Crypto exchanges have a particular problem right now: Their customers don’t trust them.
Customers are taking their assets out of crypto-exchange wallets and putting them into their own wallets at a rate that would equal about 172,700 bitcoins per month—worth $2.8 billion at current prices, according to research firm Glassnode. That is a record amount of outflows, the firm said.
- Some exchanges are trying to counter this distrust with an exercise in transparency called “proof of reserves.” Binance, the largest crypto exchange, unveiled its proof of reserves system on Friday. It shows that overall, the exchange has slightly more bitcoins in wallets it controls than the amounts deposited by customers, at a ratio of 101%.
- Another exchange, OKX, unveiled a similar system this week, which also showed more crypto in the wallets it controlled than the amounts deposited by its customers.
Critics say this exercise doesn’t prove that those assets belong to the exchanges’ customers. In the traditional finance world, an investor’s assets are held by brokerages that are legally obligated to keep them separate from the rest of the brokerage’s assets, and they cannot be touched in a bankruptcy proceeding.
The crypto model doesn’t work like that. The exchange is also the custodian, but has no legal obligation to segregate assets. In May, Coinbase Global noted this dynamic in its quarterly earnings report. If Coinbase were to declare bankruptcy, the company said, rather than return those assets to users, they could become part of the bankruptcy estate.
Therefore, the proof of reserves exercise doesn’t tell customers that the assets they may believe are theirs actually are theirs.
“Do not get lulled into a false sense of security because your crypto exchange/custodian tells you they hold more crypto in aggregate than their clients have deposited,” said Ross Stevens, the founder of crypto-services firm NYDIG. “That’s irrelevant. Either your crypto is yours or it is not, period.”