A number of cryptocurrency groups have said they will publish proof of their reserves in a bid to boost transparency and confidence in the digital asset industry after the near collapse of FTX, one of the largest exchanges.
Growing concerns over the state of FTX’s finances and sales of the company’s FTT token have shaken the already-fragile cryptocurrency sector, after the collapse of several big crypto companies including Celsius Network and hedge fund Three Arrows Capital.
FTX hit a valuation of USD 32 billion at the start of this year with investors including BlackRock, SoftBank and Temasek. The company, founded by Sam Bankman-Fried, was considered one of the largest and best-managed cryptocurrency exchanges; the surge in withdrawals that led to its near collapse surprised many in the cryptocurrency world.
Rival Binance on Wednesday signed a letter of intent to buy FTX after a “significant liquidity crunch,” its chief executive Changpeng, or CZ, Zhao announced on Twitter.
Big digital asset exchange players including Huobi, BitGet and Hong Kong-based OKX said they would become more transparent and implement so-called Merkle-tree proofs of reserves—a form of financial auditing done through evaluating and verifying transaction data logged on the blockchain, which can be audited by a third party and assessed by the public.
OKX said it would publish theirs within 30 days as an “important step to establish a baseline trust in the industry.”
Binance said it would also be transparent and publish its proof of reserves. “All crypto exchanges should do Merkle-tree proof-of-reserves. Banks run on fractional reserves. Crypto exchanges should not,” Zhao wrote.
Bitget’s Gracy Chen said the exchange will “soon be ready” to share its Merkle proof of reserves. “Confidence and transparency are two important pillars for sustainable development in the industry,” Chen said on Twitter.
Some industry observers say proofs of reserves can only work when implemented correctly. Leo Weese, co-founder of Hong Kong Bitcoin Association, said public users need to understand how to verify the PORs in order to judge if a company is solvent and rebuild confidence.
“Proof of reserves can help underpin the credibility of the balance sheet, but there is no way of proving that loans made will be paid back, and assessing the default risk of some counterparties will remain impossible,” Weese told Nikkei Asia.
In a letter sent out to investors on Wednesday, Bankman-Fried said the company had entered a nonbinding agreement with Binance.
“What does this mean, exactly? That’s a good question; and unfortunately I don’t have a perfect answer for you, because the details are still being hashed out,” the 30-year-old founder wrote in the letter seen by Nikkei Asia. “Protecting our shareholders is our highest priority outside of the nonnegotiable ones.”
If the buyout goes ahead, Binance will consolidate its position as the largest crypto trading platform by volume. It also will be a setback for Bankman-Fried, a key figure in industry who has lobbied in the US and was involved in helping the industry recover following the collapse of Terra and Luna tokens in May.