors to be able to provide absolute assurance and not reasonable assurance anymore.

[00:01:30] Umar: But how do auditors bridge the gap and how can the auditing industry as a whole remove the technical barriers to entry? 

[00:01:37] Umar: Large auditing firms have the resources to host their own blockchain nodes and build their own audit specific queries. But the remaining smaller firms are left scouring for tools or explorers on the internet to extract blockchain information.

[00:01:52] Umar: Enter LedgerLens, providing a suite of crypto audit and attestation tools, enabling auditors to complete financial statement audits with digital assets on the balance sheet. Additionally, LedgerLens provides proof of reserve specific tooling, enabling you to take on new engagements for stable coins, exchanges, and real world assets.

[00:02:15] Umar: LedgerLens was made for auditors by auditors. And today I have the pleasure to have its Founder, Jeremy Nau on how auditing firms can use their tool to offer auditing and attestation services. 

[00:02:28] Umar: In this episode, you will learn how auditors prove ownership of digital assets, LedgerLens and its different auditing and attestation features, providing proof of reserves services, the role of auditors in tokenizing real world assets, how to prepare your accounting and auditing firm to offer digital asset services and much more.

[00:02:51] Umar: Jeremy, welcome and thanks for making the time to be here.

[00:02:55] Jeremy Nau: Thanks Umar, appreciate the opportunity.

[00:02:58] Umar: I'd like to start our conversation today with, a little bit of your background and how you've founded The Network Firm. So for the listeners, The Network Firm is the company who has developed LedgerLens. Which I introduced earlier, and it's the tool we'll be diving in today, but before I want to speak a little bit about The Network Firm and how it rebranded from Armanino, which was one of the two external auditors of FTX alongside Prager Metis.

[00:03:27] Umar: I want to ask you what learnings did the FTX saga leave you with?

[00:03:30] Jeremy Nau: Yeah, thanks Umar for the question. Because I think there have been a lot of misunderstandings with The Network Firm, Armanino, FTX. So I appreciate the opportunity to help clear some of those up on the pod. So first off, 

[00:03:46] Jeremy Nau: The Network Firm isn't technically a spin off or a rebrand of Armanino. There's no common ownership. or financial interest in The Network Firm from Armanino. It's a completely new entity with independent ownership, independent operations, independent licensing, and the like. Now, of course, The Network Firm and Armanino, they've been in articles together, so what actually is the relationship? Well, I'll provide a little bit of context there.

[00:04:12] Jeremy Nau: So going back about seven years now Armanino at its height had built a digital asset practice that was one of the biggest in the country, right? How I thought about it is that it was kind of 

[00:04:24] Jeremy Nau: Friedman on the East coast. And there was the equivalent, which was Armanino on the West coast, really leading in the digital assets space. We had team members at the firm across service lines and crypto pods or crypto experts within each service line. So think about crypto audit pod, crypto tax pod. And then we had a digital asset practice that acted similar to a center of excellence, like some of these firms call their digital asset innovation hub. Where we focused on supporting initiatives across the firm, but then also on new and novel innovation.

[00:04:58] Jeremy Nau: So that's where we actually did the first ever Merkle Tree - Proof of Reserves. We brought the first ever off chain data on chain by an accounting firm via Chainlink and a few other firsts that we're very proud of. So at its peak, Armanino had about 75 team members focused on digital assets across the firm, doing over $25 million a year in engagements. We were an industry leader and had clients like: Coinbase, Kraken, CoinShares, Public Miners and more. Of course, a lot of that changed in November, 2022. So Armanino was the auditor for FTX US and Ledger Prime, which was the CFTC regulated entity. Armanino was not the auditor and or didn't provide any services to FTX International, Alameda Research, 

[00:05:48] Jeremy Nau: or any of those other hundred plus entities that they had throughout the world. And from my perspective, and from what I know, I wasn't on the audit. Armanino, like all other audits, followed standards and completed the audit in accordance with those standards that they were required to adhere to. And looking back, like throughout the bankruptcy, process, FTX and Ledger Prime don't seem to be the core of the problem. And it looks like there's hopefully going to be a good outcome for the customers of those platforms. But from my personal experience, I don't think Armanino deserved to be the scapegoat that they were in the media. To be frank. Armanino was innovative, but still a traditional accounting firm.

[00:06:29] Jeremy Nau: And they did not realize what crypto Twitter and what the media is like today. And they thought, okay, maybe this is going to be some accounting drama that blows over like most accounting drama does because it's boring. But FTX was a different animal, right? None of the nuance that I mentioned above about who they actually audited mattered. During the whirlwind, the genie was out of the bottle. And since Armanino was a huge player in the digital asset space, right, bigger than any of the other auditors for any of the other entities, I think they became an easy target. And once the barrage started, it didn't stop. So ultimately, Armanino had to decide and had to make a tough decision.

[00:07:05] Jeremy Nau: And they ultimately decided to halt the digital asset practice and serving digital asset clients throughout the firm. So many of us at the firm had a decision to make. We could either go back to our day jobs, go back to doing internal controls, or ERP implementations or audits, or we could take a risk and follow our passion, and that's what 12 of us ended up doing. We all left the firm. It was very amicable. They were very nice during the process. And then in March 2023, we officially put the shingle on our door. The Network Firm LLP was open for business. We got registered as a licensed CPA firm domiciled in Florida. And we started taking on our first clients and have been lucky to have flagship clients at our firm from day one. So it's been quite the whirlwind since then. More recently, we've launched LedgerLens to enable other firms to get in the digital asset space because a huge problem today is that there's simply not enough service providers to serve this space. And we think blockchains inherently are an accounting innovation.

[00:08:09] Jeremy Nau: So we, as a profession, should be leaders of this path. And we want to enable other firms to have the tooling that they need to be able to serve the space and innovate too.

[00:08:18] Umar: Thanks for sharing, Jeremy. 

[00:08:20] Umar: We'll speak a little bit more about The Network Firm later. I want to start our conversation today with how generally speaking auditors would have to prove ownership of digital assets. So our listeners would be familiar with the episode with 

[00:08:38] Umar: Harris & Trotter on episode 53. Where we spoke about their signature matching tool that basically is able to cryptographically prove that an individual has control over the private keys of the wallet without the need to spend gas fees. Or if there are auditors listening, that would be obtaining assurance on the ownership assertion. Now, all auditors, like I mentioned in the intro, they don't have this in-house, specialized knowledge, right?

[00:09:03] Umar: To develop these tools to audit crypto transactions, and that's why I'm so happy to be speaking with you today, Jeremy. So before we go through LedgerLens that you've developed, can you explain to our listeners. Maybe the different challenges that auditors would have to independently prove that the client has ownership of their private keys.

[00:09:23] Jeremy Nau: Yeah, certainly. It's a great question, Umar. The way I approach this is that, okay, what is the difference between digital assets and then normal bank balances that you might see on a balance sheet? Well, there isn't a bank, right, where you can get a bank statement or send a confirmation or review access to, right? It's instead of a bank that holds your assets, crypto is actually a bare instrument. So you hold the assets. So there's no other party that you can inquire with and say: "Hey, do they own and control these assets?" However, there are some unique inherent characteristics of blockchains. You can make an equivalent, or you can use an analogy to help describe how proving ownership is applicable in a digital asset context. So in digital assets all holders of assets have a public address or a public key. And you can think about that as the equivalent of your bank account number, where that bank account number gives you access to hold digital assets, and usually like your routing number and some information, it's okay to be public, people can't steal your information with that number. Or with that account number. However, there's another important piece of information and that's your password or your 2FA to access your account and be able to initiate transfers, initiate movements of funds at a bank. Well, the equivalent to that in the digital asset context is a private key, right?

[00:10:52] Jeremy Nau: It's essentially the password to the balances held in your account or held at your public address. Now. That private key. What is that private key? It's not, password one, two, three, like you'll set for your bank account. It's actually a string. It's between 132 and 256 bits, that's zeros and ones, that make up your private key, right?

[00:11:17] Jeremy Nau: And people they format those zeros and ones in different formats The mnemonic seed phrase that you'll see like when you create a MetaMask account to make those easier to remember, right? But at their core, what is a private key? A private key is a number. 

[00:11:31] Jeremy Nau: The reason why proving ownership of digital assets is hard is because you're basically trying to prove ownership that they, own a number or have access to a number.

[00:11:41] Jeremy Nau: Not like the number, like seven, like a one digit number, right? But a big number, right? So any challenges that you're gonna have are gonna be stemming from, hey, like, how do I prove that they actually have this number? And the unique part is that they can't show you this number because if they show you the number. Then you can take all their funds or say if someone else, if they leak the number in any way, shape, or form, right, they never want to show them online, that someone else can steal all their money. There's this unique challenge of, okay, I have to prove you have this number without actually showing me this number. There's a couple different solutions, right, to doing that. We don't want to see the number, right? But we want to prove that you can demonstrate control over that number. How this actually happens in Bitcoin, for example, is that let's say I wanted to send you some funds. Alright, I have one Bitcoin, I'm doing well. I've got one Bitcoin at my address. I want to send it to you though, so I'll construct a transaction, right? This happens typically behind the scenes in your wallet software But it'll construct the transaction with the UTXOs, the input address, the output address And then what will happen is that when you say send it'll ask you to send or sign the transaction with your private key and what that does is that authorizes that transaction to actually move those funds from your address. With that UTXO to an address controlled by you. So by using the private key to sign a transaction, by initiating a transaction, we can prove that you can control those funds at that source address. However, you can also use a similar strategy. Instead of signing a transaction with the private key, you can sign a message. With the private key, so how it works in practice is that the auditor can send the client or whoever's trying to prove ownership, say, hey, sign this message. It'll say TNF 9224, right? And they'll sign the message. They'll give me their public address that they sign with the associated private key, the message, and it's called the signature digest or the output. And then we can use cryptography to verify that they actually signed that message with the associated private key without actually showing us the private key. We use cryptography and to do this, there's no gas fees, like you mentioned, it doesn't need to be published to the blockchain. Nothing needs to be connected to the internet besides the actual signature output sent to us. And it's much more scalable because if you wanted to prove ownership of hundreds, thousands, or millions of addresses, you can't do that with, we call it, sent to self transactions where you're publishing on chain. And you can verify millions of addresses. It's just a simple hash algorithm, essentially, where you can verify hundreds of thousands per second if you get the outputs. So this is the most scalable and typically the best way that we prove ownership during the course of financial statement audits and proof of reserves, for that matter.

[00:14:29] Umar: And regarding the setup that auditors would typically need to retrieve information from the blockchain as in having to set up in house nodes and let's say an auditor right now is listening and they've not serviced digital assets yet. And let's say there's a client who has assets on Bitcoin, Ethereum, Solana, a few more different blockchains.

[00:14:52] Umar: Because they need to perform those checks independently. So what's the required setup there?

[00:14:58] Jeremy Nau: Yeah, so we think about this in the context of assertions, right? We have LedgerLens, right, where you can verify those signatures, right, to prove ownership. But, of course, that's just one of the assertions that you're going to encounter, right? Prove ownership? Great. But how do I get the balance as of six months ago or nine months ago? And usually, there's a lot of explorers out there and there's a lot of great tools, but, you don't know who the company is behind it. They don't have a SOC report. They often times are great at showing you balances today, but how do you get them, six or nine months in the past? And then you might also have a hundred or a thousand addresses. How are you going to just type in one by one and get the balances for each of those? Right, so with LedgerLens we need, we have auditor specific tooling purpose built for the auditors so that it can perform existence of the balances at scale for all those addresses that they just proved ownership of, right? And the reason why is because these are the challenges that we encountered during our audits. So, okay, we need to figure out actually how to do this ourselves. So we're really scratching our own itch from our tooling perspective.

[00:16:06] Jeremy Nau: Now, of course, there's other assertions like completeness, right? And that kind of depends on completeness of what if you're looking at completeness of transaction history, right?

[00:16:15] Jeremy Nau: Per address, right? You can plug in the address and then we query the blockchain for all the associated transactions related to that address. So you can verify completeness that way. And also there's some tips and tricks if you use XPUBs, right? You need to get a holistic list of all the addresses, right?

[00:16:31] Jeremy Nau: As long as we have the XPUBs, right? We can see all the child addresses derived from a single XPUB, providing completeness in that sense, too. So there's, we call it the app for all assertions, right? Related to digital assets. That's really our focus, right? It's really to hit those financial statement audit assertions, along with performing other engagement types.

[00:16:49] Umar: So you've touched on the challenges. I think it's a good time to speak a little bit more about LedgerLens. 

[00:16:55] Umar: You've developed LedgerLens, which is an off the shelf tool, which any auditors can basically now use to validate completeness, accuracy, existence, and ownership of digital assets.

[00:17:05] Umar: So far you support around 15 chains like Bitcoin, Ethereum, Solana. Polkadot, Cardano and a few more EVM based chains. Can you walk the listeners through this tool and how it's different features validate these assertions that we just mentioned, especially the completeness and ownership assertion?

[00:17:25] Jeremy Nau: Like I mentioned, we're scratch our own itch. So we've built the tools purpose built for that. Right? So, we have specific tooling for auditors. The key ones that you don't get on normal explorers are point in time balances and doing things at scale. That's pretty unique and most of the Explorers out there I don't think really have that. Right? Because they have different use cases for the most part. But, what's really novel about this is that for LedgerLens, there's the out of the box tooling, which is really helpful if you're, already servicing digital asset clients and you just need to scale and you need the tools to be able to get through your current engagements. That's only one type of firm, right? There's other firms that they are trying to get in the space, but they just don't know where to get started or how to start or, what are the steps to actually building a digital asset practice? So that's typically the other type of firm that we see. They come to us and say, Hey I want to get in the space.

[00:18:18] Jeremy Nau: How do I do it? We just can't hand them tools and say, have fun, right. They need more support, right? So that's where we offer different bundles. Like we have the practice in a box bundle, for example, that, of course you get the tools, but we have a resource library of engagement templates and additional information. We have our crypto question and our QC hotlines, right? You can give us a call and say: "Hey, I have a client and there's a new novel situation that I haven't seen before. Can I bounce ideas off of you?" You can also rent out personnel that have experience, right? Of course, you're going to get your first engagement, and you're going to say, Well, am I going to do this cold turkey by myself and try to figure it out on the fly? Or would I feel more comfortable kind of having these resources plus having people that have done it before, right? And then once you get comfortable, you can learn how to fish and do it on your own. But in the meantime, you can scale up in a risk based and a comfortable way for your firm to get started into the space.

[00:19:12] Umar: All right. So they would be able to leverage on the team at The Network Firm, but what level of experience, let's say with digital assets, do you expect these auditors to already have before using LedgerLens?

[00:19:24] Jeremy Nau: Yeah, so typically, like I mentioned, there's, maybe three buckets of clients, right? There's the first that they already have crypto clients. They're already knee deep into the space. They know what digital signatures are. That's a great litmus test. You have them, they're ready, right?

[00:19:39] Jeremy Nau: They can use this mostly out of the box. They've serviced digital asset clients. They're ready to go. They just need some tools to optimize, streamline some engagements. Then you have the crypto curious we'll call them. So those are really the market that needs a little bit more help.

[00:19:53] Jeremy Nau: Right, and that's why we have these bundles, right. It's not just the tools that they need more support. So that was really the impetus of building out more for them so that they can become a full service. Have a full service digital asset practice at their firm. So that's what we're trying to build.

[00:20:09] Jeremy Nau: Of course we, for us, right. They use LedgerLens. Use our resourcing. That's great for us. Their success is our success, right? So we want to build them up and that's how we envision this too, because the more service providers there are, the more the space can flourish as well. That's, it's been a bottleneck, honestly for digital assets, especially in the US getting service providers.

[00:20:28] Jeremy Nau: Especially audits.

[00:20:29] Umar: Before we continue, we'll take a quick commercial break from our sponsor. 

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[00:22:33] Umar: I've got a few more follow up questions on LedgerLens. So from one of our past discussions, you did say, I understand you spent a lot of time building this tool and you've only recently begun commercialization at what stage of its product life cycle would you say is LedgerLens right now. Are you currently in beta or is it live?

[00:22:53] Jeremy Nau: Yeah, so we are live. We just launched publicly about a month ago. And we've got our first three firms using various different tools on LedgerLens. So it's been pretty good so far. And now we're really ramping up building out new tools, adding new chains, and optimizing for streamlined onboarding for your clients.

[00:23:14] Jeremy Nau: For example, we have an On-Chain Proof of Reserves tool. So we want to make it basically instant where you can sign a RWA issuer. Hook into their bank accounts to get that off chain data and present it via API to Chainlink or to others, within under 30 minutes, right? So it's really about just streamlining the engagements and the tools that we already have to make it for the best user experience for our customer firms.

[00:23:40] Umar: And the other one is about onboarding. So for the auditors listening to us right now, and I'm going to try to promote this episode with let's say auditors more in web2 and have their opinion about it. So for them, can you explain how would you accompany like a new company like that on their first engagement?

[00:24:00] Jeremy Nau: Yeah! We would recommend, let's say you're new to the space. If you already got your first engagement, you're ahead of a lot of people, right? Because most people don't actually dip their toe in and say, oh, I'm going to take this on. First thing, try to take a risk reduced engagement.

[00:24:12] Jeremy Nau: I wouldn't take an exchange, day one. Those things can be pretty complex. But if you have a Stablecoin or an RWA issuer, those are a good place to start. So as you sign up, of course, you'll get access to the tools, day one, that's easy, but with our bundles, right, we can give you your team, the training it needs specific to perhaps your client or in general, right?

[00:24:32] Jeremy Nau: We can customize these because we've had experience working with all different types of digital asset companies. Next, you're going to have some crypto specific templates that you're going to need. Typically in your audit programs, you have, oh, cash, payroll, etc. But, are you going to have your digital asset templates? There's different treatments for digital assets too, right? Are you going to have, in a stable coin context for reserve balances versus inventory versus gas fees? Right, so you're going to need to have a game plan for these new and novel areas in your financial statement audit. And we have templates, and we've done those before, so we can help you streamline those. We'll also help you, you know, with language on your website, but if you already got your first client, you're good with that. But, let's say you didn't, right, and you wanted to dip your toe in and get the word out, we have LedgerLens, we can spotlight you on our website, we can get you up and running and push your brand to the marketplace, and introduce you to resources like The Accountant Quits, or Chainlink, or all the other resources and connections we have in the digital asset space. Then once you start the engagement, you can either decide, Hey, LedgerLens guys, we want someone on your team to help us out. We can be a part of your digital asset team for the course of the audit, or you can just hit us up on, on our, crypto QC hotline, right, if you just need us on call. Happy to serve in that capacity too. Then, once you finish the engagement, and you're starting to feel pretty good about your practice, then that's when you can, either hire internally directly and just use the tools as needed or you can continue to leverage us as you need until you get to that level of comfort in order to fly on your own as your own digital asset practice.

[00:26:06] Umar: Perfect. Thanks for sharing. The next topic I want to go through is proof of reserves and how now auditors can provide attestation services. 

[00:26:14] Umar: As a refresher for the listeners, so proof of reserves, it's the process whereby let's say an exchange, a custodian, a token issuer, an ETF issuer or let's say a crypto fund, they demonstrate that they have enough assets in reserve that exceeds their customer liabilities.

[00:26:33] Umar: So initially only exchanges were applicable to execute a proof of reserves. However, the application of proof of reserves has expanded to stablecoins, asset backed token, ETFs and more. At LedgerLens, you've developed three Proof of Reserve toolkits, the Merkle Tree Proof of Reserves, the Real-Time Proof of Reserves, and the On-Chain Proof of Reserves.

[00:26:56] Umar: Could you elaborate on the use case of each of these toolkits?

[00:27:00] Jeremy Nau: Sure. Yeah, it's a great question because I think this is where a lot of confusion happens when people talk about proof of reserves, right? It started with exchanges, then the term got used in different contexts. But how I think about proof of reserves is. What proof of reserves does is that it is a reconciliation between customer assets, compared to customer liabilities.

[00:27:23] Jeremy Nau: Essentially, is the issuer fully reserved? Now, the mental model that I use is that the liability is typically unique in different circumstances, and I'll break that down. So for a stablecoin, for example, the IOU or the liability is the actual token itself. For example, USDC is a liability to Circle, right? They have an obligation to pay you back $1 when you burn your one USDC, right? So the liability to the issuer is a token. So that's the same for stable coins, RWAs, right? That liability that's issued by the issuer should be backed one to one with the underlying assets. Now for an exchange, for example, the liability is actually an account balance on a database. So when you log into your Coinbase account, your Kraken account, take your pick, right? You, they have a balance that says, Umar has one Bitcoin, right? And they better have one Bitcoin for you and for all their other customers in the aggregate, right? But the liability is a database entry, right? It's tracked on their internal database. Then you have ETFs, right? Where the liability is actually a share, right? That you hold the share and they hold those assets in reserve. Now we've built tools for those different circumstances. So typically when the liability is an account balance on a platform like an exchange. What's been the most used form of proof of reserves has been what we call Merkle Tree Proof of Reserves. And what that is, is that essentially we can confirm ownership of all the assets, right? Using those rights and obligation in the signature methods that we mentioned earlier. But then on the liability side, what happens is that we'll get an export of all the customers. And their account balances, we can use a Merkle Tree structure to essentially maintain privacy of all the individual customer accounts, but then expose that Merkle Tree to enable users to verify that their account and their balances were correct within the scope of that proof of reserve.

[00:29:35] Jeremy Nau: So when you go to a lot of exchanges today, like Binance, OKX, a lot of exchanges are using a Merkle Tree Proof of Reserves where you can actually verify that your account was included. Now, what people don't realize oftentimes is that the way to cheat in a Merkle Tree Proof of Reserves is to doctor or understate the liabilities on that database, right?

[00:29:58] Jeremy Nau: Without an independent third-party, like an auditor or an attestation provider, the exchanges can cheat. So that is really one of the core benefits of adding an auditor to that process is that they can validate completeness of that customer liability listing, right? And then issue a report over that. So we're seeing in jurisdictions like Texas and the US, a few others, Wyoming mentions it, Dubai, they include auditors right throughout that process because they understand that there is a gap, right? If you don't include this third-party, so that's Merkle Tree Proof of Reserves. 

[00:30:30] Jeremy Nau: And then we have for tokenized assets, we have what we call on chain and Real-Time Proof of Reserves. So what we talked about earlier is like that liability is a token that everyone can see that's easy, right? But how can anyone see the reserves that are off chain? So our On-Chain Proof of Reserves toolkit essentially enables you to hook in to the banks, for example, for a stablecoin issuer, hook in to the bank accounts, read that information in real time, as frequent as, every 30 seconds, and then publish that information via Chainlink or other oracle networks, publish it on chain, and now it can be used in smart contracts, and now other people can see it. Right, it's transparent, and it can be used on chain for insurance, DeFi protocols, etc. Now, since we're already pulling that information, right, to expose it to on chain blockchains, this off chain data, We can also just issue real time attestations, right?

[00:31:26] Jeremy Nau: We're already getting the data, right? So we can actually issue an independent CPA's report, accountant's report, as frequently as 30 seconds as well. Essentially, we templatize the report and create an automated system to read all the information, right? Because the blockchain balances are available in real time. And so are the bank balances or the custodial balances. So let's just publish them as frequently as every 30 seconds as well. So we like actually pairing these two. One is the On-Chain Proof of Reserves is really crypto native, right? And then you have Real-Time Proof of Reserves, which is traditional in some ways, where you're getting a CPA attestation report. But just more frequent right then every 30 days that typically most stablecoin issuers do and reducing that interval to every 30 seconds. So we like to pair them together because you get the best of both worlds for RWA and stablecoin issuers.

[00:32:14] Umar: So the Merkle Tree proof of reserve you said the use case is more for exchanges, 

[00:32:18] Umar: Real-Time Proof of Reserves and the On-Chain Proof of Reserves who are typically the target audience?

[00:32:25] Jeremy Nau: Typically for stablecoins, real world asset issuers. And actually ETFs do pretty well with that as well. When we talked about the liabilities and the proof of reserves, when the liability is a token and the assets are off chain, that's typically that's when you need that transparency to the reserve data off chain. And then ETFs are actually relatively, similar, right? Instead of a token, it's an ETF share, but similar process of a reconciliation. It's really exchanges are just much, much more complex, which is why it's harder to do it in real time. But it's theoretically possible, I'm working on it.

[00:33:00] Umar: Now, you wrote a great article on the role of auditors in tokenizing real world assets, which inspired me for my next question. So again, for the listeners a refresher on what real world tokenization actually is. So basically it converts the rights of diverse assets like bonds, equities, real estates, into blockchain based digital tokens. It's an innovation that promises more liquidity, of course, proof of ownership and transparency, which essentially aims to democratize traditionally inaccessible investment avenues. BlackRock earlier this year announced that it intends to tokenize $10trillion of assets and other asset managers will probably follow suit.

[00:33:42] Umar: So this on chain future, it brings new challenges. So how do we know that real world assets such as these real estate, gold or others are accurately represented in value and amount by tokens? So we have Oracle networks like Chainlink, which Jeremy mentioned earlier. They solve the problem of fetching and delivering data from off chain sources and make it available to on chain smart contracts.

[00:34:08] Umar: But the question here is how much can we trust these Oracle networks? And what's the role of the auditors when real world assets are brought on chain?

[00:34:17] Jeremy Nau: It's a great point and great question that's often overlooked, Umar. So I think you pinpointed the problem or the challenge, right? It's you have these tokenize assets, but how do you know that the real world equivalent that's mirroring that digital token is actually being mirrored accurately, right?

[00:34:35] Jeremy Nau: Is it actually the same? And then there's additional problems, additional challenges like, okay, let's say you have a tokenized real estate. But what characteristics would need to be reported on for the underlying to tell the token holder, what they're actually holding, right? You need to show the condition of the real estate to report on that. Is it the valuation? Is it the address? What characteristics should be reported on to be able to give the token holder an accurate understanding of the underlying assets that they think they're holding? The good news about this is that there's a profession that's been around for about 6000 years since the days of Babylon that have been reporting on similar types of things.

[00:35:16] Jeremy Nau: Of course, that's auditors. And auditors are doing this already with tokenized assets, starting with stablecoins. We started with stablecoins in 2018, and now it's moving to tokenized gold products. And we'll eventually get there with all different types of tokenized assets as they come along. But when we talk about bringing that data on chain, you hit the nail on the head too with Oracle Networks, right? Oracle Networks, what they do is they publish data on chain from information that's sourced to them, that's sent to them. Now, the bottleneck in that situation then becomes, well, what is the source? What is the source of that information, right? Is it the issuer themselves? It's best, right, if there's, if you're getting a price data, right?

[00:36:01] Jeremy Nau: You get it from 15 different sources. That gives you a level of redundancy that it's hard to be gamed, for example. But, let's say you want to publish that data on chain and it's in one bank account and there's one auditor, right? Even if there's 15 chain link node operators and they're pulling from the same data source, it really falls on that auditor or maybe there's multiple auditors in the future, right, that are doing the same thing to decentralize it a little bit. But that's the challenge, is that Oracle networks are inherently reliant on the source of that data and the source of that data is ultimately responsible and unless there's a way to decentralize that we need to have transparency and understanding of how that information is sourced and who we can hold accountable for providing that information.

[00:36:43] Umar: Yeah, the source is tricky. I'm thinking of real estate, for example. So it would still have to be performed by, let's say, a valuation specialist. And on what frequency would that valuation be updated? Is it every year? It's not going to be every day. So yeah, where do you see those bottlenecks and for which categories of real world assets is it more tricky?

[00:37:05] Jeremy Nau: Yes, so today it's been easier, right? It's started with tokenized dollars. Then we got to tokenize treasuries, right? It's similar. Instead of a bank account, it's a custodial account with treasuries. Earn interest, okay. The next move was to tokenize commodities, right? And how you can verify that is, typically, you're not going to the gold vault.

[00:37:26] Jeremy Nau: Typically, you're getting statements, like bank statements, but they're like gold statements, for example, or commodity statements. And maybe once in a while, you'll go check the vault if you're feeling like it. Then what we're getting to is like private credit markets. Now you start getting a little bit more complex, right? It's like what characteristics need to be reported on? The duration is different. There might be terms in the contract that are different than like a treasury bond, for example, right? That it's, pretty standard and fungible. So then you start getting credit markets, and then real estate I think is the most challenging one that I've seen probably to date, right?

[00:37:58] Jeremy Nau: It's what are those characteristics that need to be brought on chain? It moves a lot slower than traditional, even banking, right? And we think banking is even slow, but what's actually unique about that too, is that when people are tokenizing real estate, they're typically not tokenizing the building. They're actually tokenizing for the most part, an SPV around the building. So they're tokenizing the legal structure around the building. Now it's okay, well, you're getting away from You're trying to get creative, right? To tokenize something, but you're getting away from some of the, it's just adding complexity to this, right?

[00:38:32] Jeremy Nau: That's, I'd say probably the next frontier. It's okay, what are the legal wrappers that we can tokenize this in a simple format? Right. And I think people are working on that. Maybe trust structures specific to real estate that are easier to tokenize, right? I think that's what's coming next, but I'd say that's where we're at in the life cycle of easiest to hardest and where we're at to providing transparency to them.

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[00:40:34] Umar: A topic that I often like to bring on this podcast is subledgers. So even if I'm not speaking to the founder of a subledger, because they do play an integral role in the tech stack for crypto accounting and accountants they use of ledgers to extract, process and feed in transactions from the blockchain into their main ledger, like a QuickBooks, Xero or NetSuite.

[00:40:57] Umar: So we've spoken to a lot of subledgers here on the podcast, and the listeners will be familiar to them, like Cryptio, Bitwave, Breezing, TRES, Cryptoworth, and a few more. So since many of the listeners are using subledgers. There's two questions I want to ask you. So first, what would be the auditor's responsibilities in the event their client is using a subledger?

[00:41:20] Umar: And when using LedgerLens, to what extent would the auditor be relying on the data present in the subledger?

[00:41:28] Jeremy Nau: Great questions. So typically in the course of the audit, I definitely recommend our digital asset clients, to have a subledger, trying to do it manually or some other way is a huge headache and trying to track gains and losses. It's basically impossible if you're doing any significant amount of activity without one of these tools. But in the course of an audit, my responsibility as an auditor is to get the information from the subledger, right? Because typically that's fed into the ending balance of, the balance sheet or the income statement. And then I have to validate that those numbers are correct. Now, having SOC 1s and SOC 2s, that's very helpful. Thank you. That's great. But also, I have to be able to independently validate that those numbers are accurate too. Right? I might select samples, transactions, right, to validate the transaction details. Or I might need to look at your ending balances, right? Now, if I have a tool that I can just search the ending balances quickly, I'm going to validate that. So fundamentally the crypto accounting subledgers and LedgerLens, they serve different purposes, right? Subledgers are for internal digital asset company use to prepare and compile the books and records. And LedgerLens is used by external auditors. It's purpose built for auditors to be able to validate those outputs from the crypto accounting subledger. Now, the better your subledger, the better these things are going to match, and it's all, it's great, right? They, fundamentally, they do different things. For example, LedgerLens doesn't do your crypto gain loss tracking, right? We're not trying to validate your gain loss, right? We have the assertions, existence, ownership, cutoff, completeness, et cetera. Right. And we oftentimes will look at your gain loss reports, right. And validate some of the transaction activity, recalculate the gain loss, but LedgerLens doesn't do that as a system, right. Because it's not built for that, right. That's what crypto subledgers are built for and it's pretty good at it.

[00:43:23] Umar: And in your experience, there's a lot of subledgers and when I speak to Accountant CFOs, sometimes they don't know which subledger to choose. Some of them are basing their decisions solely on pricing, which maybe is not the best way to choose a subledger. They all offer features to calculate the realized gain or loss to automate some of those transactions coming from the blockchain.

[00:43:46] Umar: But if there was one feature or a few, which you'd expect the subledger to be really good at which ones would those be?

[00:43:53] Jeremy Nau: I would really hone in on, okay what is your type of digital asset business? So if you're an exchange, for example, and you want to plug and play one of these digital asset subledgers, right, they're going to have a whole separate set of functionality and features to be able to support you and most of them if any, you know don't have that type of feature, right? So it really stems on your type of business. That would be where I start first, but okay. This is my type of business. Do you have specific tools for me. 

[00:44:22] Jeremy Nau: Now if you're a miner, right? Usually most of them can support you because it's relatively simple business But if you're an exchange or you're a DAO or you issue transactions in, some pretty deep in a DeFi, or on some tail end chains, for example, maybe some of the not as popular chains.

[00:44:39] Jeremy Nau: You're going to want to see, hey, do you guys actually support this activity? Because typically, what I've seen is these crypto accounting subledgers, a lot of times the core functionality is similar, right? But some might be better at, random chain X. Or some might be ready for miners or exchanges, right?

[00:44:53] Jeremy Nau: You there's these ancillary, decision points and features that I would look at, right, to see which one's right for you.

[00:44:59] Umar: Perfect. So we spoke a little bit about The Network Firm at the start of the episode, but could you share a little bit more with the listeners about the different services offered today by The Network Firm and the jurisdictions that you serve.

[00:45:14] Jeremy Nau: Yeah, certainly I'd break our services into two main buckets. So the first bucket is your traditional accounting services. So think audits, accounting, tax basis tracking, advisory, right, a full service firm in that way. Then we also specialize in our proof of reserve services, right? So that's Merkle Tree Proof of Reserves, on chain Real-Time Proof of Reserves, right?

[00:45:38] Jeremy Nau: We use LedgerLens to execute these different engagement types. However, I do want to mention that we don't compete right with our firms using LedgerLens. We actually would rather you use LedgerLens than win the engagement, right, because we want to support you growing as a firm and we get SaaS fees and if you use our resources, of course we get fees from that. And then you help your growth. You get bigger, you use LedgerLens more and we succeed from that as well. So we don't compete with our customer firms in that way. And we actually dish off and have a network to our customer firms that we work with closely. Now theoretically, The Network Firm can service firms globally unless there is some specific requirement in a jurisdiction, but the best way for us to scale is to partner with firms in different jurisdictions, right? They can be the unique service provider for Proof of Reserves in their jurisdiction and they can really tackle and own that market.

[00:46:32] Jeremy Nau: So that's been our approach. We have, partner firms in South Africa, Hong Kong and Europe and different jurisdictions and of course, we're looking for firms throughout the world right to be able to perform these services and really help build them up.

[00:46:45] Umar: Perfect! This last topic which I want to go through with you today, Jeremy, is. On how to become a crypto accounting practice firm. Earlier this year I was invited at an accounting conference with its audience comprising mostly of web2 accountants. Some of them not very familiar with digital assets, but the idea for me was to explain how companies today are using or doing the bookkeeping of crypto using a subledger and, with the different tools that they know already, like the Xero and QuickBooks, and basically to present to them the new opportunities to drive revenues, and, make crypto accounting feel less intimidating.

[00:47:22] Umar: It was a tough crowd. Some of them were questioning me on the energy impact of Bitcoin or that Bitcoin or other cryptocurrencies can be used for nefarious purposes. I tried to dodge those questions since it was not the reason of my presence, but a few others, they did acknowledge that it's the future, but the problem is they don't know how to start and their team are not trained for that.

[00:47:49] Umar: So the demand for crypto accounting expert services continues to outpace supply. I was, recently speaking with the founder of a small crypto accounting firm who had to put new clients on hold since they didn't have the capacity, with their small team basically. So if there are traditional accounting firms listening right now, who basically, they are seeing the opportunity and they would like to capture this new market.

[00:48:14] Umar: Where should they start and how do they get started training their team?

[00:48:19] Jeremy Nau: Yeah, there's actually a lot of great resources compared to what there were, seven years ago, eight years ago, when the first batch of crypto accountants were getting involved. But the first thing I would do is tool yourself up, and that's, of course, with identifying the tools that you want to use, but tooling yourself up with the knowledge that you're going to need some baseline knowledge. And the way to do that is there's actually a lot of good CPE and courses out there, right? Like The Accountant Quits Academy, there's Bitwave and Cryptio, they have different digital asset courses out there that are tailored for you, right? It's not just crypto generally how to invest, it's things that you need to worry about as a Crypto Accountant and a Crypto Auditor. So that's great! Right? 

[00:49:04] Jeremy Nau: But there's only so much you can do by learning from the sidelines eventually, you just have to get your hands dirty and interact with the space. So if you haven't done that I'd recommend go to MetaMask download a wallet. Get some ETH and go play on some different blockchains, go check out the apps, go on Aave, go on pump.fun just mess around with the tooling, right? And see how it works and use some stable coins, see how it works, see the power of it. Because that means when people talk about it, you're not going to be thinking about it just generally. Oh, this is some abstract idea.

[00:49:40] Jeremy Nau: You understand what they actually mean viscerally. Start there, create some wallets try to run a node, go read some explorers, right, go on blockchain explorers, just start to get acquainted with this and that's going to help you feel more comfortable kind of going forward. Then ultimately you're going to have to just take on a client, right? I would try to take on a risk reduced client, maybe a smaller client, maybe a stable coin or a miner, right? It's probably the easiest place to start, relatively simple. And, of course you can use the LedgerLens team, right, as bounce ideas off of some tools and templates and all that. But, ultimately need to take on a client.

[00:50:17] Jeremy Nau: You might lose on your first client. It might not be the most profitable because you're learning, but you're getting so much from education and from experience. So you'll be paid back and those for your next clients going forward. So this actually inspired an article we wrote.

[00:50:33] Jeremy Nau: You can check it out. It's 10 steps to create your digital asset practice, right? So you can check that out and see step by step how we actually built our practice twice, right? Once at our previous firm and now at The Network Firm. So it's, been battle tested way of getting your practice off the ground.

[00:50:49] Umar: Yeah, for sure. I will share the article. For this upcoming cohort, we have a few taxation firms. They've handled clients, individuals, let's say with who have. Or had digital assets and now they want to try and expand to accounting So a lot of them I think they do start with tax and then they see the opportunity and then they want to also offer accounting services. 

[00:51:14] Jeremy Nau: Yeah. It's interesting. Cause if you're using the crypto accounting subledgers, core functionality for that is tax, but then. It's almost the same reporting from an accounting perspective, right? So it's like you're already familiar with the data. You already know the challenges. You're already, halfway, maybe even more there to do the accounting.

[00:51:33] Umar: Yeah, I agree, Jeremy we've covered a lot today and thanks for I think the way you explain such a complex topic today was very clear and articulate. And like I've learned a lot just preparing this episode and I'm sure the listeners have as well. 

[00:51:51] Umar: As closing thoughts, is there anything that we have not touched on that, or maybe you would like to summarize the main takeaway of this episode for the listeners?

[00:52:00] Jeremy Nau: Yeah, I think I alluded to it briefly at the beginning, but I think I'm personally extremely bullish on auditors and accountants. If we realize that this is an accounting revolution, blockchains are literally just accounting ledgers that are debiting and crediting accounts with each transactions. It worries me in some cases because a lot of accountants don't even know this, right? And if they're going to have a profound impact on the profession, because if you think about completeness and accuracy, and I think about the most complete and accurate ledgers in history, I would argue that the Bitcoin blockchain is likely the most complete and accurate with all the hash power behind it secure ledger in all of human history.

[00:52:44] Jeremy Nau: This is. This is crazy, right? This is a big deal. And it's funny, I mentioned this. I was at my previous firm and we were being inspected by an oversight body, put it that way. And I actually said that, they said, Oh, how do you get completeness over the blockchain balances? And I said, hey this is likely the most secure ledger in history and I went into the consensus and the hash power and all that and he might have thought I was kidding, but maybe now a few years later, I think it's becoming more common knowledge, maybe not all common knowledge that that I wasn't kidding and really these ledgers are a new and novel innovation and they are significant advancement in ledger technology.

[00:53:24] Umar: Thanks for sharing Jeremy. If you've listened to this podcast before, you would know that there's a last question that I like to ask my guests before they leave. Do you have a personal favorite maxim or quote that you live by?

[00:53:35] Jeremy Nau: Yeah! On my email signature, I have a quote that says: Buy the truth and do not sell it. It's from the book of Proverbs. So it's an ode to finding truth as an auditor, right? That's our job. It's an ode to buying Bitcoin as true money. And the old adage goes, Never sell your Bitcoin, right?

[00:53:54] Jeremy Nau: So do not sell it. And it's an ode to keeping the quest for truth, even if it's uncomfortable, or not what you want to hear, right? Keeping that search as your north star, because the closer you are to the truth, right, the better you're going to make decisions that align with just how the universe operates, really. Yeah. Yeah, I got this quote from the Bible from Proverbs, it's 23:23, and I like it on my signature. We'll see, maybe next time on the pod, I might have a different one by then, but for now, I like this one.

[00:54:28] Umar: Thanks for sharing. And I'm happy we are recording this podcast today when you've just begun commercialization. I can't wait to see or have you again on this podcast two or three years down the line where I have no doubt that so many auditing firms will then be using LedgerLens. Jeremy, thanks a lot for your time today.

[00:54:46] Umar: And also the listeners wouldn't know this, but, this is the second time I'm recording the episode with Jeremy. We had a technical issue with the recording the first time. So thanks a lot for being so generous and flexible with your time. Before we go, if people would like to reach out to you or learn more about LedgerLens, where should they go?

[00:55:04] Jeremy Nau: Yeah, you can find me mostly on LinkedIn: Jeremy 

[00:55:07] Jeremy Nau: Nau - N A U or you can reach me at my email: jeremy.nau@ledgerlens.io or jeremy.nau@thenetworkfirm.com. 

[00:55:18] Umar: Perfect. And Nau it's spelled N A U for the listeners. 

[00:55:22] Umar: Jeremy, thanks a lot. And yeah I'll be following the progress of LedgerLens and we'll be in touch.

[00:55:29] Jeremy Nau: Thanks for the opportunity, Umar.

[00:55:30] Umar: I would like to thank everyone for listening to this episode. You will find all the links of the episode, show notes, and transcript on the website of The Accountant Quits at theaccountantquits.com. Please note that this content is for general information purposes only and is not a substitute for consultation with professional advisors.

[00:55:51] Umar: If you do know anyone who could benefit from the episode and you care about them, please do share the episode with them. All the episodes are available on Spotify, Apple Podcasts, and Google Podcasts. And by leaving us a review and rating, you will support the channel and all your fellow accountants. In order to be notified each time we release a new episode, do follow us on Instagram and LinkedIn.

[00:56:14] Umar: We hope to have you with us next time. Bye for now.

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