The failure of the cryptocurrency exchange FTX made it clear how crucial proof of reserves is for preventing scenarios when users’ money is misappropriated.
The CEO of Kraken Exchange Jesse Powell claims that in order for a proof-of-reserve audit to be complete, it must include the total of client liabilities, user-verifiable cryptographic proof that each account was included in the total, and signatures demonstrating the custodian’s authority over the wallets.
Many business leaders have criticized the move as “pointless” because exchanges do not account for liabilities despite the fact that exchanges have proactively started disclosing wallet addresses to demonstrate the presence of customers’ assets.
Powell claims that in order for a proof-of-reserve audit to be complete, it must include the total of client liabilities, user-verifiable cryptographic proof that each account was included in the total, and signatures demonstrating the custodian’s authority over the wallets.
Despite the fact that Kraken’s proof of reserve makes it possible to compare the company’s assets to its liabilities, Powell still criticized other players for failing to include accounts with negative balances.
Powell previously criticized CoinMarketCap, a market index tracker owned by Binance for disclosing a “cryptographic proof of client balances and wallet management” that was insufficient. He emphasized that reserves are assets less obligations, not a list of wallets.
Binance’s recently launched proof-of-reserves system allows users to authenticate their assets using a Merkle tree. Powell expressed his disappointment that the system did not take into consideration accounts having negative balances, adding that:
“The whole point of this is to understand whether an exchange has more crypto in its custody than it owes to clients. Putting a hash on a row ID is worthless without everything else.”
Moreover, he asked the media and journalists to refrain from “overselling it and misleading consumers.” Instead, he suggested they spend time learning the rationale behind the proof of reserves.
Few, though, in the neighborhood disagreed with Powell’s assertion that a reliable auditor was necessary. In response to the charge, Binance CEO Changpeng “CZ” Zhao rejected it by revealing planned plans for Binance that call for external auditors to examine the exchange’s proof-of-reserve data.
The community endorsed CZ’s answer to the issues brought forward by the CEO of Kraken. Some members, however, criticized CZ for being hypocritical in preventing public commentary on the post that welcomed “questions and checks.”