Centralized crypto exchanges are scrambling to improve industry transparency.
With the collapse of FTX amid allegations that ex-CEO Sam Banksmanfried used billions in consumer funds to grow his sleazy trading firm, centralized crypto exchanges are seeking to improve industry transparency. are working
After it became clear that FTX’s opaque balance sheet hid huge holes in customer funds, exchanges are turning to blockchain-assisted reserve audits to provide transparency and investor peace of mind.
With the failure of Sam Bankman Freud’s FTX and FTXUS exchanges and the revelations of how deeply and secretly he was connected to his bankrupt trading firm Alameda Research, at least 10 major Exchanges have promised to provide these proof-of-poors (PoR). ) audit, and several others already in place, like Kraken and Gate.io, are shouting it from the rooftops (or Twitter, anyway).
Coinbase, which as a Nasdaq-listed US company already has outside auditing and transparency as a regulatory requirement, is also promoting it with full-page ads in the Wall Street Journal. .
The point is that the exchange of on-chain data – specifically Merkle Trees – through regular, audited PoR statements should be able to calm investors worried by the news that FTX has spent billions of dollars to secure Alameda. Has secretly transferred customer funds. Only through its own highly illiquid FTT token.
Exchanges that have announced they are working on acquiring them include Binance, Bitfinex, Bitget, Bybit, Crypto.com, Deribit, Huobi, KuCoin, OKX and Poloniex. While a number have provided unaudited PoRs, they are essentially lists of wallets where funds are stored.
External auditors are required.
Obtaining an audited version of the evidence deposit will take months, if not weeks, as the process involves hiring an external auditor and giving them time to actually conduct the audit.
Binance CEO Changpeng “CZ” Zhao indicated in his November 8 Twitter announcement that the world’s largest crypto exchange will come out with Merkel Tree Proof of Reserve, saying that all exchanges should do so. Should. He added:
“Banks run on fractional reserves. Crypto shouldn’t.
To which Kraken founder Jess Powell replied, somewhat sheepishly, “We look forward to your arrival.”
Still, it was Zhao’s tweet that brought the issue to light. And on November 14, Decrypt reported that Zhao revealed that Binance is working with Ethereum creator Vitalik Buterin, who “wants to create some kind of new proof-of-reserve protocol and make Binance a guinea pig, or first Want to use as a test case.”
The other half
Another solution that is increasingly emerging is to add evidence-of-liability audits to the mix.
There’s a simple reason, as CasaHODL CTO Jameson Loop tweeted on November 9:
“Proof of reserves is not a panacea. You are still relying on the auditor’s confirmation. You are still hoping that the reserves will exceed the liabilities. But it is better than not having a PoR. Although the proof of reserves is solvable. is not proof, but I don’t know of any defenders who publish proof of reserves that have been broken down… it shows a willingness to at least work on improving transparency a bit.
Meanwhile BitGo CEO Mike Belshe noted that while the PoR is a good start, “it’s impossible to prove the absence of accountability. Obligations to be informed come with solid, clean finances, audits and regulation.”
That’s something Bank of America analysts agreed with. In a research report, BoA wrote that PoR Merkle trees work, but they are not sufficient. The report points out that they are usable snapshots over time that can be falsified by short-term lending at the right time and need to be backed up by an audit, CoinDesk reported. Determining leverage requires evidentiary liability reports to make them useful, and stablecoin reserves must also be audited by a reputable third-party firm.
BoA said two more things are necessary: clearly defining exchanges and market makers, and creating a sound regulatory system.
All about trust
Not that the results are always positive. Crypto.com released its PoR report, revealing that nearly 20% of its user deposits were in SHIB, a dogecoin-based meme token.
When he raised questions, Crypto.com CEO Chris Marzalek pointed out that his balance sheet is based on customer purchases: “They’re not our funds. They’re our client’s funds,” he said this week. said on a live stream at the beginning of
It didn’t help that Crypto.com accidentally sent $400 million to one of its wallets on Gate.io, leading to vague rumors that the exchanges were pooling funds to shore up each other’s balance sheets. Move around.
Still, the rush on PoRs comes down to a trust issue, and thanks to Sam Bankman-Fried that’s currently in short supply.
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