Expert explains why the evidence of cryptocurrency exchanges’ reserves should not be trusted
Proof of crypto exchanges’ reserves cannot be considered the truth in the last resort – a statement made by the acting chief accountant of the US Securities and Exchange Commission (SEC), Paul Munter. In his latest interview he urged investors to be sceptical about the publication of trading platforms. Meanwhile, the publication of Proof-of-Reserves or so-called Proof-of-Reserves itself has become a trend since the collapse of FTX last month. We tell you more about what’s going on.
Cryptocurrency exchange reserve disclosure has become the main focus of trading platforms’ activity after FTX failed to cope with a massive withdrawal of users’ crypto-assets. This happened because the company’s management was using other people’s money for their own trading, investments and purchases. Accordingly, when people wanted to withdraw coins from the exchange, it faced a shortage of funds.
So now representatives of trading platforms are forced to regain users’ trust by publishing information about their own reserves. The logic is simple: if the amount of funds in the platform’s wallets matches or exceeds the amount of users’ deposits, then the latter can easily withdraw their own crypto-assets if they want to. In fact, that’s what traders and investors today want to be sure of when they deposit coins on trading platforms.
Cryptocurrency trader
Who has published proof of cryptocurrency reserves?
According to Cointelegraph’s sources, several major trading platforms have already conducted audits of their reserves. However, Manter insists that these actions cannot fully show the real financial position of the company. Here’s his rejoinder on that point.
Investors should not give too much credence to companies’ reports that they have confirmation of their reserves from audit firms.
It is important to understand that SEC officials are unlikely to view cryptocurrencies positively - at least because of the ongoing proceedings against Ripple. Therefore, one should not take the position of the SEC representative as unequivocally true, as it may be biased.
The CoinMarketCap website has information on the auditors of exchanges. For example, Coinbase’s auditor is Deloitte
He also added that these reserve reports “do not contain” enough information for stakeholders to determine whether a company has enough assets to meet its obligations. This is partly true, because in order to get a complete picture of a stock exchange’s financial stability, one must also have information about its liabilities.
So far, only a few stock exchanges have done this. Among them is WOO X, which publishes data on its own assets and liabilities, and updates this information every 15 minutes. Right now, it uses data from a blockchain to display data, leveraging various custodian companies to help keep crypto-assets safe. In the future, the developers will implement Merkle's tree algorithm, which will allow each user to check the display of their own funds in the overall balance, as well as bring in auditors to validate the relevance of the data by a third party.
This is what the reserves page of the WOO X platform looks like.
WOO X cryptocurrency exchange asset table
And here is the page with its liabilities.
WOO X cryptocurrency exchange liabilities table
And the information is also provided in an expanded form. You can see the actual data on the corresponding page.
A detailed breakdown of cryptocurrency exchange WOO X’s liabilities
Manter also spoke at the Association of International Certified Professional Accountants conference in Washington the day before. At the event, he expressed frustration over the ever-changing structure of cryptocurrency companies. This may also have been a reason for the Mazars auditor to refuse any contracts with exchanges, including Binance.
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Despite the criticism, the major crypto exchanges continue to publish information about their reserves. The day before, OKX, which ranks third in the market in terms of trading volume, published its second reserve report in the last two months. According to it, BTC and USDT are backed by 101 percent assets, while Etherium is backed by 103 percent. That means any request to withdraw coins should be immediately met by the exchange.
OKX cryptocurrency exchange reserves
Representatives of the cryptocurrency exchange said that as part of its “transparency commitment”, the platform will publish such reports on a monthly basis around the 22nd of each month. In addition, OKX has added new features that allow users to view the history of the exchange’s reserve changes.
It is worth noting here that publishing such important reports once a month is an unconvincing idea. Obviously, users might have questions about what happens to the assets over that period of time, which means there could still be doubts about what is happening. So the 15-minute update scheme mentioned above from the WOO X exchange looks a much better option for user trust.
We believe that cryptocurrency exchanges that share data on their commitments can be trusted today. That said, it's clear that relatively little time has passed since FTX collapsed, which means trading platform staff will still be working on creating new tools to validate their own assets. And the more time that passes, the more relevant they will be. So there clearly shouldn't be any problems with confidence in most exchanges in the future.
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