Exchanges hastened to provide reserve proof
After the demise of FTX, centralized exchanges scrambled to demonstrate proof of reserves. According to experts, it's a wonderful display, but it's not enough.
Proof of reserves — or disclosing exactly what an exchange holds — is an attempt at transparency, which, as recent bankruptcy filings revealed, was severely missing at FTX. So, in the aftermath of the failed exchange's failure last week, exchanges such as Binance, OKX, and Crypto.com put up their proof amid social media choruses of "not your keys, not your crypto" and calls for increased transparency around such exchanges' reserves.
On the surface, the transparency is a positive step. However, analysts warn that verification of reserves is only a snapshot and does not represent the entire picture.
Assets are displayed at a fixed point in time, which allows for manipulation, according to a Nov. 17 notice from Bank of America on evidence of reserves.
What is lacking?
The exercise also has limited relevance because it is only one component of several interconnected financial variables, according to Wayne Trench, CEO of exchange OSL.
"They don't show audited fiat reserves, client and business liabilities, company loans, or much of the other basic information needed to determine a firm's financial soundness," Trench pointed out.
OSL is owned by BC Technology Group, a Hong Kong-based public company subject to rules and frequent audits. While admitting that traditional structures are not without flaws, the company emphasized that regular and transparent audits, the segregation of client assets in bankruptcy remote trusts, and being subject to tier-one regulatory supervision and oversight currently provide significantly higher levels of investor protection.
CoinShares CFO Richard Nash agreed, saying that giving proof of reserves is a good practice.
"However, it is not foolproof," Nash emphasized. "It promotes trust and transparency, which have never been more important in the digital asset industry than in the previous two weeks."
CoinShares is publicly traded on the Nasdaq First North Growth Market, and its proof of reserves "sits alongside our annual financial statement audit work," according to Nash.
"What conclusions, if any, can be drawn about the financial health of the entity holding custodial assets when a proof-of-reserves is not a full balance sheet view," Nash inquired.
While exchanges were ready to give proof of reserves, none shared documentation of liabilities or ongoing debts.
Binance, Crypto.com, OKX, Deribit, Kucoin, Bitfinex, and Huobi all issued proof of reserves following the collapse of FTX. Using data from Defi Llama, the Block calculated the overall worth of reserves in USD and each reserve asset.
Except for Binance and Crypto.com, the majority of reported exchanges disclosed a majority of clean reserves with clean total value locked (TVL) — with little assets issued by the exchange. Kraken only posts reserves semi-annually, and its most recent filing, dated June 30, was not included.
