Kraken CEO says Binance's proof of reserves pointless without liabilities
Powell says that a full proof-of-reserve audit must include the total amount of client liabilities, cryptographic proof that each account was included in the total, and signatures showing that the custodian has control over the wallets.
The demise of the cryptocurrency exchange FTX highlighted the need for proof of reserves to avoid circumstances involving misusing users' funds. While exchanges have begun to share wallet addresses to authenticate the presence of customers' assets, numerous entrepreneurs, like Kraken CEO and co-founder Jesse Powell, have dubbed the practice "pointless" because exchanges fail to include liabilities.
A full proof-of-reserve audit, according to Powell, must comprise the sum of client liabilities, user-verifiable cryptographic confirmation that each account was included in the sum, and signatures demonstrating the custodian's authority over the wallets. While Kraken's proof of reserve allows for the verification of assets versus obligations, Powell continues to single out other players who have failed to include accounts with negative balances.
Powell previously chastised CoinMarketCap for disclosing inadequate proof of reserves, citing a lack of "cryptographic proof of customer balances and wallet control." He underlined that reserves are assets minus liabilities, not a list of wallets. The response from CZ to the concerns raised by Kraken CEO received positive support from the community. Some members, however, pointed out the inconsistency in CZ's decision to disable public comment on the post that solicited "questions and checks."
On November 19, CZ revealed that it had begun work on developing a secure centralized exchange (CEX), a notion proposed by Ethereum co-founder Vitalik Buterin.
In this case, the best-case scenario would be to create a system that prohibits crypto exchanges from withdrawing a depositor's funds without agreement.
Binance's freshly launched proof-of-reserves technology enables customers to validate their assets using a Merkle tree. Powell, on the other hand, expressed his disappointment that the system failed to cover accounts with negative balances, claiming that:
“The whole point of this is to understand whether an exchange has more crypto in its custody than it owes to clients. Putting a hash on a row ID is worthless without everything else.”
Moreover, he asked the media and journalists to refrain from “overselling it and misleading consumers.” Instead, he recommended they take the time to understand the motive behind the proof of reserves.
Few community members, on the other hand, disputed Powell's need for a credible auditor. In response to the accusation, Binance CEO Changpeng "CZ" Zhao addressed it by discussing Binance's future plans, which include third-party auditors auditing the exchange's proof-of-reserve findings.
