LiabilitiesĮxchanges have liabilities and assets equally, but among the liabilities they do not have only debts to their customers. In short, PoR only truly works if all assets are declared as well as all liabilities, because that is the only way to be certain that all customer deposits are covered. That is, one would need to distinguish between true Proof-of-Reserves, i.e., on-balance sheet assets that cover only and exclusively liabilities due to customer deposits, and generic assets that possibly cover other liabilities as well.įor example, if it turned out that the liabilities covered by the assets declared in the PoR were not composed only of customer deposits, there would be a risk that the exchange would not be solvent even if the value of the assets exceeded the value of customer deposits.įor example, Binance claims to have more than $66.8 billion in reserves, but it is not known whether these cover only customer deposits, or possibly other liabilities as well. The PoR is basically the declaration of assets, i.e., the assets held in cash by the exchanges, but without knowing how the liabilities are structured, it is by no means certain that these assets cover precisely the customer deposits. At that point, those amounts become a liability for the exchange, because it must be ready to return them to it at any time, and a receivable for the customer itself from the exchange. These include customer deposits, because when customers deposit funds on an exchange they are effectively giving those funds to the exchange. Within a corporate balance sheet, debts are considered liabilities. The statement of assets is pointless without liabilities. The merkle tree is just hand wavey bullshit without an auditor to make sure you didn't include accounts with negative balances. This is either ignorance or intentional misrepresentation. “The statement of assets is pointless without liabilities.” Powell himself pointed this out, stating: ![]() However, this system has a major flaw: it ignores any debts. Criticism from Powell, CEO of crypto exchange Kraken Indeed CoinMarketCap, which is the crypto aggregator owned by Binance, has even publicly added for some of the monitored exchanges information regarding their reserves. So in the event that a sort of “bank run” is triggered, with a large number of users requesting to withdraw their funds, the exchange may be forced to suspend withdrawals, and perhaps even admit to spending their own customers’ money.įor this reason, some exchanges have begun to provide so-called Proof-of-Reserves (PoR), which is evidence that they have sufficient funds in their vaults to cover all of their customers’ deposits. ![]() Criticism from Powell, CEO of crypto exchange KrakenĬrypto exchange reserves, Kraken exposes itselfĪs the FTX case has shown, unfortunately, not all crypto exchanges keep enough assets on hand to cover the full amount of customer deposits.Crypto exchange reserves, Kraken exposes itself.
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