Read the full Originate Report April edition here.
Armanino LLP, one of the top 25 independent business and accounting firms in the U.S. by revenue, is carving out a name for itself as a global leader in blockchain and digital asset solutions.
Headquartered just a stone’s throw from Silicon Valley, Armanino has been working with leading fintech and cryptocurrency companies in an audit, tax, and advisory capacity since 2014. This exposure served as a launch pad into the world of blockchain and accounting.
“Innovation is a big focus for us. It is something that we actually live because we’ve enshrined it as a strategic anchor for the firm,” said Noah Buxton, a director at Armanino.
Buxton leads Armanino’s Crypto & Digital Assets practice and was part of the team that began experimenting with use cases for the technology. By 2018, they realized there was a major opportunity at the intersection of accounting and distributed ledgers. In January 2019, Armanino launched a dedicated practice focused on the crypto and digital assets industry.
Early on, the concept was to embrace and leverage the same blockchain technology their tech clients were using to explore new use cases. In short order, it became apparent that there was a significant opportunity to build transparency tools. Today, Armanino offers a first-of-its-kind suite of attestation services and transparency tools designed specifically for digital assets. Possible future applications cut across industries, including real estate investment and lending.
“In a world where all assets are digital, analog audit and assurance services will be obsolete,” said Patrick Clancy, senior manager of strategic growth for blockchain and private funds at Armanino. “Our money has been digitized, our public markets have been digitized, next up is the digital disruption of private securities offerings and markets.”
Armanino’s flagship digital asset transparency platform, TrustExplorer™, is built for the impending digital future. Today, it enables real-time attestation and transparency services for over approximately $5 billion in digital assets. TrustExplorer™ is the first and only real-time attest platform available, giving clients and their current and prospective customers the ability to download attestation reports, some only 30 seconds old. The tool adds a “paradigm-shifting level of transparency,” said Buxton. “We think of it as a giant leap for public accounting.”
Readers can see this tool in action on the Armanino website here (you will need to select a current client to view their real-time attest dashboard).
The Power of Public Chains, Tokenization and Security Token Offerings
Appreciating what makes TrustExplorer™ so groundbreaking requires some foundational knowledge about how blockchain and tokenization work. Put simply, public blockchains are shared digital ledgers of transactions. A peer-to-peer network of computers, or nodes, must verify the data stored in “blocks” on the chain. Any changes to a block triggers changes to all the blocks that follow, which requires approval from the network. Because the structure is decentralized and constantly verified, the technology is highly secure and transparent.
Blockchains are all about storing and transferring value. The Bitcoin platform is the first blockchain and still the largest; Bitcoin is the currency built on top. Other public chains such as Ethereum (the second largest today), can be used to tokenize (create digital representations of other assets) and to make that digital value programmable.
Tokens can empower representation of ownership in a frictionless, transparent, automated, programmable, and compliant manner. Tokens that represent real-world assets like real estate ownership interests are called security tokens. They function as a “digital wrapper” around traditional private securities that offers the promise of making private securities better, faster, and cheaper.
The Benefits of Tokenization in Real Estate
The concept of tokenization has been around for several years, but until now, it lacked the infrastructure to really take off, according to Buxton and Clancy. There was no platform to tokenize assets, no custodian to hold the tokens, no registered transfer agents, no licensed broker dealers, and therefore no secondary markets for trading and liquidity. “Now those players are there,” Buxton said. “That’s the promise for security token offerings on real estate and debt pools taking off like wildfire, frankly, in the next few years.”
In industries like real estate investment and lending, tokenization on public blockchains holds the incredible potential to free up previously illiquid assets. Once an ownership interest is tokenized, fund managers can benefit from increased management capabilities, ease of visibility to cap tables, and increased depth and breadth of capital. They can even program income and dividends using on-chain assets, like stablecoins or other cryptocurrencies.
Tokenized assets that reside on-chain will increasingly be used as collateral in other on-chain activities, including decentralized lending. All together this means public chains and the digital assets that run on top are like an “Internet 3.0” that “doesn’t just help you transfer information, it helps you transfer information and value,” said Buxton. “It’s an internet of money, not just money on the internet.”
In the context of commercial real estate and debt funds, information about the underlying assets is critical to making tokenized assets programmable. Such off-chain information can increasingly be brought on-chain using “oracle networks,” which are purpose-built information bridges between off-chain and on-chain systems. Altogether, this means fund managers and issuers will soon benefit from the ability to strike daily or minute-by-minute net asset value calculations for tokenized ownership shares.
One of the most exciting evolutions for TrustExplorer™ will be its use as a trusted source of off-chain information, known as an “oracle” in the blockchain world. In a digitized future, where commercial real estate and debt ownership is tokenized, trustworthy data feeds of off-chain data (e.g., asset valuations, expenses, income streams) will be in high demand. TrustExplorer’s™ oracle service is designed to begin filling this need for trust and transparency as a service to on-chain protocols. In Q3 2020, TrustExplorer™ was the first such system to provide oracle data on-chain.
“Asset managers across industries should consider that digital assets are eating traditional assets. With the ability to wrap a private offering in a digital wrapper at low cost, increased efficiency and high liquidity, a move to the tokenized offering will become the norm,” said Buxton.