History shows that the cryptocurrency community desperately needs good auditing services. Currently, those who are best equipped to audit businesses such as exchanges are people who have an in-depth understanding of Bitcoin and cryptocurrencies – often but not necessarily developers.

For example, Mt. Gox invited Roger Ver (a.k.a. “Bitcoin Jesus”) to audit their reserves in 2011 and again in 2013. In 2014, exchanges responded to the influx of new customers, increased competition, and the collapse of Mt. Gox by taking audits much more seriously: Coinbase was audited by Bitcoin advocate and entrepreneur Andreas Antonopoulos, Bitstamp was audited by former Bitcoin Core developer Mike Hearn, and Bitfinex, Kraken, Huobi, and OKCoin were audited by former Ripple Labs CTO Stefan Thomas.

Sounds great right? The only problem is, those who have the technical skills to audit exchanges generally don’t have the skills to audit the fiat side of things. And the people who have the skills to audit the fiat side generally don’t have the technical skills to audit the crypto side of things, as Mike Hearn explained during his audit of Bitstamp:

“The overlap between people who are traditional accredited auditors and people who understand the Bitcoin technology and things like signing with private keys is presently very small.”

In December 2022, Binance CEO Changpeng “CZ” Zhao also indicated during an interview that traditional accounting firms had difficulties auditing crypto exchanges:

“Audits don’t reveal every problem… Many of them don’t even know how to audit crypto exchanges.”

The fiat side is important because it is possible for a business such as an exchange to make up for a shortage of BTC or ETH by borrowing or buying cryptocurrencies with fiat. In such a case, someone like Andreas Antonopoulos might look at the hot and cold wallets and assume that everything is fine. However, a closer look at the fiat side would indicate that the exchange is actually insolvent.

In fact, during his audit of OKCoin, Stefan Thomas explicitly warned about this possibility:

“Note that there are limitations to this type of audit. It does not verify an exchange’s fiat assets and liabilities or other aspects of their balance sheet. It is also difficult to prove definitively that the bitcoins in question are actually owned by the exchange versus being on loan for instance.”

Of course, there could still be issues even if we had a healthy and competitive marketplace of cryptocurrency auditing services to choose from. For example, Roger Ver had name recognition but his audit of Mt. Gox wasn’t a particularly thorough one and it couldn’t save them from collapse in 2014.

And while cryptocurrency reserves can be proven transparently and in real time, confirmation of fiat reserves cannot be done in real time and companies might not want to expose their financial operations for their competitors to see. Therefore, some degree of trust will probably be necessary in this field.

Then there’s also the fact that the cryptocurrency industry is much more complex and diverse now. Back in the old days, when nearly all attention was focused on Bitcoin and a handful of altcoins that simply copied Bitcoin’s code, a technically inclined and sufficiently dedicated accountant might have gained a working knowledge of the entire space in just a few months. Now the cryptocurrency space is significantly more complex with multiple layer 1 and layer 2 platforms, NFTs, ICOs, utility tokens, smart contracts, stablecoins, DeFi, DAOs, blockchain forks, airdrops, and DApps.

Finally, companies that enter this space will likely face challenges such as finding sufficiently qualified experts that are respected in the community (who won’t come cheap) and building up a reputation. The latter is unfortunately a catch-22 because a company with little reputation is unlikely to attract clients and their “seal of approval” won’t mean much. But without clients, it would be difficult for a company to build up a reputation.

In conclusion, it seems apparent that there is a large void in the industry for auditing services that team up cryptocurrency experts with fiat experts. Yet, very few startups have expressed an interest in filling it. This is understandable because there are probably far easier ways of making money in the cryptocurrency space that don’t involve dealing with clueless accountants and the legacy fiat-based banking system. That being said, most of the challenges faced by companies that enter this space don’t seem too insurmountable. Perhaps there are more that I might have missed? If you have any thoughts on this issue or know of any companies working in this space (or even wish to promote your own) then feel free to share them in the comments.