EthCC 2: Max Stein

hello everyone my name is Max Stein I lead business development on the balanced team at consensus bounce is a digital asset accounting tool for enterprises so today we're gonna talk about how do we track digital assets in a time when there's more and more use cases for digital assets yet we're seeing some problems with real mainstream adoption so we have this vision I think a lot of you here share that vision with me today is that in the future we're gonna have more and more businesses running operating and holding digital assets you know the initial vision was perhaps that you know companies worldwide would start accepting and operating in Bitcoin I think we've learned recently that that's that's probably unrealistic with such a volatile currency but perhaps with stable coins they may you know run start to accept with stable coins we might have legacy businesses starting to interact with defy you might have more and more traditional financial companies using digital securities but a big problem and the reason this hasn't really proliferated there's usually two things people talk about and it's an int you guys know its scalability probably right of the block chains but even more than that it's it's the user experience and wired digital assets so difficult to to use and a big part of that is is because blockchain transactions and what happens on the blockchain doesn't necessarily translate to the legacy financial world right we have you know transaction hash and a block header and you know a to and from pseudo anonymous hex address in some value in in a currency that has eighteen decimal places so to line that up directly into a legacy financial organization is really quite complex and and so this is kind of the problem a balance that we're really trying to solve we're trying to add that compatibility add that interoperability and really connect these legacy businesses to the blockchain world so who here has more than one exchange account who here is more than two exchange accounts still almost all a few wallets multiple wallets I'm assuming on multiple protocols as well and if you guys have felt this it's it's quite a a task to really know what your entire position is and where your assets are and what's going on with them and so what we're trying to do is really connect these these you know different locations all these siloed protocols and exchanges and and get all that data into the legacy world and it is quite a challenge and we believe that this is one of the major obstacles right now in mainstream adoption of digital assets is connecting all this information all that's going on and getting it into the systems that this the legacy world understands so that's you know that's the fidelity's that's the Oracles the net Suites the SI peas and the work days of the world and so how do we do this how do we connect these these digital assets to the legacy world and so we use balance so today I'm gonna kind of go through how we use our software to to kind of add that extra information to the blockchain transactions and connect it to the legacy world so the first thing we do is we need to locate where these digital assets are so like you said exchanges and that's big the centralized exchanges but a big part of the complexity actually is the wallets there's a lot of different types of wallets especially on Bitcoin with hierarchical deterministic wallets it can be quite complex to know and track all the different transactions over time a good use case an example of this is you know the recent exchange in Canada where the founder you know passed away and or allegedly passed away and lost the keys and it took an enormous amount of effort and I don't think it's still been determined where these assets are where are the cold storage and which hundreds of wallets is it spread across so this is still a major challenge in the space and that's exactly why we're we're trying to address it so the second thing is is okay sure we know where these with where these assets are but do you own those assets can we prove that that maybe one or two sovereign individuals have the multi SIG's or our access to control these these wallets so a big part of this and when we go into an organization to kind of audit or verify the ownership we'll do is we'll ask them to sign a transaction right and then from there we can kind of get an idea that there's a pretty good chance that they have control over that wallet it can often be extremely time-consuming if like a lot of exchanges they have they can have hundreds of wallets so some best practices there is it's it's good yes have lots of wallets for organization and we'll get into that a little later but by using a hierarchical deterministic well you can have an extended public key that can actually you can use to sign in prove ownership to all the all the seed addresses so that that's a major time saver so so this is kind of how the process works let's see yeah can you see so the first thing is when we onboard new clients is we we start with the exchanges because that's where most of the activity really occurs these days right one of the major use cases of cryptocurrency probably we'd all agree within the last few years has been speculation and the majority of speculation occurs on these centralized exchanges though we are seeing some new movement and activity on decentralized exchanges and I think we can all agree that with more scalability there'll be an increase in in decentralized exchange activity and potentially it could eventually over overtake centralized exchange activity so the second thing we do once we get the private API keys and connect to your exchange we add the addresses so we get your Bitcoin your ether your leg coin we add your public address and the address or and then we label it and then from there we're able to extract all your historical transactions and get a real clear picture of your transaction history a method we used up until Reese actually was we allowed people to upload a CSV that they just exported another exchange and that was that was okay and it was good enough for helping a user or a client understand their position but the second you have external stakeholders then that's drawing really enough CSV doesn't really prove much you can download the CSV open it up in Excel change a few numbers around and uploaded into our system and we wouldn't really know that no the better so that's why we've now switched over to almost exclusively connect via exchange API and give us your address and we'll go out and pull that data ourselves in blockchain so another big thing is what are these pseudo anonymous hex addresses it's a mess and if you've ever tried to account for this you go back to your transaction history and you have no idea who or what you sent your ether around to so a nice kind of feature that we like to do is we build a kind of an address book of all the different contexts you have so your exchanges that you're sending money to your friends your employees you know your clients and then from there we can start to add a bit more information in the blockchain transactions so to look a little bit more like legacy financial transactions and so that's when we get to this we get to see your a consolidated view of your whole transaction history and the important thing to note as you'll see on the right is the total USD equivalent and so that's that's not today's value that's that's the value at the time of the transaction because that is critical for accounting purposes knowing what the value was at the time in turn order to realize that as revenue and and also in order to understand your gains and losses which is you know a major implication of such volatile assets and we'll get into that a little later so then a big thing is is adding that one extra piece of information to these transactions so here you can kind of see a screenshot of the balanced application going in and we see a transaction for it was 1100 and $18,000 and so what was that payment for so this is where we add in the meaning of that transaction so this for example was you know an invoice paid to for wages expense to an employee and they also lumped in some travel reimbursement as well and so this is an example of doing it manually and and for small enterprises or small medium-sized businesses that may make sense if your transaction count is low because it is critical to get that kind of key information into the system but what's more realistic is Auto classification with large enterprises there they're dealing with thousands and thousands of transactions a day and you're not going to have a bookkeeper go in and manually classify each transaction it's a nightmare trust me I've tried it so what we do here for example so you can here see we set it up by addresses so what we do is we recommend clients set up unique addresses for each of their lines of businesses so here we work with a lot of miners in the space and so they set up a separate wallet and all transactions getting sent to that wallet they call mining revenue and you can see the the chart of account code 1019 mining revenue and what we do is we make sure that chart of accounts maps to their legacy financial accounting system whether it be s AP or both QuickBooks or sage we make sure we upload their entire chart of accounts into the balance system so when classifying transactions it can sync perfectly so other other examples of Auto classification are we've worked with exchanges where every time they have a small every time someone makes a trade on their platform a small percentage of the trade is is sent to a unique wallet and we call that you know trade fee revenue and so this way we can actually start to have financial records that sort of build themselves so every time certain contracts or or every time certain smart contracts are interacted with every time certain wallets are paid we can automatically know what what it was for and then chart of accounts then maps to the balance sheet in the income statement which then using the blockchain can start to automatically update themselves and have really cool opportunities to peer in and verify the authenticity of this stuff the next kind of big big value add is is gains and losses so we like to run different types of inventory methods to determine what we short-term and long-term realized gains are and unrealized gains and what's interesting about this is the way you set up your wallet infrastructure significantly impacts your potential tax liability so for example for specific identification we need to make sure that we are separating the wallet by the transactions because if you're lumping all of your assets and every time you buy ether into the same wallet you can't specifically identify specific ether and say this is the one I sold you know I didn't sell the ether I bought it ten dollars I sold the ether I bought a $500 so I'm not paying capital gains you can't do that if it's all in the same wallet you have to follow you know first and first out or last and first step but you can actually have quite creative with it by setting up unique wallet addresses we worked with one ice do actually that for every single contribution to the ico they set up a unique wallet address and they did that through their smart contract because their ICO was took place over the course of about sixty days and throughout that period I think ether you know went from 300 dollars to 500 and then you know back down to 400 so it was a volatile period and what it enabled them to do is when selling that ether they could go and point to a specific wallet that they said okay we got that ether in at you know $300 Eve and that's what we're selling and or we were selling the $500 e and so this way you can really massively kind of specific identify and limit your you can tax optimize essentially the next kind of nice thing is is you know our application gives you portfolio overview so like many of you who have asked that's all over the board all these different protocols on all these different exchanges our application really lets you just kind of get a picture okay where is everything when was last time he was moved and you know what's my composition in my portfolio and you know down the line we plan to add interesting things along the lines of risk parameters and and really making it a nice kind of station for a CFO or you know even the CEO to kind of understand where they are at I mean yeah you can add more addresses more exchanges you can record minting events a lot of obviously Auto classifies key especially with high transaction throughput you know for an ICO every time you know that's an easy one right every every time someone sends funds to the ICO wallet it's it's you know I see a revenue or deferred revenue or however you're classifying that so this is the big part and this is how we connect to the legacy world is after all those steps we went through labeling the contacts establishing the cost basis in terms of USD adding the classification from the chart of account perspective to these transactions we're finally at a point where these blockchain transactions they start a map to the traditional world and we give you an export that seamlessly can go into your legacy system and and this is really key for forgetting these these businesses on the fringes of the crypto industry who are interested in engaging making it compliant making it so that they can actually record this information what's really cool now is that we're actually in in deep integrations we're building full integrations with with QuickBooks and with NetSuite and with Sage so that you actually only have to do an export it just seamlessly flows into those systems and what's exciting about that is there's 30 million small businesses who use QuickBooks nothing to do with crypto but if we're able to connect them directly to to the blockchain and make it easy for them to interact maybe they're gonna start to you know open CDP maybe not open CDP's but maybe it's gonna start except I cuz it becomes a little bit easier maybe they're gonna start engaging with you know to centralize finance in different ways leveraging it for new ways to gain capital or raise capital NetSuite for example has 40,000 enterprises using their platform and so this is a really nice way to bridge that you experience problem and get these these legacy businesses to start working using the blockchain so kind of like we said to kind of summarize the core use case here obviously is accounting for the enterprises additionally it's it's assisting individuals high-net-worth individuals individuals like many of yourselves who have assets across the board and kind of need to figure out what tax to pay we had one accounting firm come to us and they they use the FIFO method and the miner was had to pay twenty million dollars in in taxes that years and we said hold on a second you know he had assets on separate wallets separate exchanges what if we go and do the specific identification method we're actually able to save about eight million dollars so it's these kind of extra level of analytics a little bit more clarity into where your assets are and how they can be used that really can make a huge difference financially other cool use cases that are kind of you know a little less priority is Treasury estimation I know a few investment firms who like to use our software not for their own accounting purposes but there's a project in the space there's an ICO they invested in and they're like okay how are they doing now you know they raise thirty million dollars that you know five and jewelery and so let me go and go on ether scale it's fine they're it's fine they're you know they're cold storage or they're they'll start with their ICO wallet a smart contract and they'll dive in and the other addresses and then we'll start to classify things and say okay you know they actually they actually sent money to Kraken when eath was a thousand dollars and it looks like they withdrew and actually convert it to fiat and then what you can do is you can kind of you know it's an estimation of course but you can get a kind of a clearer picture of okay this ICO that raised twenty million dollars you know actually there sitting on forty five million now you know or or maybe the other way around they raise fifty million and and they didn't sell any and it was at $1,000 each and and you know that they're sitting on something like you know a quarter of that or something so you know that's kind of a side use case but it is interesting and then the last is asked the transparency and verification I think it should be requirement across the board for an email your exchanges to be transparent about their wallets you they shouldn't be able to provide a transparent picture and using our software or their own to show you know we actually do have 300 million dollars in cold storage and you know show that it showed that there isn't a delta between what's being traded on their exchanges and and what they actually have in reserves and a lot of things could be avoided if that happened and you know there's a lot of platform benefits of of accounting on the blockchain you know everything from reduced accounting and audit expenses you know you're minimizing error because you're taking everything directly from the chain you're not you know using CSV is like I said earlier you know higher data integrity you know weird you can see that there's some great benefits I think we're all pretty much aware of them the last not least I just want to do a kind of a shameless plug plug for the accounting blockchain coalition the founder of the accounting blockchain Coalition is actually sitting up here Griffin Anderson so happy to answer any questions and it's basically you know that we started this a couple years ago when the accounting companies in the space saw a crypto and we're like what is going on how do we deal with this and and so we were we're trying to figure it out with them and yeah so thanks a lot are there any questions so I loved the whole thing from one end to the other right into the accounting software that's exactly it feels exactly right to me so how's your adoption and what would be holding back adoption because it feels really very useful yeah so that's a good question so initially we really focused coming out of consensus we focused on solving the problem for consensus initially right consensus grew really quickly and we were operating many many lines of businesses whether it was investing in projects that had tokens whether it was paying contractors in foreign countries with digital assets we this it was apparent that there was no tools in the space to solve this so that was kind of the initial use case and once we kind of mastered it for our own purposes you know has been scaled to about you know a thousand plus people we decided to go to our partners in the ecosystem that you know we're spin similar situations and held large amounts of digital assets and that's kind of where we started kind of the crypto enterprises that that you're all kind of familiar with in terms of the legacy world a big thing that's holding back their adoption is a lot of lack clarity from a regulators perspective in terms of the treatment right now the way Kryptos meant to be treated is as an intangible on the balance sheet so from an accounting purposes purpose a very volatile asset doesn't necessarily suit treating it as an intangible when accounting for intangibles you you recorded that cost and then every time the price falls you have to mark it down but the thing with intangibles is when the price goes up you can't mark it back up and with crypto zigzagging like it does it's really quite difficult for you know any major public company to want to hold or account for that I think a big thing that will help art the adoption on the enterprise side is stable coins the rise and stable coins the more acceptance of them I think that that is really quite attractive and from our perspective that's really where we're aiming yeah thank you talk I was taught about balancing DEFCON four and I'm really happy to see the the revolution so in our case we are just partnering with Alessio the fact that that's our as our euro euro based stable coin we need traceability all the stuff so I wanted to ask you if you more or less are planning with a left here somehow to giving the information your the fact that I'm doing the JSON API monitoring and reporting stuff yeah so Alessio as you may know is also you know part of the same company at consensus and so we do work with them closely we're constantly collaborating the way we kind of see things we look at the block chains from a slightly more financial lens Alethia was definitely doing some really awesome analytics and monitoring and I think down the line as we continue to add more features I think you know many of our current users would would like some of those features that Alethia offers in terms of you know you let you as this great monitoring feature where you can you can add some of your your key wallets whether they're you know the the cold storage for your your coin base and you want to make sure that it never you know gets hacked you know you can you can get set up a monitoring service that you get pinged if if the balance ever you know drastically declines and you could also do that with your own wallets your own multi SIG's and I think some of those features would be great to add to our dashboard and and I look forward to collaborating with them more in the future okay I think that's all the time we have for questions thanks everyone [Applause]