Transforming Financial Reporting for Crypto With Sam Leichman of Propeller Industries

In the latest episode of Cryptonomix, Mark Eckerle speaks with Sam Leichman, Blockchain Practice Leader at Propeller Industries, a strategic finance and accounting partner for venture-stage and high-growth companies. The pair discuss the transformative potential of Web3, the creation of the Statement of Digital Assets (SODA), and the importance of accurate financial reporting for digital assets.

Transcript

Speaker 1 0:00

Hello, listeners, welcome to this episode of Cryptonomics. Before we jump into today's discussion, please keep in mind this recording is for general education and is not intended to constitute investment advice. Any opinions expressed are those of the participants and do not necessarily represent those of Witham . Hello everyone. And we go back to another episode of cryptonomics, brought to you by Witham . As always, I am your host, mark Eckley , and today I welcome up to the show, Sam Leichman , blockchain Practice Lead at Propeller Industries. Welcome up to the show today, Sam. Thanks,

Speaker 2 0:29

Mark . Thanks very much for having me.

Speaker 1 0:31

Of course. Appreciate you joining us. I, the one question I always like to start with , um, with all of our guests is their crypto journey, the Rabbit Hole experience, kind of how you got interested in this space and what kind of propelled your career in this direction. So why don't you tell us a little bit about that as well as background on Propeller?

Speaker 2 0:47

Sure. And , uh, maybe taking the last piece, first, propeller was founded about 17 years ago, really with the intent of providing a full stack service of CFO down to staff accounting for VC backed startups . Really, you know , you look at a seed series A and sometimes series B , um, those teams should be focused on building, selling and scaling, not necessarily having a perfect instance of QuickBooks. And while it's great to have a CFO around, there's , there's just not really 40 hours a week of work to be had at those points in, in those organizations. I, I joined Propeller a little over six years ago in our SaaS practice, and , um, very fortuitously was assigned Solana Labs as a client who , uh, at the time was in Testnet. And, you know, really as I unpacked their business model really recognized, you know, what, you know, Web3 was the potential Web3 had for, you know, not just a kind of a , a niche technology, but just something that was going to be transformative. And , uh, uh, you know, from a finance and accounting perspective, realized very early on that in addition to the finance and accounting work we're doing for all of our other clients at Propeller, there was gonna be this kind of second order of crypto finance and crypto accounting. You know, more specifically, how do you take on chain activity and translate that to the p and l . Um, and then for US gap . And then, you know, when you think about the balance sheet, you know, how do you , well first make sure that you're reporting accurately per US gap , your , the digital assets that are sitting on your balance sheet. But I'd say maybe more importantly, how do you make sense of that? Um, and , uh, we , I'm sure we're gonna get into a little bit of that later in the podcast, but yeah, very, very quickly realize that this is , uh, this kind of coming exciting technology. You know, propeller had been around for a , a good number of years , um, prior to our work in the space . And you know, my outlook right now, we've got about 60 clients in call it either crypto native or blockchain related businesses, but we've got another 300 clients in SaaS and c pg and it's my thesis that in five years, every one of them is gonna have exposure to blockchain technology. And it could be payments, it could be some sort of loyalty programs, everything that I'm sure , uh, folks who listen to this podcast are, you know , uh, you know , the technology that, you know, can be unlocked with decentralized computing. And so, yeah, you know, kind of, I I came for just this exciting, these opportunities and, you know, now it's, you know, it's not just let's, let's play within our walled gardens. I, I think it is , you know, this is gonna be truly transformative. I know we, we said earlier that we're gonna talk politics and , but I do think that with the coming regulatory unlocks again , uh, there was a , a Coinbase study that I'm gonna, I'm gonna not be good with my stats on this one, but , uh, something like 70% of Fortune 500 execs surveyed thought that, you know, stable coins were going to be, are , are , are looking seriously at stable coins as payments. Some, some number in the eighties are looking at some kind of tokenized project. So yeah, it kind of came because I think the technology is just so exciting and, you know, stayed because I think it is , you know, this is not just gonna be a , a crypto native endeavor. I think this is the , the opportunities are really, really pretty broad and, and , and super exciting now.

Speaker 1 4:41

Yeah. And we see all the time, traditional tech companies, like you mentioned of your, your SaaS core business model, asking those questions about stable coins, asking those questions about, okay, if I wanna accept it from vendors, or I wanna move it onto the balance sheet, just a very small minute amount as part of an investment thesis after a raise, whatever methodology would come about, we're starting to see those questions from non crypto companies to your traditional tech companies . So we're starting to bridge the gap between the two. And it's just gonna open the doors to folks like you and I on the accounting side to have that leg up of already having that expertise, understanding digital assets, understanding this new asset class and how to interact with it, how to transact with it, understand the inner workings of the technology itself.

Speaker 2 5:26

Yeah. You know, I think there is , uh, I'm gonna double click on that because I'm sure these questions that you're, you're hitting as well. But, you know, there is the , um, on chain a accounting for on chain assets. But I think, you know, I , I think rwa is a , uh, an easy term to lean into, but it's really tokenizing off chain assets, token tokenizing financial assets. But , you know , I think you're now not just faced with the question of how do you account for that , just this one section on the balance sheet of other assets. But now you're , you're , I think we're gonna be seeing tokens appear all over the balance sheet, pp e variety of other places, you know, where you're , you know , the token is just representing something else and it needs to be accounted for , uh, like that something else. And then, you know, I think we're, you know , again, to geek out from an accounting perspective for a second, you know, it's like, okay, a fractionalized whatever belongs maybe in where, how that should be accounted for. But what happens when you begin to make it composable or programmable and all of a sudden the thing isn't the thing anymore. And again, this is the, these are the , the questions that scare the crap outta most accountants, but I think attract the folks that have, you know, really embraced the space, you know, just made the , this is what makes it fun.

Speaker 1 6:53

Yeah. It keeps us coming back for more. Yeah . And , and I think part of that bridge and what I , what I really want today's episode to focus on is , um, one of the exciting projects that you and the team propeller as well as other contributors have been working on for these space as a whole. So, can you tell us a little bit about what this statement of digital assets is? This the soda term that we'll be throwing out? Tell us what it is, its origin and kind of how you envision this should be incorporated into the legacy current financial reporting packages of a balance sheet, statement of operations, a cash flow statement of stockholders, equity, right . Equity, right. Those four core statements that companies expect to get when they have audited, when they're getting monthly, quarter, monthly, or quarterly financial packages. So if you could dive into a little bit about that, that's, that's where I'm excited about. Sure.

Speaker 2 7:40

And I , I think that , you know, again, I liked how you started the podcast talking about origin stories. 'cause I think a , I think this , this industry in general is built on narratives, and I think that's what makes a lot of it really fun. But, you know, I think about, you know, how we, how, how did we get to soda? It really started as a, you know , I was probably our most beefy client at the time that was, had three to 5 million transactions a month hitting the p and l . Luckily, they actually, the balance sheet was 1, 1 1 digital asset class. But, and , and a lot of it, and a but a range from, call it , you know, I'm just gonna make up some numbers here, you know, that was acquired from 500 to 4,000 and every week we would do a flash report for them . And the , the view was wallet asset quantity. They didn't care about book value. They wanted to know what was the liquidity and, you know, how did that speak to the treasury? And so we got to really our first gap close and, you know, I was reviewing it with my internal controller and I was like, yeah, that number's wrong. I know that we discuss, and again, making up numbers here, but you know, on , you know, our weekly calls, you know , uh, we talk about, you know, 10 to $12 million of , of value at current market rates. And that's, I know that's the number that our client , our client thinks about . Um , and of course, you get under the hood, you look at the subledger, it's like, no , this is a book value. This is, here are all the reconciliations. Here's their , you know, here's, you know, where it was acquired, you know, what did some impairment and that's the right number. But we were showing, you know , like three or $4 million. And I'm like, all right , well sure enough , uh, you know, going through the numbers with the client the next day, it was like, yeah, that number's wrong. It's like, no, it's right. Let's take you under the hood. And you know, by the way, getting under the hood in a sub-ledger is not for a non accountant, is not a pleasurable experience. Uh , but, you know, he is eyes glazed. Everyone's like, look , you guys know this stuff. I'm sure fine, it's a cat . If there's some, you know, you , you're , you're telling me that this indefinite lived intangible asset thing, I don't know what that means, but fine, you know, US Gap makes no sense for this, but let's just move forward. We know what we, we know how to run the business. And so got to thinking that, you know, next iteration, I know how we knew how operators looked at their treasury, and it is at the wallet level, it's at the asset level, and it's, they wanna know what the fair market value is. But you know, it's like I felt, you know, like a little bit like I was back in like fifth grade where I had to show my work. And so, you know, I just basically took kind of this flash report that we were delivering and said, okay, well here is the , uh, here's the math that gets you to that $4 million . Even though the , uh, fair , you know, the , the current market value is 12 million or 10 million, whatever the number he knew in his head and the simple math that he was able to do to say price of asset times, quantity of, of holdings is equal to, that's what my treasury is. And you know , I think for a hot second at Propeller, we thought that we had something that was like some kind of secret sauce. A you know, this is really unique to we're gonna, we're gonna build a mode around this. And, you know, bottom line is, I think it's, you know, mark, I've known you for four years, maybe five. I don't know . It's like, you know, there's this phenomenal ethos in this industry where I think there's this great conversations with, you know, folks that do, you know, related stuff. There's folks that do exactly what you do, but I think everybody is, is pretty open about, I guess, wanting to just get to the right answer and very quickly, you know, like everybody was doing something kind of similar in terms of how do you rationalize what's on the balance sheet. And not only was it from an operational perspective, which is obviously our, our , our lens , but we started having conversations with leaders in crypto audit , crypto tax , like yourself, the venture community. And you know, this, this approach really, you know, sort of symbolized a way that everybody was like, yeah, that has real relevance, you know, for audit prep, for tax prep at the end of the year when, you know , VCs have their information rights due. You know, look, gap is the language of business. And you know, I think as this industry is growing up, you know, we need to be talking about things in terms of gap . And really the , the relevance of, I think what we're doing, number one had , you know, touched all of these other parts of professional services, the investment community and other operators that, you know, I think we, we've realized very quickly that, you know, this is something that should be open sourced. I think it would very much aligned with the ethos of the industry. And I think there was, you know, the sense of let's create a kind of a public benefit collaboration where we're gonna put this down in a white paper and talk about, you know, what is the thing, what are the use cases? And really just promote it as a best practice for the industry. And we've got incredible support. A 16 Z Delphi Ventures, op labs, sari . There are more two big fours that we're , uh, in the midst of their policy committee for getting full attribution and naming on. But no, but it , it , it's really has served as this , um, you know, just a , a a , a tool that I think has relevance for all these different areas. And I'm , I'm sorry, mark , you're gonna kick me under the table for saying this, but you know, for, for , for non CPAs, the easiest way to describe where this fits into the whole thing is , but people don't get that is for a GAP package . And that , you know , it's a start that says, how do you bridge, you know, what you, you know, have to be reporting per US gap , which, you know, I think you've got, you know, the rules prior to a SU 2020 3.08 were, did not make it , uh, very , uh, clear of what was on the balance sheet. I think the FASB update made something , made it , uh, I think it was a , a step in a great direction, but it's still, to look at a , a US gap balance sheet doesn't make a whole lot of sense. And so this is a way just really to put it all out there and make, you know, make this a usable, make , uh, the balance sheet better accessible and more usable for parties that wanna understand what is the impact of, of digital assets to an entity. And one last point too. You know, I think we got into this writing about it, not just from, you know , yes, my client base, we're working with about 60 projects at Propeller right now, everybody, and you know, this is, this is kind of all we do, but I think that there is a reality that in, you know, the next five years, it's not just gonna be about people who are serving as CFOs for Web3 projects . It's gonna be the web ones , the web twos , any CFO who is working in the space needs to be able to have a way to really understand what is on the balance sheet. And, you know, I think that if you can't account for it , you're gonna have a really hard time having a CFO who is not crypto native being willing to transact with it.

Speaker 1 15:54

Yeah. And I, I think the important thing that you hit on there was the legacy framework and reporting for digital assets. And the ultimate presentation on the balance sheet was not indicative of a company's financial position. And I think that hurt a lot of companies from a presentation point of view when you were reflecting that to investors, if you're a public company or to your board. 'cause you'd almost always have to have some type of narrative supporting that of, okay, well here's our actual value of digital assets, a treasury that we're sitting on if we need to go and pay vendors, pay employees liquidate for cash. So I think this statement replacing that painting, that clearer picture to management, to the board of directors, to potential public investors or future investors is, is paramount to the digital asset industry. Now I do agree, I think the rollout of the new FASB standard does present the balance sheet in a much cleaner and more accurate format. But I, I think seeing the breakout like you would with the cashflow statement of all the activity, instead of just grouping everything on a cashflow for non-cash digital asset activity, not really knowing what's being packed into that number. I think breaking that out in a readable format in a statement that is similar to current framework, right? So it's, it's like the back of our hand for you and I in the accounting world, we know how to do balance sheets, p and l statement of cash flows. It it , it's just gonna go such a long way for the industry and those companies that are both in crypto and those companies that are going to be in crypto in the future.

Speaker 2 17:32

A absolutely. And just to also double click , and again, this is sort of the , the fun challenge that I think the ASU presents, you know , you now have, and this is the way we, we set up the chart of accounts for our clients under digital assets. You now are, you've got a bucket for fair value reporting bucket for a law of cost or impaired value book value. And then, you know, although nobody wants to, you know, have this conversation stable coins, because they're not cash, they don't belong in cash yet. We'll see what a stable coin bill tells us. But you know, all of a sudden you have these, you know, these three pretty different types of assets from an accounting perspective. And even to look at your, your fair value assets, it's not telling you what is your cost base and, and what is kind of an underlying tax liability that you're gonna be on the hook for when you, when you get rid of it, obviously, you know, you look at your, your , your , your what you're valuing a book value that could be your a native token, which we've seen, you know, in the billions, but sitting on the book at a zero cost basis. And then you've got your stable coins, which you know, is from a, working with, from a startup lens, you know, well , you can't account for it as cash. You have to be able to think about that as how does that inform your runway? And, you know, in no way, shape or form do we ever say, Hey, take a look at whatever your treasury is in terms of total digital assets at fair value and then divide your monthly run run rate of , of cash expenses, and that's your runway. It's not a very responsible way to be a finance practitioner. So, but I, we, we are very comfortable saying, if you're sitting on x millions of stable coins, that does speak to your runway. I I think that it also, you know, blowing out the detail behind the digital assets speaks to another thing as well. And that is, and I I , you know, I've said this on other, other , uh, panels and whatnot, but you, you get five crypto CFOs in a room and ask them what treasury, the definition of treasury, you're gonna get nine different answers. And I think that it is , you know, my , my perspective treasury is just having a full picture of real , real liquidity. And I think one of the things that soda does is not only does it put everything out there in terms of being able to understand book value, fair value, and your entire portfolio, but we also include , um, the opportunity to assign roles. And that's a very, you know, again, I'm , I'm , this is not a , uh, I'm not, this is not a software program. This ends up in Excel and it really, you know, it , it's very bespoke to how you are running your organization, but all of a sudden you start thinking about, okay, well you have ops and admin wallets, you have treasury wallets , you have every, every purpose that purpose that you are using digital assets for can and should be tagged. And, you know, I think this, you know, you know, gets into some interesting opportunities with the IRS RevPro and, and , and the necessity now also to be assigning, to be basically running your, your tax calculations at the wallet level. But I think more, I think importantly from an ops perspective, this concept of wallet hygiene and being able to say, you know, look, it's, it , it's a lot harder to set up bank account than it is to spin up a wallet. And as a result, you know, when we get involved with engagements, you know, it's, you know, in some cases a , a dumpster fire and nobody's, you know, there's intermingling funds. You ask other folks in who do what we do. And you know, how often do you, or have you ever seen , uh, clients that don't share all your , all their wallets, not in any, any sense of trying to not do a , uh, do do something bad, but you know, it's just you've, you know, all the got , all of a sudden you've got, you know, oh, I , Jim from engineering has been messing around with this and oh, there's million dollars in Ethereum that we forgot to tell you about. And so this, this also gives you a sense of saying, okay, let's, let's think about your wallet infrastructure, think about wallet hygiene. And then I don't know if we'll have time to get into, you know , some of the , the tax stuff that's coming out with a recent IRS RevPro. But, you know, you do need to be responsible for tracking at the wallet level your, your cost basis for, for the 10 99 DA rules and the broker rules coming up.

Speaker 1 22:27

Yeah. The , the one path I wanted to go down a little further that you started to allude to was for the creation of this new statement for, for soda. So two things I wanted to, to push back to you on were one, if I were a CFO, if I were a controller, how would I go about creating this new statement, right? Because you mentioned in Excel, right? So kind of wanna make sure we're explaining to listeners how to bridge the gap of one, creating this new statement, but two, how does this interact or speak to your current ERP? And when I say ERP, that could be mean both your general accounting software, your, your NetSuite, your QuickBooks, your Zeros , as well as your sub-ledger crypto software, whether it's crypto bit, wave , what have you, which both kind of commingle each other. But I'm curious how at the end result, at the end of the day, you would get this new statement. Can you talk through that a little bit?

Speaker 2 23:20

Yeah, and I, I think again, it all goes back to sort of let's, let's start with the origin story. Um, but you know, I look it started out with okay, sub-ledger, you know , I don't think that any, any business like propeller blockchain or I'm , I'm not mention my competitors by name , but you know , you know who they doing could not do what we do without a sub-ledger. Basically a tool that takes, you know, that tracks the on chain activity and, and essentially serves up journal entries for your, your general ledger, your QuickBooks and, and , and NetSuites. And you know, I think , you know, I, and by the way, we were pre , we were doing this work before we had subledger technology to, to, to work with, I shudder to think about some of the early spreadsheets that we were heavily relying on. But you know, you , you may do with what you have in front of you , but I think at the most basic level, when we started putting this together, it was all of these data points are available within the subledgers. Um, so, you know, it starts out with the equivalent of a balance report, which has your , at the wallet level, what are the assets in there, what's the quantity of assets? And again, I think it's the nature of the business. People care about what is the fair value. So, you know , they would have some sort of pricing mechanism they'd pull in, gets a little bit trick when they're looking at NFTs, but put that to the aside and then you would, again, you know, what is the least sexy part of probably the sub-ledger was, you know, tracking your cost basis and figuring out what is, you know, what either by wallet early on it was , uh, that was, that was challenging for all the subledgers, but you know, there was a different report they would be pulling your, your your , it was a tax runner in Bit Wave originally. Everyone had gone variety. And you basically, we started by just saying, okay, you take one report which gives you, you know, the wallet infrastructure, quantity, asset type and fair value, you take another report which gives you your cost basis and you put it together, and I think it's downstream after the books have been closed, after the , the , while it's have been reconciled and you've got, you're , you're using a source of truth that is already informing the financials. So this is the whole point is how do you tie this out, you know, I mean, again, back to the origin story, you , we started out with a number that we needed to tie out to . And so we basically just went back to the sub-ledger, which was built Wave in the example that I brought up originally. And we said, okay, well, you know, all this is coming from this one source of truth. Let's just kind of, kind of pull from a couple of different reports to , uh, to, to make it, you know , basically again, the whole point initially was to show our work. Um, and so that was, you know , so it's really just pulling the select reports from the subledgers, you know, I think that, yeah, look, I , at Propeller, we are platform agnostic. We work with Bit Crypto , integral trades , crypto worth , and I'm sure I'm leaving somebody out and I apologize to whoever that may be, but Yeah, but look, at the end of the day, we could not do our job. Nobody, no, no operational accountant can do their job without the use of the subledger. And I , I , I guess what I'm excited to, to kind of maybe lean into a little bit is as we have begun to really focus on soda, and, you know, again, I think it , this could only exist if it was a collaborative effort. We've got an incredible buy-in from the , the leaders of the sub-ledger firms . And so I believe Bit Wave has rolled out a soda report. Crypto is, if if it hasn't rolled out yet, it is rolling out, I've gotten verbal commitments from Integral, from Crypto worth , um, from Trace. And, and you know, to be very clear , uh, this is a soda report. This is not something that is a, you know, soda by Propeller or Soda by EY or Soda by Deloitte. This is soda. This is a public domain, a standard that, you know, we want to be able to be again, you know, just adopted. It's, there's no, the , the , there's no commercial kind of , uh, let's, let's really kind of think about it, then we're gonna start charging for it . You know , there's no freemium model that we're , uh, it's in the back of our head. This is, you know , again, I've got other outsourced accounting providers that have contributed to this project. We've had two big four contribute to this project. We've had multiple VCs contribute to this project. So ultimately it comes down to the sub-ledger. And in terms of assembling this, right now, we're very close to basically just going to the canned reports. And I have to come up with a good joke because it's a can Soda report, but come back for the late show . No, I, no, but the , I , what, you know, what , what we're working towards with these subledger partners is the ability to have a dropdown. And, you know, again, all, all , whenever I explain soda for the first time to a sub-ledger, they're like, well , we're already doing all that. I'm like, well, you're not doing it in a way that operators can just say, I want this, and this is exactly how I wanna look at it. And again, I don't think that what we've put together is necessarily rocket science. I think it's just a rational way to make sense of digital assets through a gap lens and through an operator's lens . Mm-hmm <affirmative> .

Speaker 1 29:16

And , and you mentioned it's a public domain. Can you give our listeners the site so that we can go and endorse it? Because I think, I mean, getting as much traction, getting as much endorsement of following more than the merrier. Yeah,

Speaker 2 29:29

No, mark , thanks for bringing that up. Yeah. So look, I think, again, we started by just wanting to put this out into the , um, into the industry , making it be a useful tool first . Our, our V one came out August of last year, and then the a SU kind of, you know , kind of forced us to sort of rethink, you know, some of how we were approaching things. Um, so we came out with a V two and, you know, as we, you know, have been working on these white papers , and , and there is a white paper that you can download it , soda Finance, xyz, sorry, that was your question. I'm not getting directly to it, but, you know, we , we came out with these white papers , it was like, all right , well, what else can we be doing? And part of that is saying, okay, well, when we think about what does maybe a V three look like, is we want leaders from this industry, whether they be CFOs, controllers, professional service providers like you and I, investors from the venture community to go and we're, we're accepting endorsements, as you mentioned. You go to the website, there's a go to endorse , and basically it's saying that when we roll out our V three , we're gonna have a slate of leaders from a finance and accounting perspective who, it's not saying that this white paper is a work of art or anything beyond the idea that this core analysis, which is a schedule to the a a standard set of financials is a good idea that we're endorsing this to say, Hey, this makes sense. And I think that, you know, what we're really aiming for is, you know, I, we , we have had conversations with A-I-C-P-A , you know, look, wherever it ends up from an official accounting perspective, I'm excited. But I think the reality is, again, there is a opportunity for us to create the best practice for this industry. And I think that's, that's really, you know, my goal with the project.

Speaker 1 31:41

No, and I think it's, it's got a bright future. I'm excited to see this as, like you said, V one, V two, but the laying the foundation for what's going to be essential for crypto companies and their reporting requirements. Um, I think this has a bright future. I'm excited to see how this is gonna be rolled out, and I'll be the first in line to continue endorsing this project. So Sam, it was a pleasure having you on today's episode. Where can folks go to learn more about yourself and propeller? So

Speaker 2 32:08

Find me on LinkedIn. It's Sam Leichman , L-E-I-C-H-M-A-N. They're , uh, i , I post a lot about soda , um, but please DM me there. Uh, our website is propeller industries.com. My email is first initial , last name at Propeller Industries do com . But , uh, LinkedIn is probably the easiest, easiest path.

Speaker 1 32:31

Awesome. Great. Awesome. And with that wrap up, another episode of cryptonomics. Thank you everyone. Thanks

Speaker 2 32:36

Mark .

Speaker 1 32:37

All views expressed in this podcast by Mark Eckley or his guests are solely their opinions and do not reflect the opinion of rhythm . This podcast is for informational purposes only .