27th November 2022 > > PoR (Proof of Reserves).

tl;dr

PoR (Proof of Reserves) is flawed today, but it will become a mightily useful tool in the future. More useful than the SEC perhaps.

Market Wrap

Market Wrap

The leveraged children are not giving up hope of another market downturn. Outside of cryptos, risk markets appear benign to me (cue a massive sell-off later today …) so I can only assume that the techies are running the show.

Curious Cryptos’ Commentary – PoR (Proof of Reserves)

There has been much chit chatter about the concept of proof of reserves since the fraudulent fiasco at FTX that led to the failure of that centralised cryptocurrency exchange.

The idea is a simple one – providing cryptographic proof of an exchange’s reserves should provide comfort to crypto depositors that their funds are safe, and it should lessen the probability of another FTX situation.

However, as discussed in the CCC on 13th and 14th November 2022, this rather naïve and simplistic approach does not cut the mustard.

For example, Crypto.com was quick off the blocks providing information about its reserves, but not a word was spoken of its liabilities. One half of a balance sheet is better than nothing but tells much less than half the story.

Soon after Crypto.com issued this information significant assets were moved to Gate.io who then reported its proof of reserves, effectively double counting 320,000 ETH across two different exchanges.

The first problem is one of either naivety, or wilful misunderstanding. The second is at a minimum dishonest, and for any publicly incorporated company, criminal in nature,

…

Kraken is a large, centralised cryptocurrency exchange, one with which I have had zero interaction to date.

Kraken’s CEO, pony-tailed Jesse Powell, has come out in defence of this critical stance taken by the CCC, when he commented on Binance’s disclosure of its reserves but not its liabilities:

“I'm sorry but no. This is not PoR. This is either ignorance or intentional misrepresentation. The merkle tree is just hand wavey bull**** without an auditor to make sure you didn't include accounts with negative balances. The statement of assets is pointless without liabilities.”

Spot on Jesse. Though I pride myself on a contrarian approach to most matters financial (amongst other stuff) it’s nice sometimes to have allies too.

Jesse continues in a robust manner:

“I said I was going to be more assertive with calling out problems. This is one of them. "Reserves" = assets minus liabilities "Reserves" != list of wallets The Proof of Reserves AUDIT requires cryptographic proof of client balances and wallet control.”

…

But in the round, this is all good stuff.

It is in the interests of both investors and the industry that another blow-up of an exchange is avoided, and the industry itself is already acting in a sensible manner to get there. Of course, there will always be malicious actors, but that is a problem across all fields of human endeavour and is not something that is specifically crypto-related.

It is also time for the legislators and regulators to focus on what is important, rather than trying to burnish their own credentials as a crypto killer. Over to you Gary Gensler, Chair of the SEC (Securities and Exchange Commission).

Curious Cryptos’ Commentary – Gary Gensler, Chair of the SEC

Gensler has been coming in for some almighty, yet appropriate, criticism of late for his enforcement driven approach to regulating cryptos far beyond his own remit (see CCC 5th November 2022).

Congressman Tom Emmer has now joined the long list of those publicly calling out the SEC and its chair. He claims that Gensler’s approach is not only overburdensome, restricting innovation and development, but is also failing in its core task:

“We are even more concerned now as we've seen his strategy miss Celsius, Voyager, Terra/Luna-- and now FTX.”

He sighted a breach of the Paperwork Reduction Act of 1980 as an example of SEC overreach.

That is the first and surely the last time I ever refer to that specific piece of legislation.