Crypto Exchanges Need Proof Of Reserves: Bitcoin Policy Institute Report

A new report from the Bitcoin Policy Institute discusses why the industry needs to adopt proof of reserves following the bankruptcy of FTX exchange.

The Bitcoin Policy Institute (BPI), a non-profit dedicated to furthering governmental Bitcoin adoption, has released a new report discussing proof-of-reserves (PoR) in the bitcoin and cryptocurrency ecosystem following the FTX collapse, per a release sent to Bitcoin Magazine.

“Proof of Reserves: a Report on Mitigating Crypto Custody Risk" discusses the fallout from FTX’s bankruptcy. This cascading event has led to multiple exchanges pledging to provide some form of PoR, in which companies provide a transparent view of on-hand assets as a way to provide consumer protection from insolvency.

BPI’s report argues that the adoption of PoR will provide information on counterparty risk, reduce the chance of systemic default contagion and improve user trust in their custodial relationships.

“Now is the time for market participants to identify private, voluntary solutions to improve transparency and instantiate related best practices,” the report said.

BPI continues to explain that recent systemic failures in the industry have attracted the eyes of lawmakers, as was seen with the fall of FTX when the CFTC and SEC both announced they were investigating the company.

Thus, as a lack of transparency fueled the downfall of many companies over the course of this past year, BPI holds that the only logical path forward is for the industry to adopt a PoR-based approach which will provide security to consumers.

Sam Abassi, CEO of Hoseki, the first proof-of-assets service provider for bitcoin institutions, explained why this step is necessary for the industry to continue to grow.

"We are ecstatic at the continued industry-wide education being conducted by organizations like the BPI to further transparency related measures, such as Proof of Reserves,” said Abbassi. “This work is critical to creating a healthier, safer, self-regulated and more robust digital asset industry."

As of November 9, eight exchanges have reportedly followed Binance in announcing their intentions towards increased transparency in the ecosystem. David Zell, co-founder of BPI, also commented on the dynamic shift of the industry.

“FTX’s bankruptcy should remind all of us that the only way to hold digital assets without counterparty risk is to custody them yourself,” said Zell. “But when customers deposit their assets with a third party, firms need to be as transparent as possible about the state of those funds. Solutions like proof of reserves can play a major role toward that end.”