I have a pound coin and I’m going to launch a pound coin treasury company.
It’s reasonable to believe that a pound coin in my possession can be valued at more than £1. Coins have advantages over other forms of money (permissionless means of exchange; store of value with low custody costs; necessary for hiring a shopping trolley), they’re in limited supply, and some people can’t hold them (nickel allergy, maybe?). Moreover, any pound coins I acquire in the future can also be valued at more than £1.
I plan to capture this arbitrage and sell shares in my pound coin. I’m going to make two equal shares, keep one and sell the other for a pound. It’s a good deal for everyone because with two shares in issue and £2 in treasury, the post-money value of each share is £1.
Next I’m going to sell another share for £2. I’ll have £4 in treasury and three shares in issue. The next buyer will be paying more than the value of their share of the treasury but it’s still a good deal for everyone because I’ll have improved the pounds-per-share ratio from 1:1 to 1.3:1. Selling the next share for £3 will further improve the ratio, which I’ll call pound yield. By selling shares in pounds and buying pounds with pounds, my direction of travel will be relentlessly positive. Here’s what it looks like as a chart.
We’ve recently been calling this kind of scheme the Infinite Money Glitch, though there was a pre-existing term.
And OK, maybe I’m simplifying a bit. It’s not a fail-safe strategy. Maybe I’ll eventually run out of buyers, or issue so many shares that it squeezes the pound-to-pound arbitrage towards zero.
One way to maintain momentum would be with fraud. When I said up top that I have a pound coin, I might’ve been lying.
With cash, however, an auditor should spot my ruse. The auditor could ask to see the coin or, if it’s deposited with a bank, request statements for the whole period under evaluation to confirm that it had not been used to rent shopping trolleys. Proving that cash exists is usually (but not always!) relatively simple.
Crypto’s more complicated. Tokens on a company balance sheet may or may not be held by a third-party custodian, whose statements the auditor might or might not consider reliable. A company choosing self-custody is under no obligation to make its wallet addresses public, and might not be honest about who else has access to the private keys. A ledger listing only shows assets, not liabilities. It won’t show whether the tokens have been pledged or lent. At the extreme, more than one party could be claiming ownership of the same crypto. If it’s stored in a non-public wallet, how would the auditor ever find out?
Many of these potential blind spots also apply to exchange-traded products, though for stuff like physical ETCs there’s plenty of guidance for auditors about how often to visit the vaults and what to look for. Crypto’s more murky. The Institute of Chartered Accountants’ most recent update of crypto guidelines boils down to asking lots of questions of management and hoping they’re not good liars.
It’s not that they’ve had to be particularly good liars. Here’s a 2023 thematic report from the US’s Public Company Accounting Oversight Board that warns of “deficiencies where the auditor did not perform procedures to evaluate the sufficiency and appropriateness of audit evidence obtained over the existence, valuation, and the rights and obligations of crypto assets recorded at year end”.
Keep in mind that the PCAOB report is mostly about miners and exchanges, whose business is to sell crypto. A crypto miner or intermediary that fakes its inventory won’t be in business for long. For crypto treasury companies, the incentive to lie is greater and the risk of discovery is lower. Their promise to buy and hodl forever means that, without public on-chain proof of reserves, the auditor’s opinion is all investors will get.
This lack of verification methodology is not an insignificant problem. Publicly traded corporations are holding nearly $90bn of bitcoin, nearly all of which is on the books of bitcoin treasury corporations, plus there’s been a wave of market-listed vehicles that hold alt-coins including tron and ether. Some of them claim best-practice transparency but none, to our knowledge, has published wallet addresses.
Below is our attempt to categorise the 130-odd stocks listed on tracking site Bitcoin Treasuries, with the caveat that there’s lots of definition overlap. Several of the miners have pivoted from selling to hoarding, for example, and in the “other” category are quasi-treasury opportunists like GameStop.
It adds up to a lot more work for independent accountants, for whom the critical audit matter has become figuring out whether tokens exist in the quantities reported. Some already appear not to fancy what that entails.
A Texas accountancy firm last year sued the PCAOB in an attempt to halt an investigation of its crypto audits. Backed by the New Civil Liberties Alliance, a libertarian pro bono law firm, the unidentified accountant complained that the PCAOB had never set formal audit standards, rules or regulations specific to crypto. Its retrospective requests for “tens of thousands of pages of documents” to investigate a “kitchen-sink list of possible violations” amounted to regulation by enforcement, the plaintiff alleged. The case was dismissed in January after the PCAOB said it had closed the investigation without recommending any enforcement action.
With all this in mind — and with no suggestion of wrongdoing by any party referenced or omitted — we thought it might be worth pulling together what we know about bitcoin treasury company audits. MicroStrategy, the sector’s $100bn gorilla, is the obvious place to start.
Strategy doesn’t give investors on-chain data that would allow public verification of its reserve. Michael Saylor, Strategy’s executive chair, says it would be a liability. “If you publish your wallets, that’s an attack vector for hackers, nation-state actors, every type of troll imaginable,” he told a conference in May.
It’s a policy that puts a lot of pressure on the KPMG office in Virginia, Strategy’s auditor since 2013. (No other company we’ve found whose main business is bitcoin treasury has a big-four firm as auditor; let us know if we’ve missed any.)
Since Strategy started buying bitcoin five years ago, KPMG’s audit opinions have included a long and nearly identical statement about processes. Below is the 2024 version; the line about “reconciliation of digital assets per the custodial service ledgers to the public blockchain” was added in 2021 and “Subjective” became “Especially subjective” in 2023:
Especially subjective auditor judgment was involved in determining the nature and extent of evidence required to assess the existence of the digital assets and whether the Company controls the digital assets, as control over the digital assets is provided through private cryptographic keys stored using third-party custodial services at multiple locations that are geographically dispersed. In addition, information technology (IT) professionals with specialized skills and knowledge in blockchain technology were needed to assist in the evaluation of the sufficiency of certain audit procedures.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the digital assets process, including a control over the comparison of the Company’s records of digital assets held to the custodial records. We involved IT professionals with specialized skills and knowledge in blockchain technology, who assisted in evaluating certain internal controls over the digital assets process performed at the custodial locations, related specifically to the generation of the private cryptographic keys, the storing of these keys, and the reconciliation of digital assets per the custodial service ledgers to the public blockchain. We obtained confirmation of the Company’s digital assets in custody as of December 31, 2023 and compared the total digital assets confirmed to the Company’s record of digital asset holdings. We also compared the Company’s record of digital asset transactions to the records on the public blockchain using a software audit tool. We applied auditor judgment in determining the nature and extent of audit evidence required, especially related to assessing the existence of the digital assets and whether the Company controls the digital assets. We evaluated the sufficiency and appropriateness of audit evidence obtained by assessing the results of procedures performed over the digital assets.
Metaplanet, widely referred to as Japan’s answer to Strategy, is audited by Yamabuki Audit Corporation of Tokyo. Metaplanet doesn’t make its wallet addresses public but partners with a digital asset authentication and verification company called Hoseki.
Here’s what Yamabuki’s 2024 report for Metaplanet says about its proof-of-reserves methodology:
Verification of BTC acquisition transactions – Compared BTC acquisition quantities and rates with external documentation; obtained broker confirmations for derivative (put-option) transactions executed with the BTC and reconciled them to accounting records.
We’ve contacted Yamabuki to ask if there’s more to say and will update the post if we hear back.
Cleanspark, a bitcoin miner, last year dismissed MaloneBailey as its auditor. Its decision followed a warning in the company’s 2023 annual report management and its independent accountants had identified “a material weakness in its internal control over financial reporting” related to IT systems.
BDO USA, Cleanspark’s new auditor, goes into a fair bit of detail in the 2024 report about how it audits mining revenue. However, since the year end, Cleanspark switched from selling tokens to holding them as loan collateral. Knowing the method by which BDO reconciles these reserves will have to wait for the 2025 edition.
Semler Scientific is a troubled medical device maker that pivoted to bitcoin last May. BDO USA, its auditor since 2013, says its verification processes included:
● Confirming the balance of the Company’s bitcoins in the custody of the third-party providers and reconciling them to the Company’s records.
● Testing the Company’s control over its wallets, for a selected third-party custodian, by observing a transaction initiated and processed by the Company between all the wallets held by this selected custodian.
● Corroborating the observed transaction by using independent public blockchain explorers to verify the movements among the wallets.
As companies get smaller and less American, the auditor reports get slimmer.
Next Technology is a China-based software-cum-bitcoin-treasury-company that trades on Nasdaq. Its auditor since 2024, Singapore-based JWF Assurance PAC, says it applies PCAOB audit standards without going into detail.
Cango is an NYSE-listed Hong Kong-Chinese car exporting business that in November turned into a bitcoin miner. It’s audited by MaloneBailey, whose checks included looking at mining rigs and evaluating “the design and operating effectiveness of controls over financial reporting relevant to the bitcoin mining income”. As with Cleanspark, it’s heavy on cross-checking mining income against public blockchain records and light on information about how they look inside treasury wallets.
The Blockchain Group, a bitcoin treasury company listed on Euronext Growth Paris, has a 2024 auditor report co-signed by Grant Thornton and BCRH & Associés. The only copy we could find, in French, is boilerplate.
So is RGT Treuhand’s 2023 audit report for Bitcoin Group of Germany, an investment company. It was yet to publish results for the 2024 financial year.
Marcum audits KULR Technology, a US energy management company that pivoted to bitcoin in December. Its 2024 audit report identifies no critical audit matters and disclaims opinion on the effectiveness of KULR’s internal finance controls.
The Smarter Web Company, an UK-quoted bitcoin treasury company that has captured the attention of retail punters, is audited by Pointon Young Chartered Accountants in Birmingham. Having emailed Pointon Young to ask about its proof-of-reserves reconciliation processes, we’ll update the post with any response.
Tether- and SoftBank-backed Twenty One Capital, having only launched in April, hasn’t said anything useful yet about auditing and reserves certification. Also needing further research is RemixPoint, a Tokyo-listed energy services company with a very aggressive bitcoin treasury policy and a very hard-to-navigate website.
Our point here is not to spread FUD, it’s to underline the size of the challenge amid very uneven application of the rules.
Guidance around how auditors check crypto reserves is onerously broad-brush and, when applied to private wallets, still can’t be relied upon to detect tricks like rehypothecation and multiple claims over the same assets. Meanwhile, Bybit’s loss of $1.5bn from a cold wallet in February has stalled a push for public disclosure that followed the collapse of FTX in 2022. SEC intervention looks unlikely under the current administration.
That none of the myriad companies now jumping on the crypto treasury bandwagon are exploiting these blind spots is possible, but is it likely? And if there are any bad actors out there, what external check might cause their deception to unravel? For an industry that made “Don’t Trust, Verify” one of its slogans, none of this seems optimal.
All these reasons and more are why we are proposing the first Sterling Treasury Company, which is similar but subtly different to a cash shell. Swapping bitcoins for pound coins means clear auditing standards. Shareholders can be confident that, when our pyramid scheme collapses, it will be for entirely legitimate reasons.
Further reading:
— This is nuts. When’s the crash? (FTAV)
