Strengthening Readiness & Compliance in the Digital Asset Ecosystem

Chris Brodersen: Great, thanks. You're on mute, Richard. Can you guys hear me?

Richard Johnson: Hey. Hello, Chris Johnson. I'm the founder and CEO of Texture Capital. We are a dealer focused on tokenization of real world assets and securities. We help clients raise capital through digital securities offerings. We have an ATS alternative trading system for secondary trading, and we also now operate through another subsidiary, an SEC registered transfer agent, which has an important role in the digital space and have also expanded into direct participation on blockchains through node validation and node operating and looking forward to this wonderful discussion.

Chris Brodersen: Great. John Lio.

John Delalio: Hi everyone. My name is John Lio. I'm a partner at Eisner's Blockchain and Digital Asset Group. I've been in the group probably for about five years as we've grown with the industry. I'm also a partner in our outsourced accounting practice and it's kind of a unique perspective. I bring more of an operational view of the accounting for digital assets and what it means not only from doing the daily books, but also passing audit. And I think it's a really interesting space right now because there aren't a lot of people who know what's going on out there and the regulations are changing really quickly. So me and my team bring a perspective that's got been there, done that element, which I think is really helpful in figuring out what you need to do to make your company valuable.

Chris Brodersen: Thanks John. Thanks everybody. So one of the main drivers of this event is something that we've seen at Eisner in our practice, which really is a situation where companies have been in hypergrowth mode for quite a while and God bless them, but then they suddenly find themselves behind the eight ball, if you will, and readiness perspective, especially as it pertains to audit. A lot of companies one day wake up and realize that they need an audit, they want that audit because they're raising capital, maybe they're going public or maybe they're filing for some sort of a registration. So I'd like the perspective from the three of you in terms of if I am a startup today, I don't have to run right out and start doing these things, but what should I be thinking about in terms of my roadmap for the future and what are some of the goalposts or mile markers when we should start executing on those things? I don't know who wants to go, Richard,

Richard Johnson: I'll kick this off. Sure. Yeah, so I think it's an interesting question. It's an interesting journey because I've been at text just since day one started the company and initially the financials is coming out of your own personal bank account for the first few weeks or months or however long it is. Then you bring in some funding and you open corporate bank accounts and you are able to manage that. I think internally with a small team, you typically won't have a CFO or even a part-time c CFO for most startups. And I think anecdotally we've seen that a lot of startups have got into some trouble around there for texture. I think we are a regulated broker dealer, so we're regulated by finra and one of the requirements is that we have an annual audit and it felt like quite a burden initially that we had to go through this process.

But preparing for that and then ultimately going through several audits at this 0.3 or four in our lifetime, I can tell you that the audit process is extremely thorough. I'm not an accountant type of person, I'm a capital markets person, never really been around an audit in any way, but the process that the audits go through is extremely detailed down to really potentially every receipt, every expense needs to be examined and justified. And if you're not keeping good records, and that can include financial records, obviously you have bank statements and so forth, but remembering why there's a certain payment to somebody, what that was for, where's the invoice for that? You don't want to be five years later digging through your inbox trying to find an invoice relative to a payment from three or four years ago or however long it was. So I would say there's a lot of work involved in an audit and the auditors are generally very, very thorough.

That's really what it means. And like I said, we were lucky that we had to have this ability in house and we had to have what's called a fin op, which is a financial operations professional as part of our FINRA requirements. If we hadn't had that and we're getting around to an audit, I think we'd probably be in much, much worse shape than we are. So I guess the answer is be prepared for it, understand what it is. I know founders have a lot of other things to focus on getting customers and so forth, but if things work out, it will be coming. Think about it in the same way. I know a lot of founders when they're looking to raise capital, they're trying to think, how can I make myself investor ready at the same time? And a lot of early stage investors don't require audits, but should start thinking about that as well because you want to have a good financial track record that you can point to when you get to later rounds and the audits are required.

Chris Brodersen: So Sebastian, how about your perspective?

Sebastian Bea: Sure. Look, as a company that is a new company, but we also intend to list on NASDAQ relatively soon. The intention is to go from startup to listed pretty fast. So we have a lot of things we have to think about in terms of setting up and being ready. I think that one thing that is specific to crypto and probably helpful for everyone to hear is obviously this transition towards potentially more defi and specifically more self custody. That presents a very obvious issue for audit. So if you're self custodying your assets in whatever wallet you may choose, that's all well and good, but you can't exactly call up Anchorage, Coinbase or Kraken to say, Hey, does X, Y, Z company have these assets when you do an audit? Right? Let's talk about the simple stuff, right? You say you have assets, okay, well prove it.

Well, to do that in a self custody context is completely different. So you have to be thinking about that, and I think that's a broader issue as the government thinks about regulating the space and how corporations can or should be thinking about custody, that can drive safety concerns, that can drive all sorts of other questions. But that's just to start with, can you pass an audit if you say you have these assets, but they're actually in self custody, and what's the process by which to do that? That's not normal for an audit away from that and maybe not directly to what you're speaking to, but look, I think regulation is changing because the laws are being written. And so if you're in the process of building in the digital asset space, you have to recognize that some of the laws are in process, most specifically clarity.

That then means that regulations are yet to be written for those laws that haven't yet been approved. You're building for a world that that's not exactly set and the requirements that you may need to meet. You have to be prepared today at least to meet, not to meet those requirements today, but at least to know that they might be coming and be okay with where they might land. Now what does that mean? It means you probably, if you're in my world at some point, if clarity passes, which is the bundle of new laws to delineate between basically commodity and security and crypto, if that indeed passes, then digital asset treasuries in the US are likely to be designated commodity pool operators. And I can tell you with high confidence that about 99% of people in this industry don't even know what A CPO is. So look, there's a lot to get ready for and just audit and maybe a new regulated status or two of those.

Chris Brodersen: So skate to where the puck is, right?

Sebastian Bea: You at least know what sport you're playing.

John Delalio: I think Sebastian brings up a really interesting point because Richard laid out three phases. There's when you're a startup, when you're thinking of getting an audit done, and then when you have an audit done, and those are the phases we see and the technology of digital assets and blockchain is so fast and flexible in that startup phases, companies can get themselves into a mess really quickly. It's almost hard not to. So we are always advising our clients to think about where they're going and put in the controls and stuff in place. Initially, Sebastian hit on a great point, which is custody. So we believe that digital assets are going to wind up on more and more companies, books, whether they're digital asset companies or not. There's a lot of traditional companies right now, treasuring thinking about treasury of buying some Bitcoin and putting it on the company's books.

Custodying, that is a whole thing that requires financial statement disclosures, it requires reviews, it's part of the audit. Now there are these things called dcos, which by the way, in August, I don't think daco was a word, but now it is a digital asset treasury company which can support a company that's thinking about getting treasury with digital assets. So that's an interesting nuance now, but I think the getting ready for just being a digital asset company and having your books ready is hard enough. And then when you add on the challenges with custody, it really makes it a lot that has to be accomplished and controlled. And the advice is always, we should have started yesterday.

Chris Brodersen: Yeah, I was going to say, I know what, from my experience in talking to companies, what they're most surprised about in terms of this process of trying to get, and I didn't want to dive right into audit, but here we are. But in terms of getting an audit, so Sebastian Richard, in terms of that process, was there anything that surprised you along the way in terms of anything? In terms of trying to get a financial audit?

Sebastian Bea: Richard, go ahead. The

Chris Brodersen: Thing is, did you need

Richard Johnson: Trying to get one? What do you mean finding someone to work with?

Chris Brodersen: Well, that's one surprise. It's not that easy to find them, number one, right?

Richard Johnson: Yeah. Well, so there's an accounting season, right? I dunno, we didn't have a problem finding anyone to do our audit, but one thing we did was it can be difficult at the end of the year or between January and April I suppose, because the tax season, but I don't know if this is something you recommend to people. We actually changed our fiscal year to June 30th, and part of the reason for that was because it would be easier to get an audit or to get accountants to come in, not the busy season for 'em, but I don't think we are a smaller firm. We're not working with EisnerAmper at this point, but we're working with smaller auditors. But I don't think we had, I went through some contacts in terms of identifying the persons some contacts in my network to find someone that we could work with, and it's worked out pretty well.

Sebastian Bea: I'll speak on this topic a little bit from my experience actually back at Coinbase might be useful. Yes. At the time were, I think we were one River Digital and we were in the process of being acquired by Coinbase, and it was not that easy to find someone to do an audit. And we had to do it quick because in that particular instance, we were being bought by Coinbase, and if I recall correctly, I think it was the same auditor that audited us, that audited, that was the auditor for Coinbase. So I didn't fully appreciate or understand, but there was apparently a conflict of interest and we had to find a new one on the hop, and that process was not that much fun. And I vaguely recall having zero pricing leverage in the moment as well. So look, that was also 2023 and we still got it done with a great auditor, but it was slower, more expensive to do it because it was crypto and there was heightened concerns at the time, and I don't want to do that again under the pressure of a deal.

So I guess that would be one thing just to kind of look out for also, because look, it is, I know it's not the topic of a startup necessarily, but it is m and a season in general. There's much more expectations of it now in crypto because we're, as an industry seemingly emerging with regulation, a lot of stratify companies are behind and it's probably not enough time to build, so they either have to rent or buy. So this issue that we encountered actually back in 2023 could become an issue for other folks where they have an ter, everything's fine, but then all of a sudden they have a suitor and now they got to find another der. So we didn't talk about this in the prep, but I do recall this and it's something that people have to worry about probably in the next year or two.

Richard Johnson: I want to jump back in given Sebastian's comments. I should point out that we don't have any crypto in our broker dealer entity. So finding an auditor who could do audits of crypto was not something we needed to do. So I think we had a broader range of auditors to choose from, but now we have started accumulating tokens and coins in another entity. We haven't gone to an audit there yet, but I'm already appreciating a lot of the challenges that we're going to have. And I may actually have some more questions for you than answers in this webinar here.

John Delalio: Yeah, I might also add, I think the surprise is how long it takes, and I think that's driven by two things. One, the regulations are relatively new and there isn't a lot of, I'll say almost like case law of how to decipher what is coming out of whatever regulation you're trying to make. I know the A-I-C-P-A has a great digital asset accounting guide, which is kind of the starting point, but even their guidance in there is up for interpretation. So one thing that takes a long time is it's not exactly clear what the requirements are. The second is there aren't a lot of people in the industry who understand the nuance with the bin there done that experience. And there aren't a lot of digital asset companies that have gone public, that number is going up. But I know that a lot of the companies that the predecessors who are already public, their financial statements are looked at a lot to figure out, well, what would be the best way to disclose this? What should we show? How should we show it? How does this tie to the regulations? So it just takes a lot more time than you could imagine actually. It's very complex.

Chris Brodersen: Talk to people who say, Hey, we need to maybe go through this process. When you start to walk them through that process and how long it's going to take just to get to the point where they're ready for that. It's very surprising. I know, John, you're working on a particular project right now in that arena, and it can be a heavy lift if you're not prepared for it on the front end. So anyway. So let's shift gears here for a minute. Sebastian, your company is a reserve company, not a daco. Can you explain to this audience what the difference is in those two things? Because Daco is coming different places, right?

Sebastian Bea: So look, the terminology right now is evolving, right? And even those that are listening to this webinar might not even know what a daco is or is meant to be. We would suggest that today, reserve one, as it's being constructed for eventual public listing after hopefully are eventually declared affected by the SEC once, of course the SEC opens that we would then be listed publicly and then be a digital asset treasury. But we are intended to be substantially different than most dcos, which I think is where you're driving. Most dcos are digital asset treasuries are single asset, meaning they buy Bitcoin and that's all they do, or they buy Ethereum and that's all they do, or they do Solana and that's all they do. And many of those dcos are passive. So they buy and hold Bitcoin but then do nothing with the Bitcoin beyond perhaps maybe borrowing against it to provide some leverage to the equity side of the cap table.

The way that reserve one was set up is very different. The intention here is to have a diversified set of assets, so not just Bitcoin, e theory, Ethereum or Solana, but all of them. And then also the intention is over time to deploy those assets to the degree to which we can to seek incremental yield. And then on top of that, which is quite unique for us, is we have carved out the ability to do venture capital inside of our company as well. So the overall look and feel of the intention for our business is fairly different from other dcos that are out there. I think technically people would still stick us in the category, but we expect that we'll look a little bit different than everybody else.

Chris Brodersen: In my mind, the dcos fall into a couple of different flavors. One is the pure passive, the strategy, Michael Sailor's firm that started this trend. That's one flavor. Another flavor is what you're doing, which sounds more like a managed platform. Then we've seen a number of companies whose business models have been struggling that are doing reverse mergers and SPACs, and what they're trying to do is pivot that business model into a daco as opposed to whatever they're doing now. And that can be in MedTech just about anything. And then the final flavor we're going to have to have, companies are going to have treasury functions as part of their broader treasury function because they're interacting with digital asset. So just like you would have foreign exchange treasury functions, if you're a multinational, you're not going to have to have that for accepting payment in digital assets or being able to move them. So from your perspective, how do you think about that?

Sebastian Bea: So for corporations, I think this is a really great question. There's at least two, well, there's many different dimensions upon which crypto will impact their business, crypto, crypto rails, et cetera. I think if you start in their treasury in general, they're going to hold their treasury assets in relatively low risk assets. At least historically, that has been the case. Some corporations don't exactly do that. They take more of an endowment approach. Historically, Microsoft was an example of that, quite a bit more active. Corporate treasuries will directly hold crypto for investment purposes unless it's really directly related to their business. I think the other area though, where there's likely to be a big upgrade coming is very specifically the adoption of stablecoin. And that can have big implications for how corporations operate. And so to be more clear with the passage of genius, we now have legal programmable money, so that's great.

What we don't have is acceptance, but acceptance is that issue. I think you're talking about when you drive acceptance, you're starting to actually input these digital rails into your corporation, like how do you accept stablecoin? Are you accepting it directly? Are you using a vendor, et cetera. And this could drive quite a lot of change. When we speak to corporations, they recognize that there is a huge amount of trap capital in their processes. They all see with cross-border payments, vendor obligations, et cetera, that stablecoin in particular could collapse the requirement of holding large amounts of cash in all different subs all over the world. This could really improve the capital efficiency of the operations of many corporations. That's great. Sounds awesome as an idea, but in execution, it is a lot of work, and I think corporations are just starting to head down this path. Some companies have been around doing payments for quite some time, but those payments in crypto have really been focused on accepting Bitcoin or Ethereum. The explosion we are expecting is an explosion in stablecoin acceptance, and that could drive massive change for corporations over the next say 12 to 24 months.

Chris Brodersen: And to that end, Western Union announced today that they're entering the space. I don't know if you saw that headline, but so Richard, you have an operating company. How do you think about the acceptance of digital assets? Will you accept it as payment? If so, how do you plan to move forward? Will it just be stable coins? Will it be Bitcoin and other cryptocurrencies? What's your thought?

Richard Johnson: Yeah, that's a very good question. So the Genius Act, which Sebastian mentioned was the legislation passed recently to provide a federal directory framework for stable coins. It defines, it specifically comes up with a definition for payment, stable coins separate from other use cases. So the stable coin that's designed for payments, we're a digital securities broker dealer. We've been very much on the forefront of this kind of emerging trend. We just got a product approved by finra, which is a retail stock trading product targeting the Web3 community. And one of the features we added into that was we wanted them to be able to stay on chain so they can fund their brokerage account with SDC. So USDC is not, or stable coins are not an allowable asset under the net capital rule. And so what needs to happen is that USDC needs to get converted into fiat at some point before it goes into their accounts. So you can work with a money, essentially. The way to do that is to work with a money transmit money service bureau who will convert that into the fiat on the way.

When it comes to, in general, we keep any kind of crypto out of our broker dealer entity because that's overseen by finra. We have audits, we have FINRA examinations, we have quarterly filings and so forth. And stable coins as an unallowable asset actually have a hundred percent haircuts, which is even stranger when you consider that Bitcoin and Ether only have a 20% haircuts in terms of net capital. So I think the regulators are going to need to change their rules because stable coins are going to become really ubiquitous. I think throughout the financial markets. They are just a better, whether you're talking about it for financial transactions, we can use stable coins for settlement in our A TS and our trading system. So when a buyer purchases security from a seller on our platform, they can pay the seller in stable coins. From our point of view, that makes it a lot easier because we were able to track that transaction to a transaction hash and confirm that settlement of the cash leg occurs. Whereas if they were using fiat rails and we have this kind of settlement obligation, we would've to make phone calls or emails to say, Hey, did you get the money? Whereas with stable coins, it very much improves that. I imagine having this transparent transaction ledger can also help the audit process when you're looking to track transactions and so forth. But maybe I'll let you guys comment on that.

Yeah, so that's certainly where I see things going with stable coins. There is a, there's a rulemaking period coming out soon, so I can't remember the exact timeframe here, but we should expect some rules going from the OCC down to treasury and then down to other agencies within the next year.

Chris Brodersen: I think the deadline is the first quarter of 26, Richard, for the rules to at least be published for comment. So John Lia, did you have something you wanted to say?

John Delalio: Yeah, I think the one thing that's both interesting and challenging is you've heard both Richard and Sebastian talk about all these different options and ways that they can move money throughout their organization, and yes, it's traceable. I think the other side of that is there's lots of relationships where you can be exchanging on chain information with other providers, liquidity providers, banks, and so your spider web of relationships grows, I think exponentially depending on where you're sourcing your tokens from and where they're going to. So that gets into keep track of it as soon as you can, and yes, operationally it can be fairly easy, but once it kind of exponentially complicates things when you have all these money movements or token movements going throughout the organization.

Chris Brodersen: Mr. Dino, welcome. You landed.

John D'Agostino: Oh wow. I rushed in this room. Hi everyone.

Chris Brodersen: Hey John, if you don't mind, just introduce yourself. We were talking a lot about audit, but we're just, John Lio just gave us a great into what I ask next, which is operations controls and governance and things like that, which is, I know an area where you have a lot of thoughts, so I'll let you introduce yourself, John, and then we'll move forward.

John D'Agostino: Wonderful. Perfect timing. I meant to do this, so hi everyone. My name is John D'Agostino. I am head of strategy at Coinbase Institutional work a lot with our large hedge fund clients, digital asset treasury firms. And the reason I'm in this role is because after about 20 years in the traditional hedge fund space, I developed as a director. So I was a board member for hedge funds and as well as running hedge fund strategies myself. Earlier in my career, I was a COO for a large options hedge fund. And so I had a bit of an understanding of what tradify hedge funds needed to do to get comfortable as regulated registered vehicles with this emerging asset class of digital assets eight, nine years ago when it was a little bit wild west. And I've seen that evolution from tricky to work with to very, very, I wouldn't say easy, nothing's easy, but very possible to work with at a very large asset manager or hedge fund.

Chris Brodersen: Sorry guys, I lost you for a minute. Can you hear me now? Lost me. Yeah, I can hear you. I froze and we went away. It looks like John del Lao had the same challenge, so there he is. Okay, so I missed everything you said, John, but I'm sure it was brilliant and okay. Okay. So again, the moment ago, sort of the segue into the operational piece of, we've been talking a lot about audit readiness and what the surprises are there, but in terms of moving into this space from an operational and control perspective, what should not just digital asset companies, but companies that are going to start touching digital asset, what are the unique things that they need to start thinking about? So for example, key management, security, where are the blind spots that these firms should be thinking about?

John D'Agostino: I think that's first and foremost, right? So you're dealing with stopping, you're looking at your team and saying, okay, I've got phenomenal technology assets. I've got COOs and controllers that just deeply understand the plumbing of traditional finance. Crypto's not necessarily more complex, but as you mentioned, the first question should be, do I have anyone in this organization who understands the intricacies of dealing with a bearer asset? I'd argue that a real asset manager is in some ways better prepared to deal with crypto because if you're buying and if you, you're investing in Uruguayan farmland, you understand the valuation issues associated with real assets, you understand what does it mean to custody of that asset? What does it mean to control that asset? Commodities hedge, one of the reasons that I think that commodities hedge funds have gravitated towards digital assets is that commodities, hedge funds that understand physical ownership or spot ownership, not just derivatives, they've got institutional muscle, if you will, of understanding what the concept of Bayer assets mean.

Now, a lot of this is, I wouldn't say moot, but obviously very few regulated entities are self custodying these assets, but to do their fiduciary duty, they have to kind of understand how their custodians like a Coinbase or Kraken or others, how they're managing that asset. What's the difference between a cold storage and hot storage, for example, and the elevated risk associated with hacking in hot storage wallets versus cold storage, which for credible firms has never been hacked. There are some still, sorry, go ahead. No, you're good, John. Keep going. A couple of years ago, there were definitely still some credible large hedge funds that were self custodying certain assets because the thesis was, well, hold on, I know I have the qualified custodial requirement, however, no one custodies these assets. I'm trading the 50th, the hundredth most popular token. And for a while, even under Gensler's SEC, there were a lot of SEC examinations under Gensler.

I wasn't aware of any funds that were dinged in a material way for doing that. And so there was this odd couple of years where everybody knew that against was SEC was very negative on crypto, and I kept saying, well, I kept holding out hope that maybe he wasn't. My thinking was, well, they could just crush every hedge fund in America. Most of them are using non-qualified custodial wallets to self custody these assets. And their argument, which I think was a reasonable one, is, Hey, we can do a better job because there's no one credible who custody these things. I think now that's a much harder argument to make, and there's no dog here as far as I know, bill. Now, it's a harder argument to make. I think it's maybe possible still, but I think now with this very cooperative SEC and the existence of, I think at this point, clearly qualified.

I used to be very wary of that four or five years ago I didn't like, even when my own firm called themselves qualified, I kept saying, well, we have a very adversarial SEC, they don't give you a certificate. So I'm not sure about this. I used to prefer saying, we believe we satisfy the qualified custodial requirements. I'm not a lawyer, but I can do lawyer speak. Anyway, I'll end here. I think the good news is you have institutional quality, custodial qualified custodial options. If you're trading really esoteric assets, you may still have that custodial issue.

Chris Brodersen: Gotcha. So Sebastian, Richard, when you're looking out there in the ecosystem, and John Delal, I'd love to hear your thoughts on this as well. When you're considering working with a digital asset company, a vendor or a partner, whatever, what are some of the things that you're looking for from a risk and operational and control perspective? Are they SOC audits, type one, type two? How do you think through those things?

Sebastian Bea: Yeah, we will obviously start with all of the security stuff, but we've got better people on the team that can verify those statements. So I focus on where I have a little bit more experience and advantage, which is really understanding the entity and the people and the resources that are backing them and the licenses they may or may not have. Right. And look, I'd go through all of those things before we even talk about the product because there's no point in talking about the product if they're not operating correctly based on whatever the regulations are in the area in which they operate. Do they have the license that they need? Yes. No, it's a very simple question, and many think they do, but don't. Then in terms of backing and resources, that is definitely an issue in this space because we have a lot of startup companies with short operating histories and really thin vacuuming in terms of their resources.

So they might have a wonderful team and a great product, but they may not be here in 12 months. So that's really important. And so I think when you're dealing with vendors, the bar is really high In traditional finance, oftentimes it is the case that you want to diversify because you want to diversify risk. The thing that many, many people will be surprised by is when they enter this space, the way to mitigate risk is actually to concentrate your exposure and watch your exposure very, very carefully. Now, that might change in three to four years as the space emerges as we discussed, but that can also explain why you have companies like Coinbase who have won big, right? Because when you go and look at some of their competitors, there's not a lot on the list.

John D'Agostino: Yeah. Can I throw out something there? Sorry, Chris, is it all right if I jump in here? No, go ahead, please. Yeah, so obviously Sebastian and I are going to tag team complimenting Coinbase, but I'll try not to be biased here. There are some other folks besides coin. Again, crack. There are high quality firms. Now, the one thing I think that if you're tradify and you're engaging in crypto, the one thing I would suggest is don't lower your standards. I'll give everyone the same advice I give my daughters. Don't lower your standards for anyone. What I mean by that is, and I won't name names, but a couple of years, not so long ago, not so long ago, there was a little exchange called FTX and they had a sister company called Alameda, which amazingly everyone was kind of okay with the exchange, the price discovery mechanism owning the market maker, the price taking, price making mechanism.

I always found that odd I if Ken Griffin bought the New York Stock Exchange, if we'd be okay with that. But put that aside for a second, but there were some very reputable hedge funds, very reputable, and I know some of them, I was on the board of one of them who were, because of Ft. X's, FTA policies and processes were wiring money, wiring collateral and capital to the exchange for their account, but sending it to an account in the name of Alameda, now that is just outrageous, and these hedge funds knew better, but they got, they're not dumb, but they got kind of conned into, oh, this is how, this is crypto man. Hey, old guy, you want to send you money to the name of the actual entity you want to send money to. That's so 2024 way of thinking. When I talked to them, I was like, how on earth, these are highly credible people. How on earth did you think this was? Okay? Their answer was all like, well, we just thought that was how you did it in this world, and that wasn't the case, I don't think back in Mount Gox, quite frankly. So I think one piece of advice I would have is you can maintain your standards, your operational standards in cryptos, I'll end with this. If you're not maintaining your operational standards, you're dealing with the wrong counterparty.

Chris Brodersen: Yeah. The way I always put it, John, you've heard me say this a million times, which is just because it's digital assets doesn't mean that the rules have necessarily changed. So we still have KYC, we still have a ML. We still have these government agencies that have the same, unless Congress changes it, those mandates for rulemaking have not changed. So take the word crypto out of the sentence and ask yourself, would I do this if this were not crypto, right? I'm trying to figure out what that difference is. So I don't know if anybody else has any ways of thinking about that, but just from the K-Y-C-A-M-L operational controls perspective. Richard, I'm going to give you a chance to dive in here. Again, I know you don't have crypto on your balance sheet, but how are you thinking about those sorts of things for your customers?

Richard Johnson: Well, so I just want to kind of touch on something that John said that he brought up FTX, which I think is great. It's surprising we haven't talked about it. Of course, that company famously never had an audit, and as you said, for some reason there was no problem with hedge funds investing there. There's no problem with VC funds investing very, very large checks in the company. But if you're a founder now in the digital asset space, those days are gone. You're going to have to have audits. So get ready for that. I think, and just to point out, Chris, we don't have crypto or digital assets in our broker dealer entity. We do have in another entity. We've kept them separate for a reason there, and we're not an investment advisor. I think maybe the perspective of the other panelists here, but I'd say that for a lot of other folks who are going to start, and up until now it's been the people who are dedicated to the space, who've been digital asset advisors, exchanges and so forth, it's now going to expand massively to, I think let's say we talked about the genius Act.

We're crossing the chasm here. We're going from early adopters to the early majority, and very soon it's going to be everyone is going to hold some kind of digital assets, and a lot of these companies are not going to be experts in the space. They may have nothing to do with it and are just receiving stable coins because somebody paid them in stable coins, or maybe they received Bitcoin because somebody wanted to pay them in Bitcoin. So I think in terms of what the service providers like Eisner and others can maybe offer is there's a level of advice needed for people on some of the things we've mentioned, because a lot of the companies new to space aren't going to understand these things, how to custody them, how to prepare for an audit, but also from an accounting and a tax point of view, certainly if you're doing any kind of staking, is that capital gains, is that income where this revenue is coming from? So there's a lot of other things out there, and I don't think there's a playbook that people can follow. So in addition to just the active services around audits and accounting and preparing different filings and so forth, I think there's a big advisory component as well.

Chris Brodersen: Yeah, that's a good segue. John Lio, maybe you want to talk a little bit about this. We've seen a lot of folks come to us and they're quite surprised by, for example, accounting treatment or tax treatment of digital assets versus traditional currencies and how they have to think about that. So maybe you want to give us a few words on that.

John Delalio: Sure. So I think to John Dino's point, the industry's evolving from the wild west and they're getting better, but that doesn't mean that you weren't doing transactions taking an order via telegram or email. So it's really a matter of how do you mature the business while still operating it and put in the right controls? There are liquidity providers and exchanges who can provide a SOC report. There are some that can't, okay, it is what it is. You have to get through that to pass your audit, and there are ways they can look on chain and all that, and that just extends out the length of your audit. But I think there's kind of four things that I look at, and one is you just got to understand the inventory is a variable fair market inventory of a lot of objects that need to be tracked.

So you need to track your transactions do not fall behind. I would also suggest using, there's a lot of good technology out there to track your digital asset transactions. If you're not using that, develop something, it's very complex. You have to basically track every single asset movement, every single cost fair value on that day, depending on the type of transaction. It impacts the accounting treatment. So that's one. The second thing is take a look at the AI CPA Digital Asset practice aid. You can find it online. If you want to text to any of us, we can get it to you as well. But that's like the rule book that explains a high level of all the journal entries that are needed, but it's vague. There's a lot of situations that they don't prescribe, but you want to understand, okay, what is my business and what is going to be the journals?

How am I going to track this am my balance sheet and p and l? And then I can't say anymore how important SOX is. So it's definitely the valuation side, the transaction classification custody is in that. So if you're not talking to somebody about passing socks, you've got to start that as well along with your audit. You need to do both. If you're going to be a public company, they do a little bit with IT general controls, but it's really more about keeping your financial statements accurate and having a fair value of crypto at all times. And then I think the last thing is your middle office is your best friend or your enemy, because those folks are on their game and they're making money. And I know there was an event a couple weekends ago, October 10th, that sent a lot of middle offices scurrying to protect their positions. It was a big deal, and hopefully there's companies that have the right controls in place that they don't lose control when an event happens like that.

Chris Brodersen: Yeah. So that's another great segue. I wanted to talk a little bit about what happened on October 10th. So John D, you mentioned that it's not quite the wild West anymore. In some areas I think it is, but for the most part, for the grownups in the room, we do have institutional grade solutions to support these organizations like a Coinbase and others. But to me, and I want some opinions here, and maybe there's a difference of opinion. What we saw happen on October 10th points out to me the fragility of the systems that we have in place with some of these providers and the controls at the customer. I mean, do you agree or disagree with that? Because really it wasn't a hack, well, maybe you could call it a hack, but prices had started to slide before the China tariff announcement. I think that only added fuel to the fire, but we were already seeing somebody trying to take advantage of the weakness in the Binance internal pricing mechanisms, is what I understand. I don't know if anybody else has a difference of opinion on that.

John D'Agostino: I don't, Chris, but I guess it all, a lot of it's, I think a function of where you're from in the sense of I grew up in the commodity derivatives markets, so nothing that's happening in crypto is surprising, and it was a lot worse on the IMEX floor back in the day. So I think there are certain assets that trade when you have a significant over the counter and derivatives multiple to spot, I mean, commodities to this day, despite being one of the most important liquid markets in the world, I mean, crude oil, as we all know, famously crude oil went negative less than two years ago, it went negative. So I view crypto for probably the duration of my lifetime, just I have you certain types of options as they're always going to be prone to that type of gap risk. It's going to get better as you got more and more ETFs and more different type of market participants.

But I hate to say this, but that's kind of the reason why it's interesting from an alpha production level, it's not munis, it's not large cap US equity. So I'm not trying to underplay the severity of what happened on October 10th, but again, up, I learned how to do all this. I didn't learn on the equities floor. I learned trading natural gas on the ninex floor that makes this look simple, that makes this look. So I think for those of us who come from that world, we're like, okay, well that's not great what happened on October 10th? But you've got a market that went from two to 4 trillion in less than two years with some assets gaining well over two, 300% to have a drawdown in the low teens that largely bounced back two days later.

Again, it's serious, but I think it's to be expected to some degree. And one last thing I'll say is I do think sometimes crypto bits a bad rap because if you think about what happens, so public equity markets fall, and I'm on the boards of venture capital, private equity, venture capital funds. So public markets crash, and then you go to a board meeting for the VC fund and the marks haven't changed, and you're kind of like, well, wait a second. That's a little bit odd. And they have the luxury of that cadence, and I'll submit this, I'll submit that the instantaneous transparency of crypto makes it to equities markets as equity markets are to private equity, meaning I think to some degree we're a victim of our own transparency, and I think the volatility that we see is a function of that. So it's not great when those things happen, but I think if you want to be in an asset class that can triple in a year, you've got to expect some bumps in the road.

Chris Brodersen: Yeah. John, listen, there are four of us, and I don't know about you Mr. Glio, but there are four of us who have capital markets slash trading backgrounds. Into your point. Those sorts of movements are not shocking to us. But if you look at the broader crypto world and the people who are involved, especially people who are a lot younger than this group to them, that is kind of shocking. They're like, whoa, I didn't know that could happen. So it's

Sebastian Bea: Lemme jump in here. Yeah, go ahead. I think the reality is the new kid on the block always gets bullied, right? And who is he being bullied by? He's being bullied by incumbents that are slow and have failed on repeated occasion, right? I remember when I was on the desk during the flash crash of May 6th, 2010, right? I was at CSFB, and if you go back, well, CSFB doesn't exist anymore. Let's start there. So dating myself, but if you go back and look at what occurred in that period, right? This amazing and incredible capital market system that we have failed completely because someone turned off a data feed and all of a sudden market makers couldn't hedge with futures, and then traders send stocks to pennies. Literally.

Let's just make sure we recall that. There's a lot of context here that's useful. I think also specifically with the case of crypto, one of the benefits is it's operating 24 7 and there is a lot of transparency to John's point, and there is significant and continued innovation that's occurring well faster than what any regulator could poke and prod to actually have happen. And you could see how many of the DEFI protocols, which have separate issues around A-M-L-K-Y-C of course, but we just talk about how they were operating during these stress periods. These things outperformed tradify under stress, full stop, end of story, and no one with a serious view. We'll actually disagree with that. So these market moments that are not great at times that are exacerbated by, let's say, retail traders offshore taking on excessive leverage, these are also showing us that some of these tools are actually the solution to the fragility we actually have in the tradify system. So I'll get off my soapbox there, but I just want to be really clear. We had this massive flash crash in Bitcoin's. What? It's like 10 off of the high, right? What we Yeah, go ahead.

John D'Agostino: So there's other people here on the call too. I don't want to monopolize, but I want to jump on something Sebastian just said when you have a moment. Is that okay, Chris? Yeah, go ahead. Go ahead. Alright, super quick. Sebastian made a great point there about the relative fragility, and not to take us off topic, but I think one of the things that in all this kind of craziness and all these flash crashes, and I'll mention something, even crazy meme coins. There's a reason you're reading about most major exchanges starting to experiment with running side by side tokenized equity platforms using, for the most part, not all of them, but many of them are using the Solana blockchain is a reason. It's because the wackiness of meme coins proved that resiliency. So when you would read about some wacky coin with some crazy even offensive name going up and down, 20 billion of market value over the weekend, you can scoff at it, but the boards that pop out to me are 20 billion and over the weekend and try doing that along traditional financial rails. So you're seeing millions of transactions and billions of dollars of value seamlessly being moved 24 7, 365 holidays, weekends, whenever, and now we have a long enough, again, ironically, this sort of thing that many people think is frivolous meme coins prove how serious this infrastructure is.

Chris Brodersen: All right. Well, we're going into the last few minutes here. I would encourage our audience to have any questions, put them into the q and a box, but just to sort of round this out, I want to go around the horn and ask each of you, if I am a startup or even a mid-size company, what is the one thing that you think I should take away from today's discussion? I don't know who wants to go first.

John Delalio: I'll jump in there. I want to tag onto what John was saying. There is no question. Digital assets are going to show up on everybody's financial statements in the future. No questions. Stable coins are going to be the commerce of ai. Robots are not going to be unrolling dollar bills and handing 'em to one another. They're going to be transferring digital assets. So this is here to stay. I think the rigor of going through an audit and going through the process, as Richard talked about, is the best thing that can happen to a company because it highlights your lack of controls and it forces you to put in a control. You can thrive in this industry and you will. So I wouldn't be shy about it, but I would also say go in with your eyes wide open and be smart about it and start from yesterday to get your books in order and understand what your risks are and what your controls need to be.

Chris Brodersen: So Richard, what am I taking away from your comments today?

Richard Johnson: I think we had a lot of great conversation here eg group with what John just said, but let's say if you're a small medium company, you've been focused on growth and you are focused on maybe getting an exit or getting a public company listing or maybe getting acquired or something like that, it's okay to be focused on growth, but don't forget about the boring stuff, like the financial side of things and making sure your house is in order that is going to make the ultimate goal that much smoother.

Chris Brodersen: Great. Sebastian, any closing thoughts?

Sebastian Bea: Yeah, I would just say focus on not just the level, but the change, right? So you're thinking about these assets and what they could mean for your business, whether it's held them on balance sheet, accepting them through clients, et cetera, and you're looking at the environment and what you'll recognize is that this is a new set of assets, going to require a bunch of things to get done, but also this industry is in the midst of change. And so you're not just getting ready for one particular moment where you can then declare victory and say, okay, we did it right. This industry is evolving pretty quickly. So I think you just have to have your eye on the horizon as to how these assets are evolving and the regulations around these assets are evolving and be ready to not only get to the standard as it is, but also recognize that bar is continuing to move.

Chris Brodersen: Great. And Mr. Dino, you get the last word?

John D'Agostino: Sure. I'd say if you're already in crypto, maintain the highest possible standards. Even if we replace the entire existing financial infrastructure, we don't need to break everything. We don't need to break systems of trust, systems of integrity, professionalism. You can reinvent the wheel while keeping the core components of the wheel that make it strong and stable. If you're not into crypto right now, my suggestion, look, if you're planning on gliding out your career over the next 10 years, you probably don't need to learn that much. You probably can ignore AI and crypto, quite frankly, but like I do with my daughter, my 11-year-old daughter, I make sure she makes me listen to all of her music. So I'm trying to stay relevant, stay relevant. It's not that hard. Don't lower your standards. The counterparties are now there that you can speak to in grownup language, and they're not that hard to find. There's dozens of companies now that are highly credible that you can deal with and learn about the sector.

Chris Brodersen: Great. I think we're going to run over here just a couple minutes if you guys can bear with me, because there's kind of an interesting question in the chat here. Based on Sebastian and John's notes on digital asset auditing and compliance, our research shows rising demand for robust controls among asset managers and adjacent sectors. From an early stage platform's view, what's the best way to partner with large enterprises to meet evolving regulatory slash compliance needs? Which integration models, proof points, and early certifications matter most? So that's a

Sebastian Bea: Long question.

John D'Agostino: A long question. It's an entire

John Delalio: Webinar right there.

John D'Agostino: Yeah, we can do a webinar on that. I know, but I'll say this, and again, I won't just pump up. Coinbase, Coinbase, Gemini, all the major exchanges now have business units called some permutation of the term crypto as a service. They've all realized they have to come in a holistic approach and enterprise. Coinbase announced today it's partnership with Citibank. So whoever your cup of tea is, whoever you want to work with, they should have that broad-based program that helps you satisfy all elements of integrations, the crypto ecosystem. And part of that is having the SO ones and having all that policies and procedures that you would need. I don't know which ones you want, but if you're again talking about doing credible institutions, they should have a crypto as a service offering that fits into your enterprise model from a regulatory perspective.

Chris Brodersen: Yeah, and John, one of the things that we talked about preparing for this call, I think you and I have this conversation, if you have questions or comments, reach out to your network, right? Whoops.

John D'Agostino: Yeah. Can I make a pitch for AMA here? I think AMA ISS really good at this. I started ama. AMA is great. They're a nonprofit industry working group, pretty cheap to join. We have a great digital asset working group and I think for less than like three grand a year, you could be a member and you get access to all that information. So Pauline has just stepped on toes, but I started that group, so I like it.

Sebastian Bea: I would just add two quick things. One, just get your hands dirty, personally playing with some of these technologies. And two, check your expectations and what you think you want to say and think you what you want to do before you actually experience the technologies. Early on in my career, I met a guy and he said, look, you're being too dysmorphic. And I didn't know what that term meant. I'm not even sure he was using it correctly, but he was basically trying to say, you're coming from trad via, and you think, but you have no idea. Some of the things are highly relevant, some of the things are not relevant, some of the things are brand new here. And come at this with an open mind and listen first, I found that great advice that I followed two years later. So I would just as they're thinking about this question of how do you partner and deal with these needs, I think is really important just to pump the brakes and just recognize there's going to be a lot of new things and you cannot anticipate them. So it's best just to listen and learn first.

Chris Brodersen: Great. Sorry guys, I lost you for a minute, ostrich. I don't know if anybody else has anything they want to say, but I'll hand it over to you.

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