“It was the best of times, it was the worst of times.”

The opening line of Charles Dickens’s A Tale of Two Cities comes to mind as I ponder on the current state of crypto.

The best of times: an estimated 30,000 people descended on Denver this week for ETHDenver and a plethora of side events. The energy was tangible; there was hardly any talk of a “crypto winter.” Everybody you talked to is working like crazy on projects they believe in with all their heart, and the entire city seemed abuzz with the sense that we are all about to crack the code on something big.

The worst of times: Silvergate Bank, one of the two major banks serving the crypto industry, entered a death spiral last week after announcing it would delay its annual 10-K filing. Crypto companies and projects are left wondering if any banks will be willing to accept them as clients.

All that and the usual spate of goodies awaits you in this installment of Triple Entry.

“Calc”-you-later, 🧮

Trevor

P.S. Welcome to our 99 new subscribers! We now have continental breakfast, but only on days that do not end in Y.

Silvergate-gate

In our last entry, we covered Operation Chokepoint 2.0: the coordinated efforts of various government agencies to block the crypto industry’s access to traditional finance liquidity. As part of that story, we talked about Silvergate Bank, one of the financial institutions serving big names in the crypto space.

As if on cue, Silvergate announced Wednesday in a regulatory filing that it would delay its annual 10-K filing. The bank stated that it needs more time “to perform analysis, record journal entries related to subsequent events and to complete management’s evaluation of internal controls over financial reporting.” It also stated that it needed to answer requests from its independent auditors (sure, throw the auditors under the bus) and, most concerningly, “regulatory and other inquiries and investigations that are pending.” And to top it all off, the bank’s forward-looking statement warned that its ability to “continue as a going concern” over the next year might be…of concern.

Before you write a similar “yo, this is going to be late” letter to the SEC in an attempt to reduce your busy season workload, know that the market doesn’t respond well to this approach. On Thursday, Coinbase, Circle, Paxos, Crypto.com, Bitsamp, Cboe Digital Markets, Galaxy Digital, and Gemini all announced that they would suspend transfers with Silvergate.

In response to the delayed filing announcement, Silvergate’s stock fell by over 50% in a single session and is down 95% from its 2022 highs.

How We Got Here

While the onslaught of bad news related to Silvergate appears to be coming out of left field, the bank has had a rough go since the collapse of FTX.

In December 2022, Senators Elizabeth Warren, John Kennedy, and Roger Marshall sent a letter to Silvergate Bank criticizing them for providing services to FTX and Alameda Research and not reporting suspicious activities. In January 2023, the bank’s stock price plummeted to $11.55 amid fears of insolvency and a bank run, after trading as high as $160 in March 2022. Fears of a bank run were warranted as the bank was forced to cut staff by 40% to cover $8.1 billion of customer withdrawals.

In February 2023, the US Department of Justice’s fraud unit announced an investigation into Silvergate over its dealings with FTX and Alameda. To add fuel to the fire, Reuters reported that Binance had access to a Silvergate bank account of its purportedly independent U.S. partner, Binance.US. Binance transferred over $400 million from the account to a trading firm managed by Binance CEO Changpeng Zhao over the first three months of 2021.

What Comes Next?

In the worst-case scenario, Silvergate could be filing for bankruptcy. But hold your horses; the FDIC-insured bank is more likely to go into receivership instead. Receivership is like a “protective umbrella” where a trustee is appointed to take over the business to protect creditors, especially those with secured loans. It’s not quite as dramatic as bankruptcy, but it still ain’t pretty. The key difference is that receivership isn’t a legal action, and it’s designed to protect the company’s lenders, not its borrowers (as is the case in bankruptcy).

What does this mean for the industry? The problems experienced by Silvergate highlight crypto’s banking problems. Many critics view this as ironic since the technology was originally created to bypass the banking system. I agree with Coindesk Columnist George Kaloudis’ view that banks and crypto can coexist.

“There will, of course, be (and are) a hardcore subset of self-sovereign individuals who buck third parties entirely, but there are billions of people in this world. Organization of those people is far easier with some reliance on third parties. The world that bitcoin and crypto can encourage is a world where those third parties are more honest. More honest banks in the business of keeping your money safe and providing responsible lenders access to future capital (i.e., credit) is better than fewer honest banks.”

Despite the “chokepoint” obstacle, crypto is here to stay, and the recent clarity will only enhance the banking relationships for crypto firms. Suppose crypto companies must meet higher standards for banking access, resulting in more extensive vetting procedures and fewer subpar businesses in the ecosystem. In that case, this could lead to a safer environment for retail investors and a less vulnerable system in the face of future crypto turmoil.

The Roll-up on ETHDenver

Last week, ETHDenver attracted an impressive turnout of 20,000 attendees from all corners of the globe. Thousands more showed up for the hundreds of side events spread across the city. Our team was there chopping it up with buidlers and boothers (neither of which are words in the dictionary, but since when does that stop us?) and getting the download on what people are excited about in crypto right now.

Here are our key takeaways from the conference:

1. The industry is resilient (and brilliant)

FTX crash, regulatory headwinds, and bear market aside, attendees were overwhelmingly positive. The previous year’s difficulties were in the past, and people were focused on building. The event showcased the resilience of the crypto industry, which has moved forward despite economic struggles and public scrutiny. Several crypto OGs commented on the contrast with the downtrodden mood of past bear markets.

On its surface, the ETH Denver community is super quirky – I mean, come on, someone desecrated a perfectly good McClaren with a bunch of Doge faces – but don’t let that fool you. I was blown away by the ingenuity and technical expertise of some of the people building in this space. And as a bonus, we even ran into a few Triple Entry readers during the event (hi, friends! )

2. Zero-knowledge (“zk”) is the way

Zero-knowledge (“zk”) is crypto’s equivalent of the buzzy “AI” acronym – thrown around by everyone, but few people truly understand it. Projects are actively using it, and investors are eager to put their money into zk-related ventures. However, the more you delve into zk, the more you realize how little you know.

In simple terms, zero-knowledge proofs (ZKPs) are a way of proving a statement without revealing any additional information beyond the statement itself. In other words, it’s a way of proving something is true without revealing how you know it’s true.

Zk is expected to revolutionize blockchain scaling and privacy. It aids scaling by enabling faster transaction execution. With a zk-proof, a batch of transactions can be verified without revealing all of the underlying details. This is especially useful for blockchains, which lack privacy, and every on-chain activity is visible to anyone. Zk allows users to prove their identity without disclosing sensitive information.

The talent working on ZK-related projects is exceptional, and there’s been a lot of buzz around promising initiatives like Risc Zero, Taiko, and Scroll, which are expected to launch soon.

3. Roll-ups rolled up to the party

And, no, we’re not talking about fruit roll-ups, but those are delicious. Roll-ups are a scaling solution for blockchains that allow more transactions to be processed without putting too much strain on the network. Instead of processing each transaction on the main blockchain, a roll-up bundles multiple transactions together and verifies them off-chain. The resulting proof is then sent to the main blockchain, reducing the amount of data that needs to be processed and increasing the efficiency of the network. This allows blockchains to handle a larger number of transactions while still maintaining their security and decentralization.

There was a lot of talk about roll-ups and Layer 2 (“L2”) scaling solutions, especially after Coinbase announced that it’s building its own Ethereum L2 Base.

4. Account abstraction was a main attraction

The user experience in crypto is notoriously complex and frustrating, but account abstraction aims to change that. By hiding all the complicated backend processes, account abstraction will make the experience smoother and more seamless.

Ethereum Foundation security researcher Yoav Weiss made a surprise announcement at side event WalletCon that the core contracts for ERC-4337 – the smart contract allowing for account abstraction at the wallet level – passed an audit by Open Zeppelin and will be made available on every Ethereum Virtual Machine (EVM) compatible network.

One immediate benefit of account abstraction is social recovery, which will allow users to designate others as recovery agents, so losing a private key will no longer mean losing crypto assets. Sponsored transactions will also become possible, making onboarding new users who don’t yet own any tokens easier. Recurring payments can be scheduled, and accounts can be programmed to require multiple signatures before transactions are executed. Additionally, multiple transactions can be batched together and signed as one, streamlining the process for blockchain-based gaming.

5. No one understands crypto accounting (still)

This is more of a hypothesis we decided to test in real time. As to the nature of this test, we’ll be sharing the full results on our social media a little later this week, but here are a couple of quick teasers of what that looked like. Literally.

Having trouble making that one out? Here, let’s try this one.

Let this be a message to you all: if you ever thought I wasn’t willing to wander around a 20,000-person convention in character as a nerdy accountant for the sake of research and science, then you’ve got another thing coming.

In all seriousness though, as fun as it was to embody my alter ego of the “World’s Most Exotic Accountant,” the real mission yielded some interesting findings. With a few rare exceptions, the subject of crypto accounting is still not a major part of the conversation, even at an event as huge as ETHDenver. We found this to be true whether casually chatting with people about what we do here at Multisig or asking them more pointed questions to feel out their crypto accounting knowledge.

This isn’t really a big surprise to us. Adding “crypto” to the word “accounting” doesn’t change the fact that we’re still talking about back-office functionality, just the next generation of it. One could argue that our niche will never rise to the level where an average “buidler” would be able to converse comfortably about the nuances of crypto taxes, any more than your average person on the street would be able to tell you the first thing about the regular ol’ taxes of the in-progress busy season.

But the bigger this space grows and the more traction the exciting, “sexy” parts of web3 gain, the more critical this humble but important niche becomes. Thankfully, the people who care about it as much as we do (they exist! They’re out there!) are talented, knowledge-hungry, and just as fired up about it as the people writing new protocols or perfecting the wallet experience. Catch our write-up about some of these projects down in our Featured Funding Finds section.

Spotlight – Solocast at Lunch Break

The Water Cooler

Things worth talking about at the office water cooler…if you 1) talk to people, 2) still work in an office, and 3) have a water cooler.

Featured Funding Finds: Crypto Accounting Newcomers

We’re going to do something a little different for this entry’s FFF. Rather than feature any particular funding event or press release, we wanted to use this section to highlight two recent newcomers to the crypto accounting space. They’re both small, both crypto-native, but they come from rather different backgrounds, as you’ll see.

1. Hash Basis

Our first highlight is so new that we’re grateful they’ve even got a website for us to link to. Hash Basis is a crypto-native accounting firm that officially launched into the world a little over a month ago, founded by Mackenzie Patel, CPA and Courtney Paul. The two co-founders got a three-year crypto crash course working together at Figment before founding Hash Basis at the start of this year.

We had the pleasure of bumping into them both at ETHDenver and hearing more about their new venture. Before that I got to hear Mackenzie speaking at EDAS last year. Suffice it to say, her accounting knowledge has some serious depth and breadth. Not only did she clearly know her stuff on accounting for staking revenue, she even talked about the history of accounting and Luca Pacioli (aka the mind behind double entry accounting). I tell ya, it’s enough to make a grown accountant cry!

We reached out to Mackenzie for a quote for this section. In her own words, here’s why she wanted to start Hash Basis – “We started Hash Basis to share our crypto accounting and tax expertise with the blockchain industry – we noticed there was a lack of accountants in the space and wanted to fill the gap with our knowledge and innate passion for blockchain tech.”

2. The Network Firm

Another small-but-mighty crypto accounting newcomer you may not have heard of yet, The Network Firm is a team of digital asset professionals fresh off the bus from a slightly larger company called Armanino.|

We’ve already written in a previous entry about Armanino and their ties to FTX, so we’re just going to keep it to the high-level facts here. Despite standing by their 2020 and 2021 audits of FTX, the firm made the decision in late Q4 to halt their crypto auditing services, and they’re not the only large accounting firm to hit the pause button on crypto clients. Paris-based Mazars – who once called Binance a client – has put a freeze on proof-of-reserve work for crypto clients.

So how does this relate to The Network Firm? Simply put, they’re former members of Armanino’s digital asset team who formed their own startup to serve the crypto accounting clients that bigger firms increasingly won’t touch.

Why Do We Care?

In a previous funding feature we made an offhand remark about why it’s interesting to write coverage of funding, startup, and acquisition events in this space. We specifically noted the things you can expect to see when larger players move out of a space they previously occupied or even dominated.

Because in crypto as in life, nature abhors a vacuum.

The reputational risks of big firms working with the crypto kids have always been present, but they’ve reached a point where the risk is no longer worth the reward. Yet the crypto clients are out there, and they still need accounting. The two companies we’ve featured here are rising to the challenge, and these are just the ones on our immediate Radar. We fully expect to see (and eventually write about!) even more knowledgeable, passionate finance and accounting professionals stepping into this niche to help pioneer the future of our financial system.

Tom’s Transaction (aka ChatT.O.M.)

Welcome back, once again, to Tom’s Transaction (aka ChatTOM – Transaction Observation Model). This section of Triple Entry features a scenario based on a real-life transaction Tom (real accountant) encountered on Etherscan. Your mission, should you choose to accept it, is to test your crypto accounting knowledge by solving Tom’s Transaction.

What is this transaction and how would you account for it? You can write in with your response, or (even better) jump on the Triple Entry Lunch Break Livestream this afternoon and drop it in the comments! We’ll reveal the answer in our next entry.

As for last entry’s transaction…?

Solution: Loan Repayment

Want to know why? Here’s ChatTOM giving the rundown!

US GAAP

Balance Sheet:

Credit to the digital asset account
Debit to the token liability account

P&L:

Debit to the interest expense account
Adjust unrealized capital gains/losses

Disclaimer: The transactions being used are publicly available information on the blockchain that were randomly selected to show certain types of crypto activity. The owners of the wallets involved, as well as the true nature of the transactions, are unknown. These are interpretations of transactions as they might relate to US GAAP. None of the tokens, wallets, or protocols are endorsed, and links (when available) are provided for educational purposes only.

Extraordinary Items

We’ll leave you with a truly extraordinary item for your consideration, a different sort of roll-up from ETHDenver: the FTX TP (FTP?) in the bathrooms. Props to the event organizers. They really thought of everything.