REGULATION

FTX Incident Insight: "Claiming not to use user assets" is not enough. Can your exchange perform PoR reserve proof?

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FTX Incident Insight: "Claiming not to use user assets" is not enough. Can your exchange perform PoR reserve proof?

"If exchanges on the market were subject to the same scrutiny as FTX, how many could survive?" This may be a question that all operators have to face.

As FTX faces a run, the founder of the largest exchange, Binance, Zhao Changpeng, flexes his muscles by displaying the exchange's wallet address, saying, "There are about $8 billion worth of ETH in our cold wallet at Binance." He also emphasizes, "This is not our money. They are user assets. We are just custodians." Perhaps you have never paid attention, but "exchange asset segregation" has always been a key point of regulatory frameworks: that is, user assets are not commingled by the exchange.

Everyone says they do not touch user assets, but how can they prove it?

Cobie Calls for Adoption of PoR Proof of Reserves to Alleviate Panic

Crypto celebrity Cobie stated that all exchanges should implement PoR Proof of Reserves, like having a block to display on-chain data and wallets. He believes that FTX's verbal assurance of having enough reserves is not convincing.

Despite the availability of many paid data platforms or open on-chain data for verification, Cobie still thinks that having a block showing "how much is in FTX's USDC cold wallet" and signed by the exchange can dispel a lot of FUD sentiments.

"Exchanges always say, 'Trust me!'" but Cobie believes there is room for improvement.

Some Exchanges are Willing to Implement PoR Proof of Reserves

Nic Carter, co-founder of renowned data company CoinMetrics, created a website listing exchanges that undergo regular reserve asset inspections.

Nic Carter stated that these firms holding crypto assets just need to prove to the public that their reserves match user balances. While the concept sounds simple, it's not that easy in practice, especially for user-facing reserve proofs rather than results viewed periodically by auditors because you can borrow funds in the short term.

He believes that implementing PoR is a form of self-regulation for businesses. PoR can also reveal potential hidden liabilities of exchanges or situations where creditors may have a higher claim over depositors.

Binance Plans to Introduce PoR

After Binance expressed the possibility of fully acquiring FTX to assist its liquidity, Zhao Changpeng stated that they would introduce PoR to enhance the transparency of the exchange.