As a reminder, confirming reserves is a current trend that emerged after the collapse of cryptocurrency exchange FTX. Still, the latter’s management misused user funds. As a consequence, there was a noticeable hole in the company’s balance sheet. And when traders began withdrawing coins sharply in response to Binance management’s decision to merge the platform’s native token called FTT, the exchange did not have enough coins to meet demand. As a result, FTX went bankrupt.

Naturally, this affected the reputation of other popular centralised exchanges, which began to be suspected of similar actions – albeit without any evidence. In response, representatives of such platforms have taken to showing their own reserves. Thus, they want to prove that they are not doing anything unnecessary with traders’ and investors’ funds, but only storing them. Accordingly, when users decide to withdraw crypto, there will be no problem here.

Cryptocurrency trader

However, such a thing did not satisfy everyone. As experts have pointed out, exchanges also need to prove that their obligations are not excessive. By doing so, one can be sure that the platform will not go bankrupt because of this component.

How to check the availability of cryptocurrencies on an exchange?

Binance’s reserve validation system is currently only available for Bitcoin. Exchange officials have said that the ability to track other cryptocurrencies will be available in the next few weeks. Here’s a quote from the announcement.

When we talk about “proof of reserves”, we are referring specifically to the assets we hold in custody for users. This means that we show evidence and proof that Binance has funds that cover all of our users’ assets at a 1:1 ratio, as well as some reserves.

Binance cryptocurrency exchange Bitcoin reserves

The announcement was accompanied by an indication of the exact amount of BTC in reserves as of 22 November this year. The exchange has 582,485 BTC, with 575,742 BTC in its users’ wallets. Accordingly, Binance can meet all of its Bitcoin obligations to customers at a volume of 101 percent. That means, in theory, even the withdrawal of all BTC users should not pose a problem.

According to Decrypt’s sources, users can verify the presence of bitcoins from their account. This information is verified by applying Merkle’s tree, a cryptographic principle that encrypts large amounts of data and allows for confirmation that the data is correct without full disclosure. After logging into the exchange, users can click on “Wallet” and then “Audit”, which will generate a unique identifier that confirms asset liability coverage.

Asset audit page

If the user does not hold any BTC on Binance, they will see an appropriate message about the lack of funds.

Binance exchange notifies the user about the lack of BTC to confirm them

For advanced users, there is another option – this is discussed in the following quote from the announcement.

For those who want to go further and verify their funds themselves, they can copy the source code into a Python application and cross-check themselves.

In the future, Binance plans to engage third-party audit firms to further validate the information provided. In addition, the developers of Binance are introducing the concept of cryptography zk-SNARK, so customers have no doubts about the safety of their funds.

To recap, we are talking about "zero-knowledge", i.e. zero-disclosure proof. This protocol allows you to confirm the correctness of certain data without disclosing it.

It is worth noting that not everyone was happy with this solution from Binance. The founder of cryptocurrency exchange Kraken, Jesse Powell, expressed his point of view. Here’s his rejoinder from Twitter.

Sorry, but no. This is not proof of reserves. It’s either a misunderstanding of what’s going on or deliberately misleading. Merkle’s tree is just nonsense in manual mode without an auditor to make sure you don’t include accounts with negative balances. The asset report is meaningless without liabilities.


That is, Jesse believes that cryptocurrency exchanges are able to manually specify the accounts to be accounted for in their reserve proof system. And that opens the door to incorrect data mapping. Powell believes there should be a third party to validate that the list of accounts accounted for in the system is correct.


Kraken founder Jesse Powell

Jesse continues.

It all boils down to “here’s a hash on the BTC table” in the end. Cool, but what’s the point of that? The whole point of what’s going on is that the exchange has more cryptocurrency than it owes its own customers. And adding a hash to a string ID is meaningless without the rest.

Binance chief executive Changpen Zhao responded to Powell’s criticism. Here’s his quote.

Here’s the response to Jesse Powell’s questions. In the report titled “Upcoming Plans: Hiring Third Party Auditors to Verify PoR Results” for this reserve confirmation result, I have repeatedly stated publicly that the bottleneck in this system is having to wait weeks for the auditors’ reports.
We are moving forward in stages and do not use any negative balances. This will be confirmed during further audits of the PoR system. This is the first time I have ever heard of negative balances in PoR systems. Well, that’s ‘innovative’.

That is, Changpen Zhao has made it clear that the relevance of Binance accounts and their list will be further audited by auditors. However, it will take a few weeks for the latter to be active.

Binance CEO Changpen Zhao


We believe that Binance and other cryptocurrency exchanges that have started using Merkle's tree to validate their own funds do not deserve the harsh criticism voiced by Jesse Powell. Obviously, these are the first steps in this direction, and in the future this component will be much more advanced and reliable in the eyes of users. So here we have to wait for the development of this industry-wide standard.