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Crypto exchanges that have published their proof of reserves and what these audits tell us

Crypto exchanges that have published their proof-of-reserves and what these audits tell us

Crypto exchanges that have published their proof-of-reserves and what these audits tell us
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By CNBCTV18.com Dec 7, 2022 4:54:30 PM IST (Published)

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A proof-of-reserve shows that user funds and deposits are safe, well-maintained, and backed 1:1 by on-chain assets. In Binance’s announcement post, the exchange highlighted the use of Merkle Trees to encrypt blockchain transaction data. This would allow users to verify not only their holdings but the total holdings of the exchange as well.

FTX went from being one of the largest crypto exchanges in the world to file for bankruptcy in a matter of days. The meltdown was triggered by a CoinDesk article that revealed the balance sheet of FTX’s sister concern, Alameda Research.

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The balance sheet showed that Alameda was heavily invested in FTT tokens, which is the native cryptocurrency of the FTX exchange. This pointed to possible mismanagement of funds, which sparked massive FUD amongst investors, who began withdrawing their funds en masse, and the rest is history.
Among many other learnings, the FTX crash highlights the need for transparency, especially on how user funds are stored and utilised. This is why Binance, the largest cryptocurrency exchange, has decided to publish a proof-of-reserves from now on.
What is a proof-of-reserves?
A proof-of-reserve shows that user funds and deposits are safe, well-maintained, and backed 1:1 by on-chain assets. In Binance’s announcement post, the exchange highlighted the use of Merkle Trees to encrypt blockchain transaction data. This would allow users to verify not only their holdings but the total holdings of the exchange as well.
The cryptoverse appreciated the initiative, and several other exchanges followed suit. Tag along as we round up the exchanges that have published their proof-of-reserves and understand what they mean for investors.
Binance
Following the FTX collapse, Binance was the first exchange to publish its Proof-of-Reserves. The audit provides a clear and transparent breakdown of the top six assets out of the 600 assets they hold on their exchange. These assets are Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), Binance USD (BUSD), Tether (USDT), and USD Coin (USDC). Altogether, Binance has nearly $70 billion worth of assets in cold storage.
Bitfinex
One of the oldest crypto exchanges in the market, Bitfinex, published its PoR on November 11, the same day as Binance. According to the published PoR, the exchange had $5.06 billion worth of assets, out of which a solid $3.36 billion was in Bitcoin.
The remainder of the reserves were held in Ethereum ($1.49 billion), USDT ($88 million), and USDC ($55 million). These holdings and others were stored in 135 cold and hot wallet addresses. The exchange also revealed plans for reviving Antani, the exchange’s open-source custody solution and proof-of-solvency.
OKX
OKX published its Proof-of-Reserves on November 23. The exchange stated that they would continue to post regular PoR audit reports so that users can verify the status of their holdings anytime they want. OKX uses the Merkle Tree approach for the verification of its assets.
The PoR audit states that most of its holdings are stablecoins, including USDT ($2.43 billion) and USDC ($195 million). However, according to Defi Llama, one of the biggest aggregators for Decentralized Finance, the exchange also holds 91,000 Bitcoins. The exchange has also created a proof-of-reserves page, where users can audit its reserves to ensure they are solvent.
Huobi
Huobi, the Seychelles-based crypto exchange, published its PoR audit on Nov 12. Defi Llama stated that the trading platform held 43,200 BTC, worth approximately $3.11 billion. In addition, the exchange also holds Ethereum (274,000 ETH), USDT ($820 million), and 9.7 billion TRX tokens. The platform also possesses assets from other chains such as Avalanche, Algorand, Solana, Polygon, EOS, and Litecoin. However, these altcoins make up only a tiny portion of the total reserve.
Gate.io
Gate.io was the first crypto exchange to provide a proof-of-reserves audit. In 2020, the exchange tied up with the leading U.S. accounting firm, Armanino LLP, to audit its assets in reserve. More recently, spurred on by the FTX, Gate.io integrated Merkle Trees into its PoR and made the source code public on GitHub so that other exchanges could benefit from their progress. As per a brief report published by Armanino, the exchange has 108 percent of BTC and 104 percent of ETH in its reserves as of October 19. This means that the reserves exceed user deposits, a very good sign indeed.
Kraken
Kraken is another crypto exchange that has been publishing proof of reserve audits before the concept was brought into the limelight by Binance. Like Gate.io, Kraken, too, has tied up with Armanino LLP and released its second proof-of-reserve in February 2022.
Instead of issuing a separate Proof-of-Reserves audit report providing a detailed insight into the assets in possession, it offers a simple tool through which users can check for themselves the status of their allocated funds. The report also provided an overview of the exchange’s holdings, which included $19 billion worth of clients’ BTC and ETH. This included $3.5 billion worth of ETH deployed on the exchange’s secure on-chain staking service.
How effective is this Proof of Reserve in the long run?
Vivian Fang, an accounts professor from the University of Minnesota, expressed concerns over the credibility of the Proof-of-Reserves approach. She stated that PoRs do not fully reveal the details regarding any hidden liabilities an exchange might have.
For instance, these reports do not reveal whether platforms have pledged customers’ assets for loans. Moreover, PoRs do not provide details of a platform’s non-crypto assets, such as fiat currency.
"Investors might assume that this attestation is similar to a full audit when in reality it is not complete and does not disclose the full assets or liabilities nor does it discuss any controls," said professor of accounting and finance at Montclair State University, Deniz Appelbaum, to The Wall Street Journal.
Ironically, FTX itself also conducted a full audit of its finances over the past two years. And just like Kraken and Gate.io, FTX, too, had partnered with Armanino LLP to audit its assets. However, one year later and FTX is reduced to ash.
Conclusion
Following the meltdown of FTX, regulators in the US are facing increasing pressure to get more crypto firms and exchanges to comply with investor protection laws. Chairperson of SEC, Gary Gensler. has refrained from commenting on the use of Proof-of-Reserves, although he maintains a strict stance on cracking down on crypto companies with unclear holdings.
However, Proof-of-Reserves is still a welcome change that holds some promise for users and investors. It may gain more popularity with advanced technologies that can offer complete transparency over the years. At this point, investors are weary of putting their money in exchanges, especially after the FTX meltdown. Amidst such an environment, whether Proof-of-Reserves can hold its promise and achieve its goals remains to be seen.
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