The Current Way of Proving Digital Ownership for Businesses

Financial auditors of digital assets are tasked with unique challenges that traditional auditors rarely face. With blockchain technology constantly evolving, auditors need specialized methods to prove asset ownership, manage complex wallet structures, and verify financial stability through proof of reserves.

Recently, Jeremy Nau, co-founder of The Network Firm, shared insights on these challenges and the tools that are helping auditors adapt.

Proving Ownership in Digital Asset Verification

Just a few years ago, auditors working in Web3 relied on a technique called “send-to-self” transactions, where clients would transfer crypto to another address they controlled to demonstrate asset ownership. However, with large numbers of addresses or high transaction fees, this method quickly proved inefficient.

As the space continues to grow exponentially, auditors shifted to using message signing as the preferred method for verifying ownership. In this process, auditors request that clients sign a unique message using their private key—a string of data only the asset owner controls. This method eliminates the need for on-chain transactions and additional fees, making it both cost-effective and scalable.

“The goal is to prove the client can exert control over these addresses that hold these balances, and more specifically, prove control over the underlying private key.”

Jeremy Nau, CoFounder of The Network Firm.

Overcoming the Complexities of Multi-Sigs

Multi-signature wallets, or multi-sigs, add an additional layer of security by requiring multiple private keys to authorize transactions. While this setup helps secure assets, it also introduces complexities for auditors. Unlike standard wallets, which only need one key verification, multi-sig wallets require auditors to confirm that the client controls each necessary key in the multi-sig arrangement.

For many auditors, this involves a two-step process:

• Identify the individual addresses within the multi-sig structure.
• Verify that the client can control each key that meets the wallet’s requirements for transaction authorization.

Multi-sig though can be very complicated, especially… in Bitcoin. The Bitcoin scripting language, it’s not very easy to prove ownership of a multi-sig… It’s a little bit more complicated.

Despite the complexities, multi-sig wallets remain essential for securing high-value assets in digital finance, and developing effective audit methods for them is a growing priority.

Tools and Automation for Streamlining Compliance Review

To keep pace, many auditors now rely on specialized tools. These tools automate parts of the audit process. This makes verification more efficient and reduces the risk of human error. One such tool is Ledger Lens, a suite of crypto auditing tools developed to help auditors manage tasks like ownership verification, point-in-time balance checks, and transaction matching.

Ledger Lens simplifies the auditing process by:

• Automating verification processes to reduce manual work.
• Helping auditors match transactions across blockchain explorers, sub-ledgers, and client records.
• Providing templates and workflows specifically for digital asset audits.

We’ve built all these tools and actually have exposed them so other auditors can use them… it automates the verification process and gives you the tools and templates you need to help facilitate this.

The Importance of Proof of Reserves for Exchanges

Proof of reserves is critical for ensuring the solvency of crypto exchanges and custodians, helping them demonstrate that they hold enough assets to back customer deposits. This process became particularly important after incidents like the Mt. Gox collapse, where insufficient reserves led to massive customer losses. Proof of reserves has since become a standard approach for enhancing transparency and trust in the industry.

For exchanges, proof of reserves involves:

• Summing up the liabilities recorded in their database to determine the total amount owed to customers.
• Verifying that they hold enough assets to match or exceed these liabilities.
• Proving control over these assets, typically through message signing, without needing to make on-chain transfers.

The idea of proof of reserves… is that when you sum up all those customer account credit balances… those liabilities should be less than the assets they hold on behalf of those customers.

Proof of reserves audits offer a robust way for exchanges to assure customers of their solvency, reinforcing the integrity and security of digital assets in the process.

About the Speaker

Jeremy Nau is a Certified Public Accountant (CPA) and co-founder of The Network Firm LLP, a leading CPA firm specializing in digital asset audits. With extensive experience in crypto finance, Jeremy has been active in the field since 2016, initially working on one of the earliest audits of Coinbase. In his role, Jeremy focuses on innovating audit practices for blockchain and digital assets, addressing key challenges like multi-signature wallets, proof of reserves, and automated verification. His insights help guide finance professionals and auditors in navigating the unique demands of Web3 with secure, reliable methods.

Top 5 FAQs

1. What is message signing, and why is it important in crypto audits?
Message signing allows clients to prove control over their private keys without moving assets on-chain. This makes ownership verification more scalable and cost-effective, especially when dealing with multiple wallets.

2. How does proof of reserves work for exchanges?
Proof of reserves audits ensures that exchanges have enough assets to cover their liabilities by verifying customer account balances against held assets. Auditors use methods like message signing to validate that these assets are controlled by the exchange.

3. What makes multi-signature wallets challenging to audit?
Multi-sig wallets require multiple private keys for authorization, so auditors need to confirm control of each key in the quorum. This complexity adds extra verification steps, especially with protocols like Bitcoin’s scripting language.

4. How does Ledger Lens help streamline the crypto audit process?
Ledger Lens automates verification tasks, such as ownership proof, balance checks, and transaction matching. It provides auditors with templates and tools specifically designed for digital asset audits, reducing manual effort and enhancing efficiency.

5. Why is automation important in digital asset audits?
With the rapid growth of digital assets, automation reduces human error and speeds up verification. Tools like Ledger Lens allow auditors to handle large volumes of transactions and multiple blockchain ecosystems, making audits more scalable.