Armanino is attesting to ‘immutable security’
Over the past few years, the accounting profession has taken serious note of cryptocurrencies and the blockchain technology upon which they are built. Cryptocurrency has become more important to clients invested in tokens, and blockchain brought promises of immutable security and more. Early on, the profession struggled to see what the real-world benefits of distributed ledger technology would be; now, as regulators, the Internal Revenue Service and others attempt to structure regulation and industry guidelines around its use, firms are starting to provide material services to clients who are involved in digital assets like cryptocurrency.
Noah Buxton started his career at Top 100 Firm Armanino in the risk assurance and advisory practice (formerly the audit practice), and it was there that he “caught the bug” for blockchain, serving Coinbase, a cryptocurrency exchange, as a client. Now leader of the firm’s blockchain and digital assets practice, he said that Armanino has always valued innovation and an entrepreneurial mindset. When he and another member of the risk team took their idea for a blockchain service area to firm leadership, they were heard and encouraged without reservation.
“Armanino’s history as a firm is deeply rooted in Silicon Valley,” Buxton explained. “Given our history of serving emerging tech clients for decades, and our trust within venture capital communities, we often end up servicing some of the most exciting early-stage technology companies, both in the Valley and other tech centers. It has always been critically important to be in lockstep with our clients, never fall behind, and, in fact, invest in emerging industries and solutions that our clients will need, if not today, then tomorrow.”
But make no mistake — Buxton didn’t bring his idea to the firm’s leadership until he and his colleagues had really hammered out what it might mean for the firm. Blockchain is complicated. First, conceptually, it is hard to grasp. It isn’t like any technology that has come before, and can’t be classified as “online,” a database or a platform. Secondly, because cryptocurrencies — also known as digital assets — are built on it, blockchain has economic implications for capital markets and payments on a global scale. As a result, regulators worldwide are now paying real attention and attempting to set guidelines in place, and attempting to tax digital assets as well. But all this means that the technology has great potential for revenue generation, as anyone involved in blockchain tech and crypto has to answer to regulatory bodies and financial stakeholders of all kinds. That’s where professional services come in.
Just a few years ago, Armanino was serving companies like Coinbase in an audit capacity. Since Buxton proposed a blockchain service area to leadership, the firm has developed a solution for instant attestation over asset-backed tokens (a type of digital asset). That solution, TrustExplorer, is itself blockchain-enabled and leverages underlying blockchains to source critical attest information. TrustExplorer’s real-time attest function works by sourcing information from disparate sources, both “on-chain” (tokens) and off-chain (dollars that collateralize the tokens), and attesting to those asset-backed tokens in real time, and under attest standards from the American Institute of CPAs.
Because cryptocurrencies can be volatile investments, and are a relatively new category or asset, attestation is particularly important both for investors and regulators. TrustExplorer’s real-time attest tools currently provide assurance over an excess of $1.5 billion in value.
This year, Armanino took on CoinShares, a European digital asset investment firm that has more than $1 billion under management, as a client. Through TrustExplorer, investors can access attest reports on demand for CoinShares’ crypto asset exchange-traded products that are updated every 30 minutes. Public and open visibility into reserves, combined with on-demand attest reporting, creates a new standard of trust for the crypto and digital asset industry. Firms like Armanino get to shape what these standards are, by being one of the first to provide the possibility of such visibility. TrustExplorer can be used by investment firms to demonstrate point-in-time reserve ratios to their customers, banking and insurance partners, regulators and prospective institutional partners under AICPA standards.
TrustExplorer only entered development in 2018, but has already gone through some evolution. At first, Buxton and his fellow “blockchain nerds” at Armanino created a makeshift lab in a conference room. They experimented with running nodes — individual sections of a blockchain — and using them to support audit clients. They also experimented with cold storage wallet creation so they could really understand the technical challenges their clients faced — clients who provided exchange platforms for crypto, which necessitate such digital “wallets” in which to store users’ tokens.
“At the time, we called this the ‘blockchain lab,’” Buxton recalled. “In 2018, we started conversations with TrustToken, one of the world’s largest stablecoin issuers, with about $500 million in market capitalization today, about how to bring more trust and transparency to their user base. At the time, TrustToken had engaged another audit firm to perform audits over their dollar collateral holdings every 30 days. TrustToken was interested in something more. Simply put, their users could see tokens on-chain, so why couldn’t they also have more transparency to the fiat collateral?”
The experience built during this time helped Buxton and his colleagues see they had the potential to build an assurance tool that would truly leverage the technology underlying TrustToken’s TrueUSD Stablecoins — a specific type of Ethereum-based token. Initially, TrustExplorer looked like what Buxton calls a “feel-good” dashboard: It came from a top accounting firm and it provided some visual comfort, but it was not under an attest standard, there were no formal reports, etc. But it laid the foundation for TrustExplorer.
Buxton explained that that first iteration of TrustExplorer was a very important first step because Armanino hosted its own nodes, they learned how to explore those nodes and make information available to a web application, and they built API gateways to custodians to balance data directly from TrustToken’s banks and trust companies.
The next evolution of TrustExplorer was when Armanino moved to true attestation standards in 2019. This module is now called Real Time Attest, and it enables assurance windows as small as 30 seconds, as well as offering on-demand reporting to any interested party.
TrustExplorer serves two other use cases at the intersection of accounting and distributed ledgers — those modules, called Trusted Node and Proof of Reserves, are also open to the public.
Implementation & onboarding
What a blockchain service like Armanino’s offers is so unique, and necessarily bespoke, that it doesn’t function like some other service areas that have a high volume of inbound leads, or a high volume of business in general. Instead, Armanino creates relationships of deep trust with blockchain clients, and in turn they introduce the firm to people they trust.
“We have three main product offerings under TrustExplorer, so each engagement takes a slightly different track,” Buxton said. “The common thread is that we apply a high level of scrutiny to the business and business models that we support on any of the services. This is largely because these are attest clients, so they follow our firm’s procedures for assessing independence and
Using TrustExplorer, Armanino provides what it calls Real Time Audit (different from continuous audit), through which clients can access an instant downloadable report, backed by the firm’s opinion. For these clients, onboarding requires some bespoke integration of software to the TrustExplorer platform. Integration can take four weeks for a straightforward client, and has taken up to 12 weeks for a complex client. “We are not at push-button integration yet, but we are working to standardize integrations so onboarding becomes quicker and more repeatable,” Buxton said.
The promises of blockchain
In discussing blockchain, Buxton is careful and precise with his language. He wants to make sure the information he gives is accurate and clear, because of its complexity. Because of the large economic and regulatory implications blockchain technology is bringing with it, it’s important for a firm not to hype expectations and promises, but rather to deliver material benefit and let the services it provides speak for itself. In addition to the natural trust it builds in a firm, it’s also important work toward legitimizing digital assets and cryptocurrencies in the global economy.
“In 2018, there wasn’t a lot of great information coming out about cryptocurrency and blockchain. Investor sentiment was low,” Buxton said. “We also had the rise of the initial coin offering, and with it came a lot of exit scams and other fraudulent activity. So those were the headlines you would see if you weren’t deep in the industry — a scam, a hack, and plummeting prices. But digital assets are real, and they’re here to stay.”
Taking on CoinShares as a client in 2020 will help validate TrustExplorer, just as the tool offers validation through attestation. Armanino already serves all types of blockchain-related organizations: infrastructure providers like cryptocurrency exchanges, custodians and wallets; blockchains and foundations; token projects and protocols; crypto funds; security token offering platforms; and tokenizers and token issuers. As it builds its portfolio of blockchain clients, TrustExplorer will continue its evolution apace with the evolution of those clients.
“Our ultimate goal is we want to claim the blockchain space,” Buxton said. “We will continue to solidify our global leadership position, the capability and breadth of our service, and help shape thought leadership and standards in the industry. Every asset we know of today will someday be tokenized to be a digital asset. That’s an inevitable future we are preparing for.”
Next, Armanino has its eye on bringing assurance data on-chain (or, onto a blockchain) through Oracle networks for use by smart contracts, Buxton said. These are still just the beginning stages of what blockchain will mean to the profession.