{ "episodeId": "SLP33", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "kara_haas": { "name": "Kara Haas", "role": "guest", "tag": "KARA" } }, "segments": [ { "speaker": "stephan", "time": "00:04", "start": 4.38, "text": "Welcome to the Stephan Livera podcast." }, { "speaker": "stephan", "time": "00:12", "start": 11.59, "text": "Welcome podcast listeners to the Stephan Livera podcast. So today my guest is Kara Haas. She is a CPA and auditor in Bitcoin and crypto. I saw Kara had some interesting thoughts recently on Twitter summarizing the thoughts on things like audits, attestations. And, and just to sort of represent the view from a real accountant and a real auditor. So, welcome, Kara." }, { "speaker": "kara_haas", "time": "00:36", "start": 36.46, "text": "Thanks so much for having me, Stefan." }, { "speaker": "stephan", "time": "00:39", "start": 38.75, "text": "Oh, it's a, it's a pleasure to have you on. So, Kara, maybe you can just start with a little bit of a background on yourself and how you came to be interested in Bitcoin." }, { "speaker": "kara_haas", "time": "00:47", "start": 46.59, "text": "Absolutely. So, I've been a CPA and a fraud examiner since about two thousand three, and typically been, a practitioner just Sole practitioner, done a lot of consulting engagements and back around two thousand nine, two thousand ten, when Bitcoin, Bitcoin first came to be, I became interested in it. I've always been interested in emerging tech. I was very involved in the payments field and working with independent retailers. So some of the new emerging payments that came to be around that time, adoption of PayPal Dewalla, which, is also like a digital wallet, digital method of, of transferring payments. I became interested in it, but of course, it was difficult at that time, more difficult than it is today even to, to acquire Bitcoin. And I just watched the space a little bit, took some time off, went back, I was pursuing my doctorate in accounting. And I really wanted my research interests to be blockchain and, and cryptocurrency, and I had to take some time off from that, and when I was during my break is when Bitcoin really became mainstream. And so at that time it was the rise, it was about a year ago, year and a half ago, and all the ICOs were coming, to market. So I just, in order to still be in the habit of consuming research, just got in the habit of reading ICO white papers, For a while, once a day. and so I really just learned by, by reading, engaging. I'm very active on Twitter. And I've, I've since, engaged with a great group, of traders, developers. originally my intention was to help accountants understand, cryptocurrency, mainly just because I wanted them to get the jokes. but I later learned that, the developers a-and some of the traders and people who were active in the space but didn't have A background in accounting became very interested in audit and accounting, and so they've been the main people that I've worked with. I do a lot of work, in incubators, with the developers, understanding, the impact of accounting, What compliance they may need to abide by in order to bring their projects to market when they're ready." }, { "speaker": "stephan", "time": "03:48", "start": 228.16, "text": "Fantastic, Kara, maybe you could tell us a little bit about why was it that those developers and traders all of a sudden became more interested in accounting and audit, it's not the typical thing?" }, { "speaker": "kara_haas", "time": "03:57", "start": 237.25, "text": "No, it's really not, and it, it's really, quite interesting in particular because of course we know, there's all kinds of controversy as to how Bitcoin came to be, is that, that we wanna be self-regulated And, so we really don't need that type of thing, and of course, the, the debate over, the ability To perform, transactions without a trusted party. but really this really came to a head with, with the whole stablecoin phenomenon, With, with Tether and Bitfinex in particular, and, and with Tether claiming, that they had an audit, back in September of 2017. Just as an auditor in the space, it, it was constantly nagging at me, when people would refer to anything that happened with Taproot as an audit, because they never did have that. In fact, even with Friedman, who was their original accounting firm, it was just a consulting a-agreement, which we'll talk a bit more about that. But in, the auditors never provided any assurance that there were, was backing. So once, once that argument really came to a head when Bitfinex was having difficulty with their banking in particular, and there was difficulty with, Redemption a-and the price of Tether or, or the price of Bitcoin on Tether traded exchanges, Was, I think at one point maybe ten percent different. there, there really became that interest in, hey, wait a second, maybe we do need a third party verification So I just, I started getting involved in, in, into some Twitter conversations with people about understanding the language and accounting the language in the field, and of course, the developers as well. A lot of them who have attempted to, to bring ICOs to the market or are preparing to aren't considering the other side of the entry when they're creating a token. So they may just mint a token, but of course, in accounting, we have to have an offset to it, and nobody really thinks about whether that's debt or equity. From an accounting perspective, everybody's just been concerned about what in the US in particular, the SEC is considering." }, { "speaker": "stephan", "time": "06:48", "start": 407.96, "text": "Right. So it's a little bit of a category bender from an accounting point of view. So what are your thoughts on that sort of debt or equity aspect?" }, { "speaker": "kara_haas", "time": "06:56", "start": 415.62, "text": "Well, the main thing is, is that if everybody wants to, to run from, from the equity side of it and doesn't wanna be a security, then it absolutely has to be debt. and in that case, it would be either deferred revenue, or, or debt like performance of an obligation. And so In, in doing it that way, the one thing that a lot of developers aren't considering as well then is that they do need to have Know your customer compliance going on there because you can't," }, { "speaker": "kara_haas", "time": "07:38", "start": 458.21, "text": "offer that to an un-unknown party. For, for example, with, with the US in particular, You have to assure the US that you're not selling it to somebody we have sanctions against, say North Korea. So They do have to go through compliance from that regard as well. I would say, I mean, at this point, since In my opinion, there's a hold on issuing any, token projects or any ICOs i-in the US. My attention has gone away from that a bit. That I haven't really kept up with, with how they're, they're planning on doing it until the SEC comes out. Because any ICO advisors that are advising people to do offerings right now, I don't agree with that." }, { "speaker": "stephan", "time": "08:37", "start": 516.55, "text": "Right, right, I see. now I just wanted to bring it back to something you touched on earlier. Now within Bitcoin, obviously part of the ethos is this whole concept of don't trust, verify. Now, you touched on this earlier around assurance. And what is an audit versus what is consulting? Just for the listeners who aren't as, you know, audit savvy, could you just outline what is assurance and what are some of the different types of assurance?" }, { "speaker": "kara_haas", "time": "09:02", "start": 542.16, "text": "Certainly. So the main thing that assurance provides and why it's important, and the stablecoin market is a good market to use as an example because Most of the products that are popular in the market right now are claiming a one to one US dollar peg and are saying that they have one dollar for every one of their tokens. And so in order to provide that assurance right now, they do need a third party, and it has- Up to this point, Ben, an accounting firm, the AICPA of course has, has audit standards and attestation standards to provide assurance, and what it does is it, it allows the CPA to gather as much evidence as possible to support the fact that there really are The cash reserves that, that the project is saying. And it, it's in the form of independent bank confirmations, which there's a lot of debate as to what a bank confirmation is, or at least I should say there's a lot of confusion out there that I've seen. the biggest thing with a bank confirmation is the auditor is in control of that communication the entire time from the request All the way through the process to the bank or whatever that financial institution is holding those dollars, all the way back to the auditor, because so many of the bank confirmation frauds over prior years Have been where that confirmation has been intercepted midway through and could be tainted with, or it could be where" }, { "speaker": "kara_haas", "time": "11:06", "start": 666.27, "text": "there's a, the CEO, I c- I can't think of the exact letters of the broker dealer P-PFGP, the broker dealer fraud where it was bank confirmation, and they," }, { "speaker": "kara_haas", "time": "11:23", "start": 683.25, "text": "the CEO had his own lockbox. That the auditor thought that they were sending the bank confirmations to the bank, and here they were sending them to the CEO, control lockbox. So they just made up The, the bank confirmations." }, { "speaker": "stephan", "time": "11:41", "start": 701.47, "text": "Right, okay. So let's go, let's maybe just walk that through in an e-example. So let's say I'm unsure of this particular stablecoin company, you know, an auditor is engaged as, and as part of the procedures that the auditor is performing to confirm, okay, that yes, you really do have one million dollars in X Y Z bank, they would go to that bank as the auditor, not through the company, and request This confirmation." }, { "speaker": "kara_haas", "time": "12:10", "start": 729.79, "text": "Correct, exactly. And, and auditors have their own bank confirmation standard template forms or there's, there's online, Electronic confirmation products as well, confirmation dot com is one, where the auditor is in control of that communication the entire time, and it was actually, it was PFG best that was the, the broker-dealer fraud that I was thinking of, and- What happens is, is that the, the auditor, ever since then, and as we evolve, auditors are more inclined to double-check the mailing address, double-check with the bank. they, they do extra due diligence to make sure that that relationship is solid. That they, they are comfortable with the person at the bank that is confirming that. and then of course they go through additional procedures as well. To make sure that that cash, that one million dollars, hasn't been pledged to something else, say another property, another project, backing a loan. So that that way they can come back and say, \"Yes, there are one million dollars backing these one million tokens.\"" }, { "speaker": "stephan", "time": "13:46", "start": 826.43, "text": "Right. And so what are some examples of, what's the correct term? Is it an encumbrance or what's the example there of, you know, these dollars have been pledged elsewhere or there's some kind of debt that, you know, the auditor wasn't previously aware of and now has discovered?" }, { "speaker": "kara_haas", "time": "14:03", "start": 842.84, "text": "I think encumbrance for the most part is, is the acceptable, acceptable term m-mainly just that, that it hasn't been pledged. Pledged is another, typical word that we use to secure something" }, { "speaker": "stephan", "time": "14:22", "start": 862.23, "text": "else. Sure, sure. Okay. And then, now let's just go back to the different types of assurance offerings that typically auditors offer. So my understanding is they might do something like an agreed upon procedures, or there might be more of a consulting arrangement, or there might be a full blown audit. Can you maybe just outline some of the different types and what are some of the differences in those?" }, { "speaker": "kara_haas", "time": "14:45", "start": 885.44, "text": "Absolutely. So in a consulting agreement, usually that is where we're acting more as an advisor. there's no issue of independence, and we're more or less just giving, giving guidance to the client There's no opinion form, there's nothing of that nature. it's just w-we're helping the client to, produce. Financial statements or whatever it is that they want to, in accordance with proper accounting. The next level up is agreed upon procedures. It's also known as attestation agreements or attestations. Those are what we currently are seeing in, in the stablecoin market, and those aren't that different from an audit, other than the fact that it's a select group of accounts. That the auditor is examining. And in the case of the stable coins, we're examining cash accounts. And some engagements may have accounts receivable or some other inventory or something lumped in. At the moment, the only thing we're seeing in the market is cash reserves. The auditor in an attestation agreement is still using the same procedures that they would In a full audit. The primary difference between an attestation and an audit is that the audit, the auditor is expressing an opinion on the financial statements as a whole. So on the assets, on the liabilities, on the shareholders' equity, the balance sheet The income statement, the statement of cash flows, in other cases internal controls. So In the case of the stablecoin market, the, the attestations, it's my opinion that right now, since no one is talking about these as equities, people are only talking about these as tokens, it's, it's, it's my opinion that The users, the token holders, only have a right to that one to one dollar backing, that assurance, that's all they have an interest in. They don't have an ownership equity interest, so technically they don't have a right to those financial statement audits. I'm sure many of these projects or some of them may need to have financial statement audits for their lenders, other stakeholders, individual investors, but in the case of the token projects and the stablecoins as they are, the attestation At this point is sufficient." }, { "speaker": "stephan", "time": "17:54", "start": 1073.69, "text": "Right. And now one other thing maybe you could comment on, I think around the time of some of the Tether drama and news, there was a discussion about- You know, this distinction between having an accounting or audit firm do some procedures versus having a legal firm do some procedures. Can you comment on that?" }, { "speaker": "kara_haas", "time": "18:12", "start": 1092.35, "text": "Absolutely, I would love to. I forgot about that. So the only people who can perform an audit are accountants, i-in particularly, I'm speaking to the US, but, but I believe this to be the case globally, but using the AICPA, Standards and guidelines. Anything issued by a law firm isn't considered, an audit. A-and the law firm that, that did do the memo, was it June 1st, I think maybe? When they issued that, they did, they did say, and they did abide in there, that it was not performed, using AICPA guidelines, and it was not an audit or an attestation. So those are, I mean, auditors or accountants and, and attorneys, there's, there's kind of a fine line between the professions sometimes as to, to what Who practices what, but, but that one in particular, only accounting firms can issue audits." }, { "speaker": "stephan", "time": "19:31", "start": 1170.99, "text": "Yeah, fantastic points. Okay, now How about on the general case of Bitcoin accounting? Do you have any, thoughts on what you believe the correct accounting treatment for Bitcoin and cryptocurrencies is?" }, { "speaker": "kara_haas", "time": "19:48", "start": 1188.4, "text": "Well, for quite some time, I really, there's two camps out there, and right now the current best practices is for it to be an intangible asset, which means that it is recorded On the balance sheet as an asset at cost, subject to impairment, which means if the value goes down That the company would write that asset down, but never has the opportunity to write it back up if it regains. So if you have one Bitcoin on your balance sheet that you bought for ten thousand dollars, and you were getting ready to Report 9:30, balance sheet. I can't remember what the price was, 6,500 maybe? But you would have to, to write that asset down, that Bitcoin down to 6,500. If there's another bull run and the price goes back up at the end of the year, in theory and best practices right now, it says you, you don't recognize that gain if it were to go back up to ten thousand at the end of the year. Now, the, the opposing camp would like to see fair market value treatment, similar to what we would do for, for other investments, derivatives. The, the, and I've been a proponent of it, for quite some time until I really started to take a look at some of the exchanges and some of the activity happening. And the potential for manipulation that until there's some type of standard on, on the market and the exchanges, I just- I, I don't see regulators or, or even the industry as a whole adopting that treatment." }, { "speaker": "stephan", "time": "22:03", "start": 1322.6, "text": "Right. What are sort of the basics on the difference between intangible versus fair market?" }, { "speaker": "kara_haas", "time": "22:08", "start": 1327.61, "text": "So the main thing is, is just the ability to recognize, The unrealized gain or loss in between. and an intangible treatment would be more like goodwill, or Software, things that literally are just written down over time, but you're not, you're not holding them on your books to make money or to recognize value. and, and one of the issues in particular with fair market value right now Is that we have so many exchanges. there's, there's some coin aggregators and market aggregators that are better than others, but we have to come to an agreement on What constitutes, a fair value as well? Like what aggregator, what market do you use? And in the case recently of the past four, four weeks or so There, there was a hundred dollar spread on Bitcoin between tender exchanges and, and non. Yeah." }, { "speaker": "stephan", "time": "23:23", "start": 1403.05, "text": "Yeah, so I, that is an example there where if the market can't come to a real conception of You know, okay, is there enough liquidity across all the different exchanges? Is it well established enough across, you know, the world that this is the price for Bitcoin? Well, then it might be a bit harder to justify the use of fair market value accounting. Now, does the treatment, in your view-- I'm not sure if you've had much exposure or work internationally-- do you find that in some countries it's more of an intangible and in other countries they treat it more like a fair market value, or is it pretty much intangible?" }, { "speaker": "kara_haas", "time": "24:00", "start": 1439.81, "text": "So far, I haven't. at the moment, I believe most to, to treat it as intangible. W-where most of my, Exposure ironically was, was a parallel market recently. Cannabis between Canada and the United States has become popular. And In, in Canada, cannabis can be treated at fair, fair market value, but in the United States, it has to be treated, at cost. And so as I was starting to study those two differences, that's where I really started to see the potential for manipulation in the books. And if you look at a case, like the Bit, Bitmain IPO, that they, they did issue their prospectus. And in that prospectus, they say that they will treat it as an intangible, recorded at cost. Subject to impairment at management's discretion. So they, given that they're looking to IPO in Hong Kong That, that to me kind of tells me that it's mainly, mainly intangible. I haven't seen too much fair market, but what I am seeing is Management of different projects taking, taking the opportunity to at least say, \"We're gonna use our own discretion, since there isn't an industry standard.\" We're just gonna go ahead and say we'll see how it is when we report. Now, there's a couple stocks, in the United States that have reported fair market value, and the SEC has definitely been vocal about it. and Riot Blockchain, it is a great example. They, they definitely use fair market value, and the SEC has sent them comment letters." }, { "speaker": "stephan", "time": "26:20", "start": 1580.26, "text": "And so in that, that's essentially a comment saying we're not agreeing with your accounting treatment, or what does it mean?" }, { "speaker": "kara_haas", "time": "26:27", "start": 1587.25, "text": "Exactly. So SEC comment letters typically will come back and say, either this is what the standard is, or this is what best practices are. We need clarification, we need better reconciliation. A lot of times the SEC is just looking for, better reconciliation of numbers. a-and then- And I see this in Canada too a bit. I've been looking at a few more of the blockchain stocks that are on the Toronto Stock Exchange and their comment letters Are, are similar, that investors need better guidance, they need, disclosures." }, { "speaker": "stephan", "time": "27:10", "start": 1629.5, "text": "Right. Okay. another topic I was keen to hear actually was around this concept of timestamping. Now, to what extent can an auditor use the blockchain as some form of evidence, and what kind of impact does, you know, this timestamping function have?" }, { "speaker": "kara_haas", "time": "27:29", "start": 1648.74, "text": "Certainly. So I definitely am keen on the time stamping function of the, of the blockchain to provide additional support, particularly in cases I think of, of Bitcoin and Ethereum, where projects or companies are, are using it as a form of payment, whether it be, performing services in exchange for contracts. goods and services, the, the timestamping function and the ability to interact with blockchain, interfaces a-and be able to have transparency to a wallet, does provide that extra backup support. I mean, far off in the future, I, I don't- I can't say when, and I'm certain at some point we will move to it. But in transacting on that ledger, it really does become a sort of a bank statement, or, or no different than transacting with credit cards and things like that. So it definitely does provide third party evidence, but At this stage, as long as most projects are banked and there's a bank involved or some kind of financial institution, there's people, there's There's actual fiat, you still need third party verification." }, { "speaker": "stephan", "time": "29:03", "start": 1742.85, "text": "That's a good point. And I think it's, well, it's true that, you know, Bitcoin is an open public blockchain. It's, you know, you have seen some people come out and say, \"Oh, well, you know, people can just put their accounting entries or just do the accounting based on, you know, what they see on the chain.\" But I think there's, there's a few real hurdles that you, you know, you just, you had- You'd have to ask the question on whether that's actually feasible, you know, for example, different, you know, would, would, would a company really be comfortable having everything kind of visible in terms of all their assets on Bitcoin's blockchain, say?" }, { "speaker": "kara_haas", "time": "29:40", "start": 1780.07, "text": "Certainly, and, and is it really necessary? And, and there's, there's two issues there. One, just scalability and necessity. I mean, why, why treat the blockchain as a database if you don't need to?" }, { "speaker": "kara_haas", "time": "29:58", "start": 1797.68, "text": "in particular, I mean, so many of these companies, and, and they don't need, to keep track of their Amazon purchases or Or receipts or, or something like that for an eternity. so some of that information at, at some point, I'm sure could, could be stored on a side chain or using smart contracts, but even so, I think in-house centralized databases, don't need to go away. Most companies don't need beyond that, and that The, the Bitcoin or Ethereum or some of our bigger, cryptocurrencies that will be used as payment or even some of the bigger platforms that smart contracts will be involved, they, they can Act as support and they can serve as a payment rail, but they don't have to be a company's entire set of books placed on the blockchain, which I think I see a lot of, a lot of people want to move toward that. And, and the other, the other thing in particular is the whole, you started to raise this of, of privacy, and actually in listening to, Xian Wu, his comments at, the mining summit is you don't want everybody in the world to know Your wallet addresses, even if they're public, necessarily because there's the potential-- I think he used the example of a restaurant. You don't wanna go to a restaurant, the waiter know your wallet address, see how much you have in there, and then come back and charge you more. so there's that issue of, of privacy as well." }, { "speaker": "stephan", "time": "32:07", "start": 1926.76, "text": "Fantastic. And now another related concept with- Bitcoin and the blockchain, you've seen people talk about this idea of, oh, we can use the blockchain and do triple entry accounting. So, Kara, maybe you could, just for the listeners who aren't as familiar with accounting, just outline a little bit around, you know, what is, first of all, double entry accounting, which is, you know, our bread and butter in accounting, and then what is this concept of triple entry accounting?" }, { "speaker": "kara_haas", "time": "32:34", "start": 1954.02, "text": "Certainly. So double entry accounting is two sides of the ledger, the left and the right side. You, you need to have On the left a debit and on the right an offset a credit. And this helps in number one, making sure that the books balance. It makes it easier to find errors. If, if there's something off because you, you have a hash and ability to, to determine whether it floats on both sides, and it also forces management to take a look at What the offset is to their entry and the impact of it on the financial statements. So with a balance sheet and double entry accounting, we have assets must equal liabilities plus equity, or Assets, what you own, minus what you owe, your liabilities, equals what you're worth, which is your equity. And Back in the 80s, Yuji Juri came up with the idea in a research paper. Called triple entry accounting. It was before the blockchain, it was before Bitcoin, and it was far more involved in forecasting, providing more forward-looking information He, he talks about, momentum statements, force statements. To a degree, I suppose it would be similar to, generally accepted accounting principles and, What we call GAAP reporting versus non-GAAP reporting, which is pro forma earnings, projections, things like that. That was more so, and there, there still could be a place for triple entry accounting, but it's not necessarily on the blockchain. and I think too many people picked up triple entry accounting and they're thinking, \"We have our accounting ledger, we're gonna put our debits and credits in, plus we're gonna put it on the blockchain, or we have that timestamp.\" counting as a third entry, and it's really not that." }, { "speaker": "stephan", "time": "35:13", "start": 2113.09, "text": "Yeah. So it's more like a blockchain pipe dream." }, { "speaker": "kara_haas", "time": "35:16", "start": 2116.28, "text": "A little bit, or, or just In the industry, of course, we, i-in the crypto space, we, we moved quickly and so did our understanding of, of different words. So a lot of times our debate is largely semantics." }, { "speaker": "stephan", "time": "35:33", "start": 2133.49, "text": "Right, I see. Yeah. Now, another con-concept that has sort of really hit the mainstream recently is this whole idea of full reserve banking versus fractional reserve banking. And so some of the comments, you know, over the last, past few months has been about whether Wall Street will do things like commingling of assets or rehypothecation of assets, such that people don't actually own, you know, one hundred cents on the dollar, so to speak, or they don't own one full- Bitcoin of that Bitcoin, because maybe it's been, you know, pledged elsewhere, so on. Do you have any thoughts around, you know, full, full reserve banking versus fractional reserve banking as applied into Bitcoin?" }, { "speaker": "kara_haas", "time": "36:17", "start": 2176.65, "text": "Well, from my perspective, the crypto community has already done it and already surpassed it, without Wall Street getting involved and doing it, when we have a hundred x Leverage and margin trading going on, when there's questions as to whether," }, { "speaker": "kara_haas", "time": "36:45", "start": 2204.68, "text": "We have stablecoins that, are fully backed or not. And in some of, like, the lending tokens, where, where, They're giving loans out for people to buy more crypto, when you have exchanges that are Allowing what's called trans-fee mining, where a trader pays the exchange a trading fee in Bitcoin or Ethereum, and the exchange turns around and pays that Refunds that fee in their own coin. It's a way that the exchange now starts accumulating Bitcoin and Ethereum. And Now these traders have the exchange coin, but the exchanges, the, the, the people giving loans, to me that's rehypothecating. As well as like a situation of, of Coinbase or somebody holding their Bitcoin on a exchange. They don't actually have custody to that cryptocurrency, to that Bitcoin. So if it's just held in an exchange pool That exchange now can turn around and, and rehypothecate that out as well. So I, I think the crypto community has, has really, done a great job of rehypothecating already." }, { "speaker": "kara_haas", "time": "38:35", "start": 2315.45, "text": "and so I don't know, whether-- I don't, I don't wanna say I have an opinion as to whether Wall Street's just gonna come in and And make that even greater, or, or just seal it up, but really in order to avoid rehypothecation Everybody needs to have custody of their crypto, of their Bitcoin, and not be willing to loan it, not be willing to use it as collateral." }, { "speaker": "stephan", "time": "39:10", "start": 2350.24, "text": "Right, and so what role can InOrder to play in terms of helping these exchanges or these other Bitcoin companies provide that sort of proof of reserves?" }, { "speaker": "kara_haas", "time": "39:23", "start": 2362.63, "text": "So the main thing is in, in having, having an audit and wherever the reserves are held, in particular the, the, the Bitcoin reserves It's really having that relationship, the working relationship of making sure that the exchange, their addresses, the wallet addresses, monitoring them If there is any offsetting cash, we need to be able to actually do confirmations, third party confirmations with wherever that cash is held, wherever that fiat is held. and then we subsequently do due tuss third-party confirmations on that money to see if it is pledged somewhere else." }, { "speaker": "stephan", "time": "40:14", "start": 2413.94, "text": "Right, so they're the key aspects. Okay, and now another area that I, I know you've done some auditing work on is around AML. So do you have-- Do you, do you wanna maybe just comment a little bit on what are some typical obligations under AML laws?" }, { "speaker": "kara_haas", "time": "40:30", "start": 2430.19, "text": "In particular with AML, the, the main thing, and AML stands for anti-money laundering, and, and KYC being know your customer. And what's happening in, in the crypto community, and what has regulators concerned is if somebody wanted to money- Use crypto for money laundering, they could essentially walk up to a crypto ATM, deposit ten thousand dollars, get ten thousand dollars worth of Bitcoin, and away they go, it's now into the system. So in order to provide some sort of assurance that we know our customers and that we are complying with anti-money laundering, we need to put" }, { "speaker": "kara_haas", "time": "41:23", "start": 2483.38, "text": "some things in place to know our customers. So it means a perfect example is Say an online gambling, or online gaming site that is global, they need to Be able, if, if they're in the US and they're receiving Bitcoin from multiple sources, they, they would need to be able to have an invoice, some kind of documentation both on where they're getting that money from" }, { "speaker": "kara_haas", "time": "42:06", "start": 2525.95, "text": "And that they're doing it if they want to turn around and, and they're getting paid in Bitcoin and they wanna turn around and cash that out on Coinbase, and I know most of the exchanges in the US won't, won't be tied to gaming at all because there's hardly any regulations. But in, if, if they wanna turn it into fiat, they need to prove to Coinbase, \"Hey, this came from a legitimate source.\" And here's our documentation about the customer, why we're doing it, the nature of our business." }, { "speaker": "stephan", "time": "42:43", "start": 2563.15, "text": "Right. And now, with traditional banking, as part of some of these obligations under, say, AML or sanctions laws, they're required to often run things like transaction monitoring programs or sanctions screening as part of their due diligence to understand, okay, is this person a sanctioned individual or is this person, you know, for various AML law reasons? They've got to do some of that screening. Absolutely. Now, do you know if there's any sort of parallels or perhaps something like, you know, what people talk about as colloquially, chain analysis, i-is done by some crypto exchanges to try and do some sort of similar analysis?" }, { "speaker": "kara_haas", "time": "43:26", "start": 2606.17, "text": "So there is, and they also essentially most of the ones that need to comply with KYC and AML actually have to satisfy requirements of a bank And so they largely parallel the KYC/AML regulations of the bank, because that's what the bank understands as well. So Even though they may provide some of that as support, ultimately if they have a suspicious activity like around ten thousand dollars or more, they still need to, to report that amount, even if it's not suspicious, just the mere amount. but I know for certain that there are exchanges that are doing, tracing and transacting because I definitely have heard of cases where they've come back and said, \"No, we know that this...\" Is some of this Bitcoin is potentially tied to an illicit source, therefore we won't cash it, we won't redeem." }, { "speaker": "stephan", "time": "44:37", "start": 2677.4, "text": "Right. Yeah. And I suppose it, it does kind of bring up a point of, you know, is that a potential injustice if, you know, an innocent party who had nothing to do with the actual illegal activity, but they're still getting, so to speak, pinged or kind of caught in the net of saying, \"Oh, these are quote-unquote tainted or dirty coins or whatever you wanna call it.\" And the other aspect there is also just around how many hops back, you know, so on the, on the Bitcoin, how many sort of transactions back would, would they really assess? Do you have any thoughts on that or knowledge on that?" }, { "speaker": "kara_haas", "time": "45:11", "start": 2710.72, "text": "I, I do actually. Two thoughts on that. One, the first one is, there really is trap liquidity out there. You talk about like potentially innocent party There, there are a lot of, service providers out there right now that are in a jam of you either get paid in Bitcoin or you don't get paid at all. And so then when they turn around, to try to cash that out and an exchange isn't letting them do that and they have no way to do it, there's definitely a pool of trapped liquidity out there just kind of stuck in Bitcoin. And then it's interesting that you ask, in fact, I, I, raised a question on Twitter last night, is, the US Marshal Service When they, seize il-illicit funds and they build them up and then they'll periodically do an auction. I was curious how many, how many jumps back, it goes as well, and somebody from the payment service, Stripe, actually answered my question, which was fantastic. Big shout out, I appreciate it. Is that, in that case, if, if I were to buy, a hundred thousand dollars worth of Bitcoin from the US Marshals? Then I would get document from them that says this came from them. So if I then go to Coinbase because I need to pay an employee and I want to cash out five thousand dollars worth of that Bitcoin, I would have that document from the US Marshal Service saying this is where my Bitcoin came. So it's almost like the last, the last point of contact, where you were able to get that verification. Would serve as subs-enough proof at that point." }, { "speaker": "stephan", "time": "47:24", "start": 2844.13, "text": "Right, but then theoretically, let's say it had gone through one hundred different hops, then, you know, you might not really be able to prove anything either way." }, { "speaker": "kara_haas", "time": "47:33", "start": 2853.31, "text": "Well, going so going forward from there, then when that employee goes or it, it's That goes another hop. It's, it's definitely a good point, but there, there definitely is an established chain going forward. the- It's definitely an issue. I mean, it, it's definitely a good, a good point, i-if not everybody at once is know your customer compliant. There's really, it's, it's kind of a challenge, and of course, there's money mixing services out there, crypto mixing, shapeshift, of course. was one of the first, and I know they're starting to adopt Know Your Customer now." }, { "speaker": "stephan", "time": "48:27", "start": 2907.23, "text": "Yeah, that's a, it's a tough topic because, you know, it just, it just seems like certain regulations are being put in without necessarily, They're sort of trying to be transplanted where, you know, they're, they're not really that applicable. a-as well as obviously from my point of view, you know, yeah, I just, I, I think they're, they're unjust, but obviously they exist, and, you know, so long as you wanna live in a certain country, then you've gotta, you know, live by that rule. Do you have any advice just generally about some of these topics we've been talking about in terms of when you trust, you know, these exchanges? Do you" }, { "speaker": "kara_haas", "time": "49:06", "start": 2946.22, "text": "Is that your trust isn't for sale, and, and I know that we, many of us that are enthusiasts in the space, really are all about, self-regulation and, and we're attempting to rise up, or, or challenge some, some of the prior practices, institutions, and systems. But There is a disturbing trend out there where people are just immediately handing over their trust with reckless abandon and Giving it all to another third party, that is just promising them magic a, and a different life. And in, in doing so, they're kind of losing sight of just basic common sense. And that's the main thing, is just check in with yourself, make sure, hey, this Just let me take all the things that I do know and my, my skepticism, not, not necessarily accusing, but my, my skepticism, to just ask basic common sense questions and make sure that I'm, I'm not just living 25 years out, on this promised dream that may not happen." }, { "speaker": "stephan", "time": "50:35", "start": 3035.32, "text": "Right, sure, sure. And if listeners want to engage you for some sort of consulting or accounting or audit services, how do they do that?" }, { "speaker": "kara_haas", "time": "50:44", "start": 3043.76, "text": "Twitter definitely is the best way to get a hold of me. my Twitter handle is divide by nine. I'll spell that out. I plan at the moment it's my busy season because I do have, some larger nine thirty year end audit clients. But right after this month, I intend to kind of revamp my website, and that's K R H P A dot com." }, { "speaker": "stephan", "time": "51:17", "start": 3077.12, "text": "Excellent. Okay, well, that sounds great. It's been a really good conversation. Thank you very much for coming on, Kara." }, { "speaker": "kara_haas", "time": "51:23", "start": 3083.16, "text": "Likewise. Thank you so much for having me, Stefan." }, { "speaker": "stephan", "time": "51:27", "start": 3087.12, "text": "So hopefully that conversation with Kara helped clear up some of the misconceptions around what is an audit versus an attestation versus consulting procedures, and also just around accounting treatment for Bitcoin in general, which can be confusing. I got some more podcast reviews recently, so just wanted to say thanks for those. Got some five star reviews, one from Uganda and one from Great Britain. I only started this podcast in late July, so it's only been about three and a half months, I'm definitely pretty happy with how it's going. I also recently set up my Patreon, so that's patreon dot com slash stephan livera. I've got a private Telegram chat group for my supporters. I was really impressed because I set it up on a Sunday night, and then I woke up Monday morning with six supporters, so big thanks to you guys, you know who you are. Anyway, that's it from me. Thanks. See you next time." } ] }