Regulator Warns Crypto Investors Against “Proof Of Reserve” Reports, Says It Can’t Be Trusted

While the intervention of regulators in the crypto industry could sometime seem unnecessary or frightening, it is worth noting that not all regulators are villains, some are just keen on consumer protection. 

On Wednesday, the Public Company Accounting Oversight Board (PCAOB), an industry-funded watchdog working under the authority of the Securities and Exchange Commission (SEC) published an advisory report addressing the so-called “Proof of Reserve” crypto firms reveals to customers to prove solvency.

PCAOB Addresses “Proof Of Reserve” Reports

Proof of Reserve, also known as PoR, is a type of report industry firms such as crypto exchanges and stablecoin issuers have been using over the past months since the FTX crash, to tout their protection against bank runs. 

While crypto firms have portrayed the report to be good enough proof to assure customers of how well-backed they are with funds, the PCAOB has argued otherwise. 

According to the PCAOB in a statement published March 8, this kind of report does not provide any “meaningful assurance” to investors or the public as they are “not audits” and don’t comply with any particular standard. 

Proof of Reserves can also be considered an act of proving the verification of assets a company such as a crypto exchange hold. The verification of assets is recorded by taking a snapshot of all sums of particular crypto assets on the exchange. 

Per the PCAOB report, this means of verification is not a good enough assurance to prove the stability of exchange as the procedures “do not address the crypto entity’s liabilities, the rights, and obligations of the digital asset holders, or whether the assets have been borrowed by the crypto entity to make it appear they have sufficient collateral or “reserves” in excess of customer demands.”

The Board further added that PoR does not provide any assurance concerning the “effectiveness of internal controls or governance” of the crypto company. Furthermore, the PCAOB did not stop there but instead concluded with a caution to investors. 

The Board wrote:

Proof of reserve reports are inherently limited, and customers should exercise extreme caution when relying on them to conclude that there are sufficient assets to meet customer liabilities.

How Did We Get Here?

It’s no more news that the FTX downfall attracted a lot of negative impacts on the industry one of which is the misplacement of trust among the crypto community. While some were seen giving up on the industry, existing firms thrived to regain the misplaced trust.

In the process, one of the largest crypto firms in the industry, Binance, began the publishing of proof of reserve reports as a form of “liquidity transparency” and to assure the public the company is fully solvent and that there is still hope for the industry. 

Following Binance, other crypto firms such as Kraken, Bitget, and Crypto.com followed suit and published their respective proof of reserves to enhance the transparency of funds in the industry. 

Meanwhile, the crypto market is still in a downtrend. At the time of writing, the global crypto market capitalization is currently down 1.2% as larger assets such as Bitcoin and Ethereum continue to plummet by 8.1% and 7.5% respectively, over the past 7 days.