CoinMarketCap.com, the largest crypto data website in the world, announced via Chirping November 22 launch of a feature showing proof of reserves (PoR) for cryptocurrency exchanges. Users of the site’s popular exchange page tables, which received around 104 million hits in September, will now see a small sign next to the names of seven exchanges that have recently jumped onto the stock test bandwagon: Binance, Kucoin, Bitfinex , Crypto .com, Huobi, OKX and Bybit.
Surprisingly, the list did not include the names of five other cryptocurrency exchanges that have publicly announced that they are conducting comprehensive proof-of-backup audits: Kraken, Gate.io, BitMEX, Coinfloor, and HBTC.
The current format of the data shows Binance as the exchange with the highest reserves, but there is no arguing that, as appears to have been the case with FTX, Binance’s reserves may be encumbered or deficient in some way. The company’s limited discussion and selective set of exchanges to launch its product suggest favoritism that could eventually erode trust.
CoinMarketCap Reserves Testing Feature
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Proof of reserves comes in several forms. Elements present in a serious PoR discussion specify:
- Whether the data is reviewer-assisted or self-assessed
- If offers users a so-called Merkle validation
- If the validation is continuous or for particular moments
Audited-assisted includes expertise provided by an external party. A Merkle validation allows users to cryptographically verify that they have a unique hash counted in the exchange’s inventory. Exchanges that offer full proof of reserves have both reviewer assistance and Merkle user validation.
Thus, the CoinMarketCap feature shows a near real-time measure of what asset reserves the selected exchanges are holding in designated wallets, but the information is not guaranteed to be accurate. Additionally, the figures are not audit backed or offer Merkle end user validation.
Kraken CEO Jesse Powell chimed in on CoinMarketCap’s announcement by saying away Chirping that “proof of reserves audit requires cryptographic proof of client balances and portfolio control” and this must include independent attestation of liabilities (who controls portfolio proceeds).
Powell further said that probate audits of assets must have the following three elements:
- Sum of Client Liabilities (Auditor must exclude negative balances)
- User-verifiable cryptographic proof that each account was included in the sum
- Signatures proving that the custodian is in control of the wallets
Exchanges based in island tax havens lack basic regulatory oversight and can publicly claim to own such-and-such a wallet that has so many tokens, without disclosing that they pledged those tokens, so they aren’t actually freely available to customers .
The risk of meaningless PoR data will likely remain until exchanges agree to submit financial statement information to credible auditors who can attest that firms have robust internal controls in place. Alternatively, an exchange could submit to regulators performing random audits, for added credibility.
CoinMarketCap reveals that its stock test pages have affiliate links that generate revenue for the company.
Takeaway for investors
Proof of reserves is a topic that will continue to get hotter and hotter. CoinMarketCap’s announcement illustrates its importance in what is a first step. The company’s treatment of this feature appears biased and sloppy, and lacks the depth evident elsewhere on its website.