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Binance CEO Changpeng Zhao says crypto exchanges should start showing proof-of-reserves
Analysts declare Binance 100% transparent, OKX and Justin Sun support the move
Several crypto exchanges have come forward to claim they are SAFU amid the FTX showdown
The insolvency of the second-largest cryptocurrency exchange FTX has led to a number of questions being raised in the community. After users staged a bank run on the exchange and withdrew close to $6 billion of funds in a few days, it became increasingly clear that FTX wouldn’t be able to honor all redemptions. While Binance has come to the firm’s rescue, users are still questioning what FTX did with their assets.
FTX CEO Sam-Bankman Fried had earlier said the exchange didn’t trade users’ assets, but he has since deleted those tweets. FTX’s failure to process withdrawals and need for a bail-out has also put this statement under scrutiny. Amidst this, there have been calls for crypto exchanges to become more transparent with their reserves.
Transparency for User Funds
In reference to this chaos, Binance CEO, Changpeng Zhao, suggested a way for exchanges to become more transparent. He took to Twitter today to advise crypto exchanges to do “Merkle-tree proof-of-reserves.” He supported his statement by saying that, unlike centralized organizations, crypto exchanges should not run on fractional reserves. The CEO further announced that Binance is also gearing up to do proof-of-reserves soon.
All crypto exchanges should do merkle-tree proof-of-reserves.
Banks run on fractional reserves. Crypto exchanges should not.@Binance will start to do proof-of-reserves soon. Full transparency.
— CZ 🔶 Binance (@cz_binance) November 8, 2022
The concept of “Merkle-tree” utilizes a data structure used by blockchains to store transaction data. It refers to a system that proves that the funds of stakeholders are safe using public blockchain information.
Other leaders from the industry supported CZ’s stance. Cryptoquant’s CEO, Ki Young Ju said he has been tracking Binance’s wallets for four years. He appreciated Binance’s decision as a leader in the industry and mentioned that the exchange has been 99% transparent with a couple of cold/hot wallets.
He also said that the exchange will now have 100% transparency. Other exchanges often fail at being transparent as they mix up clients’ assets with 3rd-party wallets like Market-Makers, Young said. Bitcoin advocate Dan Held also said it “is the way forward.”
Justin Sun also weighed in on the concept and declared his exchanges with Poloniex and HuobiGlobal SAFU. Sun said his companies have already tried out the concept and are willing to do a third one upon CZ’s proposal.
I want to echo CZ's advice. @Poloniex and @HuobiGlobal both have done it before. Huobi actually just finished it about one month ago. But we would love to do a third one with CZ's proposal. Merkle-tree proof-of-reserves 100% is very important to our industry and transparency. https://t.co/v4e09RWxGx
— H.E. Justin Sun🌞🇬🇩🇩🇲🔥 (@justinsuntron) November 9, 2022
At the same time, OKX chimed in saying the exchange has plans to publish auditable proof-of-reserves in the coming weeks.
Crypto Exchanges Attempt Damage Control
The whole incident has nevertheless raised doubts in the minds of crypto investors, especially considering that FTX was one of the most trusted centralized exchanges in the space.
Cryptocurrency exchanges are now attempting to pacify the situation as stakeholders are raising concerns about their holdings.
Brian Armstrong, the CEO of another top exchange Coinbase, was one of the first to address users. In a series of tweets, he highlighted that Coinbase has no material exposure to FTX or its native token FTT. He further said,
I think it’s important to reinforce what differentiates Coinbase in a moment like this. This event appears to be the result of risky business practices, including conflicts of interest between deeply intertwined entities, and mis-use of customer funds (lending user assets).
The CEO clarified that Coinbase does not engage in such “risky activity.” He further stressed that the exchange doesn’t trade customers’ funds unless directed to. “We hold all asset dollar for dollar, and users can withdraw their money at any time,” he added.
6/ We are incorporated in the US, and publicly listed in the US because we believe that transparency and trust are so important. Every investor and customer can see our public audited financials, which shows how we hold customer funds. We've never issued an exchange token.
— Brian Armstrong (@brian_armstrong) November 8, 2022
The CEO of Crypto.com, Kris Marszalek, while declaring it a sad day for the industry, talked about building compliance and security as the right long-term call for the industry. The exec also highlighted that Crypto.com never engaged in irresponsible lending or operated a hedge fund. This eliminated the risk of bad debt and trading losses, he said.
Although, he did add that his firm was directly exposed to the FTX blowup. However, he said that loss was “immaterial” as the exchange had less than $10 million in its own capital deposited there for customers’ trade execution.
The CEO called for industry-wide adoption of transparency measures as he believes that it might affect crypto adoption as well.
BitMEX also echoed a similar assurance, saying that the exchange always keeps 100% of users’ funds and the insurance fund “on-chain, under keys that we control at all times.” Further, BitMEX clarified that the exchange has no material exposure to FTX, FTT, or Alameda.