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Intro

In the realm of finance, traditional accounting and auditing methodologies have long served as pillars for financial reporting and corporate governance. Despite their critical role, these practices are frequently criticized for inefficiencies, opacity, and vulnerability to fraud and manipulation. In contrast, blockchain technology has emerged as a potential solution in recent years, promising a transformative impact on the sector. This report delves into the limitations of tokenizing real-world assets, the difficulties in projecting their actual value onto the blockchain, and the shortcomings of conventional accounting and auditing techniques used thus far in the crypto landscape. We’ll also examine how blockchain technology has the potential to usher in a new era of trust, efficiency, and clarity in financial reporting for TradFi and crypto assets. Furthermore, the discussion extends beyond the current-day use case of Proof of Reserves (PoR) for centralized exchanges and highlights Jiritsu’s approach to safely attesting the value of any RWA onchain.

The Challenges Facing Traditional Accounting and Auditing

For many years, the finance industry has grappled with the shortcomings inherent in traditional accounting and auditing practices. The necessity for reconciliation across disparate ledgers and systems frequently results in financial discrepancies and inconsistencies. Such practices are marred by inefficiency and a fundamental lack of transparency, contributing to potential collusion between auditors and corporate management. This collusion can lead to the dissemination of misleading financial statements, undermining the system's credibility. The resultant opacity fosters information asymmetry, impairing the decision-making capabilities of investors, regulators, and other key stakeholders.

Unfortunately, these issues have also crossed over into the world of digital assets. The handling and protection of digital assets, particularly when it involves external or managed custody services, remains a concept that is not fully understood or explored. In the realm of conventional finance, custodial institutions play a crucial role in protecting a client's financial instruments, like stocks or bonds, from potential loss or theft. This protection is often achieved through the maintenance of electronic or physical documentation by financial service companies, which are integrated with centralized systems for deposit, clearing, and settlement.

Over time, a sophisticated framework comprising legal, regulatory, and industry standards has evolved to oversee the custody of traditional assets. This framework ensures that large investment funds can trust that banks and other financial institutions securely manage their holdings. These holdings are accounted for and can be transacted upon as needed. Yet, this level of comprehension and assurance has not been fully replicated or embraced in the sphere of digital asset custody.

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Blockchain’s Key Difference

Blockchain technology has revolutionized the way we think about financial security and transparency. At the heart of this innovation is the blockchain ledger, a decentralized and immutable record of transactions. This ledger serves as a foundational element in enhancing the ability to audit assets on-chain due to its distributed ledger technology, which records every transaction across multiple nodes. This decentralization means that no single entity has control over the entire ledger, making it nearly impossible to alter any recorded information without consensus from the majority of participants. Each transaction on the blockchain is visible to anyone with access to the network, making the flow of assets traceable and verifiable.

For auditors and regulators, this level of transparency is a game-changer. Traditional financial systems often rely on internal records and third-party audits to verify assets and liabilities. However, these processes can be opaque, time-consuming, and sometimes prone to errors or manipulation. Blockchain, by contrast, offers a clear, tamper-proof, and readily accessible record of transactions. This enables real-time auditing and significantly reduces the resources required to verify the authenticity and ownership of assets.

Traditional Audits and Attestations Fall Short

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External auditors conduct detailed examinations of a company’s financials to assess financial records, internal controls, and legal compliance, aiming to affirm the accuracy and integrity of financial statements. The audit process unfolds in stages, starting with planning and risk assessment, where auditors identify potential risks in the company's operations, such as in lending, investments, and deposits. A critical phase, substantive testing, involves auditors examining transactions and financial disclosures using methods like vouching and analytical procedures to gather supporting evidence. Documentation is essential, providing a basis for the audit’s conclusions and serving as a resource for regulatory review. The process concludes with a comprehensive report summarizing the findings and opinion on the financial statements presented to the company's governance bodies. This report may also address control deficiencies and compliance issues. Overall, the audit seeks to offer reasonable assurance of the financial statements' freedom from significant errors, combining risk assessment, control evaluation, and substantive testing.

Attestation engagements, on the other hand, are more prevalent in the crypto space than full audits. They offer a more focused lens, targeting specific assertions made by management or particular aspects of financial or non-financial information. These engagements can vary in the level of assurance provided, from "reasonable" to "limited," depending on the depth of procedures performed and the nature of the subject matter.

One notable limitation of attestation engagements is their restricted audience; the report generated can only be shared with specified parties and is not publicly accessible. This constraint may not suffice for stakeholders requiring the utmost level of assurance from an independent third party. In such instances, the highest assurance is rendered through an attestation report crafted by an independent CPA auditor, adhering to professional standards established by authoritative bodies like the AICPA.

Blockchain's Revolutionary Role in Accounting and Auditing

In contrast to traditional audit practices, the dynamic nature of digital assets and blockchain technology posits the potential for more frequent, perhaps even real-time, assurance to stakeholders. Blockchain technology stands out for its potential to overcome traditional accounting obstacles. A blockchain’s transparency and immediate access to data allow stakeholders to view financial information in real-time and track the history of transactions with unparalleled precision. The technology's security features and immutability safeguard the integrity of financial records, enhancing fraud detection and prevention capabilities. This, in turn, diminishes the risk of financial tampering and regulatory penalties. Moreover, blockchain's capacity for automation and increased efficiency paves the way for the adoption of smart contracts, which execute autonomously based on pre-established conditions. One auditing technique that is not possible in TradFi but has become more popular in the cryptocurrency space is Proof of Reserves, a method in which an entity can cryptographically prove the assets held at a certain time.

What is Proof of Reserves?

Predominantly reserved for centralized cryptocurrency exchanges (CEX) thus far, the concept of Proof of Reserves (PoR) has emerged as a critical mechanism for enhancing transparency and trust between the CEX and their clientele. PoR enables these platforms to affirmatively demonstrate that they possess the crypto assets deposited by their users. The purpose, of course, is to assure users of their capability to fulfill withdrawal requests and significantly reduce the risk of insolvency. 

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The Proof of Reserves (PoR) process ultimately involves deploying a cryptographically secured, signed message. This message serves as a verifiable testament to the exchange's holdings, crafted to be independently authenticated by users.

Central to this verification process is the use of a Merkle tree, an advanced data structure that plays a pivotal role in the consolidation and verification of large datasets in a secure and efficient manner. A Merkle tree, fundamentally, is a structure that aggregates the hashes of individual blocks of data into a singular hash, known colloquially as a hash tree. This method of data aggregation is particularly suited to the needs of crypto exchanges, which manage a diverse array of assets across multiple wallets.

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In practice, a crypto exchange leverages the Merkle tree to encapsulate the totality of its held assets into the root hash of the tree. This root hash represents a summary of all assets under the exchange's management, distilled into a single, verifiable point of reference. This means users have the capability to confirm that their individual account balances are indeed represented within the Merkle tree. By providing a specific piece of data related to their account, users can engage in a verification process without compromising their privacy or the security of their assets.

Additionally, the methodology behind PoR encompasses two primary elements: the documentation of customer token deposits, representing the liabilities, and the aggregation of tokens held by the exchange, constituting the assets. Leveraging trust-minimized, blockchain-based methodologies, PoR facilitates exchanges and discloses a detailed report of the assets under their custody. This report meticulously maps these assets to individual user accounts while preserving users' anonymity. Such a framework empowers both users and independent third parties to validate that the exchange indeed possesses assets that correlate with the specific balances of accounts, thereby bolstering confidence in the financial stability and integrity of the exchange.

The feasibility of PoR is uniquely tethered to the nature of crypto assets, which stand apart from traditional financial assets like equities or bank-held currencies. The distinctiveness of digital assets lies in their capacity for ownership to be verified directly and independently without the necessity for intermediaries. Within this paradigm, the assets held on behalf of depositors are not merely stated but can be explicitly proven and showcased to clients or any interested third party at any given moment.

Incorporating PoR into accounting practices is essential for centralized cryptocurrency exchanges and other financial service providers, as it is (usually) cheaper, faster, more up-to-date, and more transparent than a typical audit or attestation. This verification process, easily accessible and verifiable with a mere click, empowers auditors to incorporate this data into their assessments, thereby enhancing transparency.

PoR Obstacles

While the implementation of PoR within the cryptocurrency exchange ecosystem introduces a paradigm shift towards enhancing transparency and trust, the adoption and execution of PoR protocols are not without their challenges. A nuanced approach to these challenges can ensure that the benefits of PoR are realized without disproportionately disadvantaging smaller exchanges or compromising the frequency and reliability of these verifications.

One significant consideration is the financial burden associated with requiring exchanges to maintain a 100% coverage of assets under management (AUM) through PoR. Given the diverse range of assets held by exchanges, each with its unique blockchain or Layer 2 (L2) solutions, the cost of implementing PoR across the board could be prohibitive. A more pragmatic threshold, such as 75% or 90%, might offer a balanced approach, ensuring substantial coverage of assets while acknowledging the logistical and financial constraints faced by exchanges.

Moreover, the prospect of mandating audit firm supervision for PoR engagements presents another layer of complexity. Currently, the landscape lacks active Certified Public Accountant (CPA) firms that specialize in overseeing PoR processes. The financial and operational demands of engaging audit firms, coupled with the need to incentivize these firms to develop expertise in this niche area, could disproportionately impact smaller exchanges. Furthermore, traditional audits, typically conducted on a quarterly basis, do not align with the optimal frequency for PoR verifications, which offer the greatest assurances when performed more regularly, such as monthly.

Historically, CPA firms like Armanino and Mazars have engaged with cryptocurrency exchanges to conduct PoR verifications. However, these engagements were not classified as audits but rather as "Agreed Upon Procedures" (AUP) engagements. Defined by the American Institute of Certified Public Accountants (AICPA) as attestation engagements, AUPs involve a practitioner performing specific procedures agreed upon by the involved parties and reporting the findings without issuing an opinion or conclusion. This approach is designed for the private benefit of specific third parties, allowing for the controlled revelation and official sharing of factual findings.

It is crucial to note that these AUP engagements, while providing valuable insights, do not offer the assurance typically associated with audits. Both Mazars and Armanino explicitly refrained from describing their PoR services as audits, a distinction that may have been blurred by exchanges using the term "audit" in a more colloquial, albeit misleading, manner. This mischaracterization has led to some confusion regarding the nature and assurance level of PoR verifications.

Finally, it is crucial to acknowledge that PoR does not immunize a company against insolvency or failure. While it constitutes a vital step towards industry best practices, PoR alone does not offer a comprehensive view of a company's financial well-being. It plays a pivotal role in fostering public trust, yet it represents only one facet of a company's fiscal stability.

A PoR from a CEX, which proves the number of assets an exchange actually owns, is ultimately incomplete without a corresponding proof of liability, which proves the amount of debt an exchange claims to owe. When executed properly, these two proofs together can serve as a conditional proof of solvency.

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Jiritsu: Pushing Beyond Simple PoR

In crypto’s fast-moving progression, the tokenization of real-world assets (RWA) represents the next evolution in the space, bridging the TradFi world with crypto’s infrastructure. However, the process of buying/selling ownership in RWAs is traditionally fraught with complications. The necessity for extensive verification, legal oversight, and adherence to regulatory standards introduces a significant amount of friction, slowing down transactions and increasing costs, thereby making these assets less accessible and less liquid than simpler asset classes. 

Tokenization, which involves converting the value of tangible assets such as rental properties, art, collectibles, etc., into digital tokens on a blockchain platform, has the potential to significantly democratize access to investment opportunities. This innovation significantly simplifies transactions and enhances asset liquidity by eliminating many of the barriers previously faced. It offers a unique blend of liquidity to assets traditionally known for their illiquidity, thereby transforming the investment dynamics in the real estate sector.

However, the transition to leveraging blockchain for managing complex assets is not without its challenges. The key lies in the accurate digitization and representation of asset information and attestations on the blockchain. Here, zero-knowledge (zk) and Multi-party computation (MPC) technologies prove invaluable, enabling the secure and efficient translation of real-world asset details into the digital realm. The Jiritsu Network, by leveraging these technologies, is dedicated to enhancing the security and efficiency of RWA tokenization. The decentralized applications (DApps) on the Jiritsu network are specifically designed to facilitate the writing of specific data. This includes embedding business logic and computations alongside cryptographic proof (discussed further down), which is crucial for the verification of value in tokenized assets.

Jiritsu has demonstrated its utility through a variety of use cases and products. This includes providing proof of inventory for a leading Amazon supply chain company managing over 100,000 SKUs and $20M in products daily and enhancing the verification of AI workloads for a top-managed service cloud company. The network also collaborates with more than 1100 financial institutions to deliver on-chain proof of bank balances and company reserves. It has also partnered with Brinks to ensure the integrity and security of gold reserves in custody. 

The platform's design allows for the creation of "provers" for any business logic, combined with data readers and smart contract integration. This flexibility provides robust and adaptable solutions tailored to a wide range of business needs, showcasing Jiritsu's commitment to leveraging blockchain technology for the secure and efficient tokenization of real-world assets.

Tokenization

Tokenization ensures that investments into RWAs are accessible to a broader audience by breaking down barriers to entry. However, the integrity of this process hinges on attention to detail in both the initial tokenization phase and throughout the lifecycle of the investment. The journey begins with establishing a robust legal structure and ensuring compliance with the intricate web of regulations governing real estate and securities. This often entails forming a legal entity tasked with holding the property and issuing tokens that represent ownership shares. Such a step is critical in aligning with legal standards and safeguarding investor interests.

Equally important is the valuation and inspection of the property. A professional, current valuation provides a credible basis for the asset's tokenization, while inspection reports offer insights into the property's condition, ensuring that investors have a transparent view of their investment.

Clear documentation of ownership is a non-negotiable requirement. This includes title deeds and any pertinent legal documents that unequivocally prove ownership, thereby laying a solid foundation for the trust in the tokenization process.

Furthermore, transparency regarding debt and lien information is crucial. Disclosing existing loans, mortgages, or liens against the property is imperative for accurately representing the net asset value being tokenized, ensuring that investors have a comprehensive understanding of their investment's financial landscape.

Sustaining Transparency and Trust

The initial tokenization is just the beginning. Maintaining investor trust requires a commitment to ongoing transparency and updates, encompassing several key areas:

• Financial Updates: Regularly providing updates on rental income, including specifics about payment dates, amounts, and any instances of arrears or vacancies, is essential for reflecting the property's cash flow dynamics.
• Ownership Changes: Promptly reporting any changes in the underlying ownership of the property or the legal entity owning the property is crucial for maintaining transparency.
• Debt Management: Keeping investors informed about the status of mortgages or loans, including details on repayments, interest rate adjustments, and refinancing activities, is fundamental for trust.
• Financial Reporting: Regular dissemination of financial statements and performance reports offers investors a clear picture of the property's financial health and operational performance.
• Market and Regulatory Updates: Staying abreast of significant shifts in the real estate market, regulatory changes, or other external factors is crucial for adjusting strategies and ensuring compliance.
• Insurance and Risk Management: Details of insurance coverage provide insights into the risk management measures in place, reinforcing investor confidence.

Moreover, the advent of technologies such as the Jiritsu proof extends blockchain's potential beyond mere proof of reserve, incorporating business logic that facilitates the tokenization of off-chain businesses. This represents a monumental leap in enabling the tokenization of real-world assets, underscoring the transformative potential of blockchain technology in democratizing access to investment opportunities and injecting liquidity and transparency into traditionally opaque markets.

Jiritsu Proof: Transforming Asset Attestation and Verification

The Jiritsu Network recently unveiled the "Jiritsu Proof," an innovative automated attestation service powered by its cutting-edge ZK MPC technology, setting a new standard in the verification of both financial and tangible assets. In addition to traditional financial verifications such as bank balances and company reserves, Jiritsu Proof expands the scope significantly. It validates a comprehensive array of real-world assets, encompassing those held in accounts or by custodians, as well as tangible assets like property, plant, and equipment (PP&E), inventory, transactions, and income. This wide-ranging capability revolutionizes the approach to asset management and verification, significantly boosting transparency and trust in financial dealings and business evaluations.

Key Features:

• Chain Agnosticism: Enables operation across various blockchain architectures, enhancing interoperability and liquidity for diverse assets.
• Proof of Workflow (PoWF): Guarantees secure orchestration and verification of computational workflows through advanced computational engines and workflow management.
• Blockchain Layer Integration: Offers seamless compatibility with different blockchain layers (L1, L2, Middleware), promoting scalability and flexibility in asset management.
• Mathematics-based Security: Utilizes advanced mathematical principles for unparalleled security and performance, ensuring the utmost protection of user data and assets.
• Proprietary Technology: Features innovative, patent-pending technology, setting new benchmarks in asset tokenization and management.

Jiritsu: Zero Knowledge Off-Chain Automation

In response to the challenges involved with real-time proof of value for RWAs, Jiritsu proposes an innovative approach utilizing off-chain computational resources and zero-knowledge proofs to achieve trustless automation. Zero-knowledge proofs (ZKP) are a cryptographic concept that involves a prover demonstrating the truth of a statement without revealing any additional information to a verifier. ZK-liability proofs can provide strong assurances to third parties, including exchange clients, while maintaining the privacy of client balance distribution. Although the concept of ZK-liability proofs dates back to at least 2015 with Provisions, zero-knowledge technology has significantly evolved since then, gaining widespread trust within the industry. As zero-knowledge encryption becomes more established and trusted, particularly regarding rollups deployed in production, the time is ripe for the adoption of ZK-liability schemes to enhance privacy and security in Proof of Reserves systems.

MPC

A key component of Jiritsu's solution is the use of Multi-Party Computation (MPC) wallets for signature delegation. This approach allows the custody of a private key off-chain, with the wallet's capability to sign transactions on behalf of the key's owner. Jiritsu enhances this model by introducing a second layer of delegation to a "ZK Robot," automating the decision-making process without human intervention.

Multi-party computation is a solution for securing data among several participants in a private manner. It allows many parties, each with their own private data, to verify the final computation without revealing their own secret portion of the data. Each participant in an MPC possesses a piece of confidential information. Typically, one entity owns one part of a cryptographic key that can move funds or change code.

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MPCs shard a private key into many segments, with each individual possessing a portion of the private key. When signing a transaction, a subset of MPC nodes must independently sign the transaction and communicate it to the larger group. In order to sign transactions, each participant inputs their secret portion and a public input (the message to be signed) to generate a digital signature. Then, anyone with access to the public key should be able to validate and verify the signatures. Since the key shares are pooled and the signature is generated off-chain, an MPC wallet transaction cannot be distinguished from a typical private key wallet.

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MPC also guarantees that if a number of parties inside the group decide to disclose information or depart from the protocol's instructions during execution, the MPC will not allow them to coerce the honest parties into outputting an inaccurate result or leaking confidential information. 

MPC Strengths

• No single failure point
• Flexible/Configurable Signing Schemes
• Detailed Controls Around Access and Signing
• Easier Recovery

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MPC Drawbacks

• Off-chain Coordination and Accountability: Off-chain management of signing policies and approval quorums make MPC setups susceptible to centralized failures not applicable to regular cold storage.
• Incompatible with the majority of conventional wallets, such as Ledger and Trezor, due to the absence of a seed phrase or complete private keys on a single device. 
• MPC algorithms are not standardized; therefore, institution-grade secure devices like the iPhone SEP and HSMs do not natively allow bespoke implementations. MPCs are mostly niche, custom-made products with closed-source libraries.

MPC Cloud

At the heart of the Jiritsu Network's technological advancements lies the ZK MPC Cloud, a pioneering technology that has successfully processed over 6 million proofs and is distinguished by several key features that underscore its innovation and utility.

Firstly, the platform introduces Proof of Workflow (PoWF), which leverages computational engines and a workflow manager. Unlike traditional oracles and Layer 2 solutions, Jiritsu leverages these cryptographic zk-proofs to secure a consensus mechanism for verifiable computation and smart contract execution. Jiritsu integrates a consensus mechanism directly into the Multi-party Computation (MPC) framework, ensuring that a minimum threshold of private key shares is met and that data sources and computations are verified. This built-in consensus mechanism allows for the embedding of verified data payloads within signatures, enhancing the security and reliability of automated smart contract execution. This innovation ensures the secure and efficient orchestration and verification of computations, marking a significant step forward in computational integrity. 

Furthermore, the ZK MPC Cloud boasts seamless integration capabilities across various blockchain layers and middleware technologies. This versatility allows for its application in a wide array of computational workflows, expanding its utility across the blockchain and fintech landscapes.

The ZK MPC Cloud's offerings are extensive, including Jiritsu RWA, Jiritsu ZKMPC, Jiritsu AI, and Jiritsu Proof. Each of these solutions addresses specific needs within the blockchain and financial technology ecosystems, showcasing the platform's broad applicability and commitment to advancing the field of secure and efficient computational verification.

Conclusion

The integration of blockchain technology and the innovative methodologies offered by the Jiritsu Network represent a watershed moment in the evolution of accounting, auditing, and asset management. Traditional systems, burdened by inefficiencies and vulnerabilities, are giving way to a new paradigm characterized by transparency, security, and efficiency. The introduction of blockchain, coupled with Jiritsu's pioneering approaches like Proof of Reserves (PoR) and the transformative ZK MPC Cloud, are not merely incremental improvements but foundational shifts. These technologies offer the promise of real-time verification, enhanced trust among stakeholders, and a democratization of access to investment opportunities, particularly through the tokenization of real-world assets (RWA).

As the financial and technology sectors continue to converge, the role of traditional audits and attestations is being reevaluated in light of blockchain's capabilities to provide immutable and transparent records. Jiritsu's network and its suite of products, including Jiritsu Proof, emerge as pivotal in addressing the complex challenges of asset verification and management in this new era. By harnessing the power of blockchain technology and zero-knowledge proofs, Jiritsu is not just responding to the current demands of the digital asset and fintech industries but is actively shaping the future of how financial integrity is maintained and verified.

The journey from traditional methods to blockchain-enhanced systems underscores a broader movement towards more accountable, accessible, and efficient financial ecosystems. As stakeholders navigate these changes, Jiritsu's insights and technologies offer a compelling roadmap for the future of finance, one that promises to reconcile the need for rigorous verification with the burgeoning opportunities presented by digital assets and tokenization.

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Disclaimer: This report was commissioned by Jiritsu. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.

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