Built for regulatory frameworks

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Introducing Onli.Crypto

OnliCrypto (pronounced “only crypto”) is a bridge between two different philosophies of how to use value storage technologies: Bitcoin (et al) and Onli. Both approaches achieve the same goals in very different ways. Bitcoin was invented in 2009 by Satoshi Nakamoto. It is an entry in a ledger stored as a chain of blocks in a distributed database. What you get is a key to that entry. The key allows you to make changes to the entry in the ledger. The owner is whoever presents the key. Bitcoin was designed to operate outside the regulatory environment. 

Onli was invented in 2010 by Dhryl Anton and Michael McFall. Onli is a data capsule stored as a chain of blocks. The capsule evolves as it is moved from owner to owner. The owner is the person who possesses the current capsule. No ledger is involved. The code that makes changes to the owner can be distributed or centralized to fit regulatory environments.

To bridge the gap between ONLI and Bitcoin a technology called Vescel is used. A Vescel is a programmatic cryptographic container that you can share without giving up control. You achieve this by putting objects in the Vescel and you share the container, not the contents. Vescel is a patented data structure used to implement a database, where every user has their own instance of the database that stores their objects.  

In the case of OnliCrypto you first put the private key in a Vescel. The Vescel then uses this key to make a new entry  in the ledger and generate a new private key that is never seen by human eyes, encrypts this new key and puts it back in the container. The owner of the container is an Onli Coin (capsule). You cannot open the Vescel without possessing and presenting the Onli.  This is called binding.

The end result is that The Vescel, which is referred to as a “Crypt” in OnliBitcoin, can be stored separately from the Coin (the Onli capsule). The Onli can be moved around independent of the Crypt. The Onli can be traded without needing to make an entry in the ledger.

Storing the Crypt (Vescel), by a third party is referred to as the custody of the Crypt. The Crypt cannot be opened without the Onli. When the owner wants to retrieve the contents of the Crypt. they can present the Onli and request it from the custodian. The owner then can use the Onli to open the Crypt and retrieve the key. This destroys the Crypt. 

With Onli Bitcoin you get benefits of Onli such as fast and final transactions, industry standard custody, transparency, and strong authentication. Settings can be configured to realize regulatory requirements, adding compliance capability to the worlds most popular digital asset, Bitcoin. 

Onli.Crypto - Accounting

Over the past 18 months, major accounting firms (EY, PwC, KPMG, Deloitte) have begun to make significant investments developing technology for [3, 4] hiring of staff in order to be able to offer auditing services to financial firms as they begin to make investments in crypto-assets. This despite the fact that there are few standards both at the local jurisdictional level, as well as globally.

 

In this paper we will review the issues as identified by both the major accounting firms themselves as well as the CPAB (Canadian Public Accountability Board) a national body organized by the Canadian Securities Administrators to oversee accounting firms performing audits in Canada, including the major firms mentioned above. We will also identify how the Onli.crypt asset class can meet many of the challenges identified by these firms.

Classification

The first major issue for crypto-asset auditors is to classify the type of asset it actually is. The consensus appears to be to initially record the crypto-asset as an intangible asset at its listed purchase price, with the condition that they be “tested for impairment”, or marked to market periodically. In some cases crypto-currency may be classified as inventory, but in no circumstances are crypto-assets to be classified as cash or a medium of exchange.

ONLI.crypto is clearly a new type of asset, with a provable title, and associated rights of ownership. This will greatly simplify the classification process for standards agencies, as it looks like many other investment grade financial assets.
ONLI.cryptos standardized form (for all crypto, independent of it’s underlying cryptocurrency) as well as a single source of truth for it’s value (the Onli.crypt exchange licensed to trade the asset) provide a stable knowable framework of value for regulators.

Existence

This problem is literally the problem of existence. The very nature of the blockchain as a record of transactions leads the auditor ask questions regarding how an invalid transaction is handled, how validated transactions are recorded, and what happens when there are hard or soft forks which can invalidate previously valid transactions.

ONLI.crypt maintains a complete and visible transaction history of every ONLI-Crypt pair traded, as well as current owner, audit history and provenance, eliminating questions about existence and the need to validate such existence.

 Fungibility and Commingling

Some crypto-exchanges commingle their clients assets, in an attempt to access and leverage the fungibility of the tokens represented by the private key, making impracticable for auditors to verify customer transactions [2].

ONLI.crypto is designed for fungibility from the outset, recognizing that private keys in and of themselves can not be fungible. By creating a standardized, secure container, with provable title, ONLI.crypto are no fungible, transactions of which are traceable and audit-able.

Since ONLI.crypto are traded off-chain their underlying asset value cannot be commingled. Each ONLI.crypto, regardless of underlying asset, is a separate, distinct titled asset with provable, traceable ownership.

Fraud and Theft

There may be fraud risk in when trading the asset, and also potential for market manipulation or theft of private keys. For example, mixing (trading assets through exchanges that algorithmically send transactions through multiple addresses), intermingling of customer assets, shared asset attestations and bad actor theft of keys, all pose significant exposure to audits of crypto-assets.

ONLI.crypto eliminates all of such risks:
Mixing is impossible as the asset is traded off chain.
Intermingling is impossible as the asset is traded off chain. The need to Intermingle (fungibility) is eliminated since same denomination ONLI.crypto are fully fungible.
Shared asset attestation (multiple parties claiming ownership of a single private key to fraudulently 
claim ownership of the public address) is impossible, since the ONLI.crypto system guarantees a provable single owner with its title) is impossible.

Bad actor theft of keys during transmission between custodian and exchange is virtually impossible as the ONLI.crypto asset cannot be decrypted except in a secure hardware enclave that has audit- able key ceremonies. The bad actor would have to intercept both the ONLI and the Crypt, and be able to prove they are the owner of the ONLI as well as get access to the hardware enclave and the owner’s device.

Ownership Rights

In a Financial Times article [4], Jatin Patel, KPMG, said “the hardest piece is verifying ownership, given the anonymity afforded to holders of most digital currencies”. In a 2017 Ernst and Young paper [1], EY noted, “there is still a lack of connection between the Bitcoin address and an identifiable legal or natural person”. The CPAB [2] suggests that auditors obtain, “obtain sufficient appropriate audit evidence that the entity owns the crypto-assets that are associated with a public address” and that management “transfer a specified amount of a crypto-asset balance between crypto wallets controlled by the entity and inspect the blockchain record for the occurrence of the transaction”. This last activity is sometimes referred to by other firms [9] as a key ceremony, which refers to formalized, audit-able processes involving the creation, use, storage and destruction of private keys.

ONLI.crypto manufacture results in a separation of the asset (the private key) from it’s title (a bundle of rights) represented by the ONLI token cryptographically bound to the Crypt containing the encrypted private key.

Ownership in ONLI.crypto is explicitly maintained in the chain of blocks contained in each ONLI token. This ownership is strongly authenticated and maintains an audit trail tying it to the original user’s KYC data.

Transfers of ownership are explicit, and audit-able, and the asset (private key) is proved (does public address correspond to private key) every time a transfer of ownership takes place, thus there is an explicit connection between the owner and the asset, the private key.

Third Party Custodian

Third party custodians represent further audit risks, as existing third party custodians (non-traditional) of crypto assets are largely unregulated and typically do not supply auditor’s reports that attest to the effectiveness of internal controls [2].

ONLI.crypto technology is designed to operate within existing , traditional third party custodian work flows and controls (see previous section of custody). 

Since public addresses are not associated with any single individual entity (as noted in Existence and Ownership sections), it is difficult for auditors to identify evaluate disclosure of all crypto-asset transactions with related parties [CAS, 550, Related Parties].

Since ONLI.crypto is a fully titled asset, with an explicit chain of ownership, evaluation of related parties transaction disclosures is built-in to the ONLI.crypt asset itself.

 

Valuation

Crypto-asset markets are 24-7 markets, and to date have offered volatile platforms for asset valuation. In addition most auditors are required to value an asset using the platform in the local jurisdiction if it’s available. As mentioned in section on Classification, the asset value of an intangible asset must be recorded in the case of impairment, which can be triggered by significant price swings. [1, 2, 4, 5, 8]

ONLI.crypto will be traded on a single global exchange, with local nodes available in jurisdictions that request such service.

Since ONLI.crypto is a fully secured, custodial, audit-able class of asset, many institutions that are currently averse to trading crypto assets will join the market. This will increase liquidity, and the fungible nature of the asset will encourage market makers to participate fully in the market.

 

The presupposition  of market participants is that new regulations, new technology and new controls and processes are required to enable crypto-assets to be held by institutions as financial assets. Since ONLI was designed and built to operate within existing regulatory environments, it can be used to bridge the existing regulatory framework with the new blockchain based infrastructure. 

 
References
1. https://www.ey.com/Publication/vwLUAssets/EY-IFRS-Accounting-for-crypto-assets/$File/EY-IFRS- Accounting-for-crypto-assets.pdf
2. http://www.cpab-ccrc.ca/Documents/News%20and%20Publications/Auditing%20in%20the%20Crypto- Asset%20Sector.pdf
3. https://www.ey.com/en_gl/news/2019/04/multimillion-dollar-investment-in-ey-blockchain-analyzer-delivers- new-upgrades-for-blockchain-and-cryptocurrency-audit-and-tax-services
4. https://www.ft.com/content/62dbb0ae-d822-11e8-a854-33d6f82e62f8
5. https://www.iasplus.com/en/publications/us/financial-reporting-alerts/2018/18-9
6. https://www.iasplus.com/en/publications/global/thinking-allowed/2018/thinking-allowed-cryptocurrency-
financial-reporting-implications
7. https://www.iasplus.com/en/meeting-notes/ifrs-ic/2018/september/cryptocurrencies
8. https://www.pwc.com/us/en/cfodirect/publications/point-of-view/cryptocurrency-bitcoin-accounting.html
9. 9 https://www2.deloitte.com/nl/nl/pages/academy/events/key-management-payment-security.html

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