Disclaimer: The article has been updated to reflect Binance CEO CZ’s response to the concerns raised by\u00a0Kraken CEO\u00a0Jesse Powell.<\/em><\/p>\n The collapse of the crypto exchange FTX<\/a> revealed the importance of proof of reserves in avoiding situations involving the misappropriation of users\u2019 funds. While exchanges have proactively started sharing wallet addresses to prove the existence of users\u2019 funds, several entrepreneurs, including Kraken CEO and co-founder Jesse Powell<\/a>, called the practice \u201cpointless\u201d as exchanges fail to include liabilities.<\/p>\n According to Powell, a complete proof-of-reserve audit must include the sum of client liabilities, user-verifiable cryptographic proof that each account was included in the sum and signatures proving the custodian\u2019s control over the wallets. While Kraken\u2019s proof of reserve does allow verification of assets against the company\u2019s liabilities, Powell continues to call out other players that have missed out on including accounts with negative balances.<\/p>\n I’m sorry but no. This is not PoR. This is either ignorance or intentional misrepresentation.<\/p>\n The merkle tree is just hand wavey bullshit without an auditor to make sure you didn’t include accounts with negative balances. The statement of assets is pointless without liabilities. https:\/\/t.co\/b5KSr2XKLB<\/a><\/p>\n \u2014 Jesse Powell (@jespow) November 25, 2022<\/a><\/p><\/blockquote>\n Powell called out CoinMarketCap in the past for sharing incomplete proof of reserves, as it lacked \u201ccryptographic proof of client balances and wallet control.\u201d He reiterated that reserves are not the list of wallets but assets minus liabilities. <\/p>\n Binance\u2019s recently released proof-of-reserves system allows users to verify their assets using a Merkle tree. However, Powell shared his displeasure as the system failed to include accounts with negative balances, stating that:<\/p>\n \u201cThe 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.\u201d<\/p><\/blockquote>\n Moreover, he asked the media and journalists to refrain from \u201coverselling it and misleading consumers.\u201d Instead, he recommended they take the time to understand the motive behind proof of reserves.<\/p>\n On the other hand, few community members refuted Powell\u2019s need for a trusted auditor. Following up on the accusation,\u00a0Binance CEO Changpeng \u201cCZ\u2019 Zhao<\/a>\u00a0refuted by sharing Binance\u2019s upcoming plans that involve third-party auditors to audit the exchange’s proof-of-reserve results.<\/p>\n The response from CZ to the concerns raised by Kraken CEO received positive support from the community. However, some members pointed out the hypocrisy that CZ disabled public commentary on the post that welcomed \u201cquestions and checks.\u201d<\/p>\n Related: <\/em><\/strong>Crypto exchange Kraken freezes accounts related to FTX and Alameda<\/em><\/strong><\/a><\/p>\n On Nov. 19, CZ confirmed to have started working on building a safe centralized exchange (CEX), an idea put forth by Ethereum co-founder Vitalik Buterin<\/a>.<\/p>\n In this instance, the best-case scenario would be building a system that does not allow crypto exchanges to withdraw a depositor\u2019s funds without consent.<\/p>\n<\/div>\n\n
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