The crypto economy plunged 11.17% within 24 hours of the announcement by Binance about their plan to buy FTX on Nov. 9. 2022. Since January 2021, the crypto economy has fallen below $900billion for the first times. The Binance and FTX news has come as a shock to a lot of people, and FTX’s financial troubles caused a number of executives from well known crypto trading platforms to discuss a concept called proof-of-reserves.
FTX Frontman Drops From Crypto Savior Status To Needing an Emergency Liveline
People are not too pleased with the situation surrounding FTX, and there’s a lot of unanswered questions right now, and nearly everyone has been searching for answers. Although FTX’s exchange did not display transparency in crypto reserves, the public had the impression that FTX is a financially sound company.
Actually, the Terra blockchain crisis made CEO Sam Bankman Fried a hero during crypto winter. For instance, the FTX chief executive officer spoke with Bloomberg at the end of May, and Bankman-Fried said his firm was a “profitable company,” and he further added that FTX was ready to spend billions on acquisition deals.
Bankman-Fried stated that FTX would provide liquidity to Voyager customers after Voyager disclosed its financial difficulties. On July 22, during an interview with CNBC’s “Closing Bell,” Bankman-Fried remarked that FTX was willing to deploy “hundreds of millions beyond what we have thus far” to crypto firms suffering from the downturn.
FTX also helped the crypto lender Blockfi, and FTX had an “option to acquire” Blockfi at a price of up to $240 million. Bankman Fried warned at the beginning of June 2022 that there would be more bankruptcy filings for cryptocurrency companies, in addition to all the moves FTX took after Terra’s fallout.
Sudden Shift in Narrative Jolts Crypto Investors, FTX’s Financial Troubles Spark Proof-of-Reserve Discussions
All this was to suggest that FTX had a strong financial position and Bankman-Fried was helping troubled cryptocurrency companies. Then on Nov. 6, 2022, Binance CEO Changpeng Zhao (CZ) explained that Binance would be dumping FTX’s exchange token FTT.
There was a lot of speculation about whether or not FTX would be solvent. The crypto token FTT lost a substantial amount. Onchain data revealed that FTX had stopped withdrawing funds two days later. After FTX requested help from Binance, Binance revealed plans to purchase FTX.
Conversation sparked more interest in another topic (and it is rightfully so), called proof-of reserves. This concept highlights transparency and requires companies to show proof they have all reserves. Bitcoin proponent Nic Carter discussed the importance of proof of reserves in an editorial that highlights “the equation is simple (in theory.”
“Proof of Reserves + Proof of Liability = Proof of Solvency,” Carter’s article details.
Binance’s CEO, CZ said Binance will soon provide proof of reserve after FTX was acquired by Binance. “All crypto exchanges should do Merkle-tree proof-of-reserves,” CZ said. Binance CEO:
Banks operate on fractional reserves. This is not the case for cryptocurrency exchanges. Soon, Binance will begin to provide proof-of-reserves. Total transparency.
Kraken executive Jesse Powell responded to CZ’s tweet and said: “We look forward to your arrival, ser.” In a separate tweetPowell noted that it was important for consumers to request proof-of-reserve audits every so often. Kraken is listed on Nic Carter’s web portal that shows Merkle tree verified audits of specific crypto companies. “Kraken continues to increase the frequency and scope of our audits. It’s not 100% foolproof but the more often you have to prove it, the harder it is to hide a problem,” Powell remarked.
Cobie, a crypto influencer said he found it “difficult to believe FTX is insolvent,” he added, “All exchanges should have transparent proof of reserves, w transparent dashboards linking to on-chain data/wallets.”
OKX Reveals Plans to Share Proof-of-Reserves — Coinbase, Cumberland, Circle, Tether, and Deribit Deny Material Exposure to FTX
Coinbase CEO Brian Armstrong told the crypto community that Coinbase “doesn’t have any material exposure to FTX or FTT (and no exposure to Alameda).” In a blog post, Coinbase stresses that people can review the company’s publicly filed, audited financial statements that note Coinbase holds “customer assets 1:1.”
Coinbase’s blog post insists “there can’t be a ‘run on the bank’ at Coinbase” and the company further added that Coinbase is “in a strong capital position.” The exchange OKX also tweeted about sharing proof-of-reserves (POR), and said it is important for exchanges to share such information.
“It’s critical for all major crypto venues to publicly share their auditable Merkle tree proof-of-reserves or POR,” OKX tweeted. “We plan to publish ours in the coming weeks (within 30 days). This is an important step to establish a baseline trust in the industry,” the exchange added. Lennix Lei, OKX’s director of financial markets explained to Bitcoin.com News, that the exchange will release a POR through the Merkel tree.
“This type of disclosure is crucial, as it provides much-needed transparency and decentralisation to the industry at this particular point in time. Releasing our proof-of-reserves via Merkel tree is one of the best ways to provide clarity on just how many funds we hold,” Lai detailed.
An exchange executive said:
OKX reserves will be audited using advanced cryptographic accounting procedures. This method will offer greater transparency than traditional financial institutions.
Circle Financial CEO Jeremy Allaire told the public that Circle has “no material exposure to FTX and Alameda.” The well known over-the-counter crypto business Cumberland also said it had no exposure to FTX. “While we had virtually no exposure to FTX and our operational controls enabled us to provide deep liquidity to a market in search of it, the exchange consolidation we saw was unfathomable 60 hours ago,” Cumberland tweeted.
Tether, which is the issuer for the stablecoin USDT, told the public that they had no exposure to FTX. “Tether does not have any exposure to FTX or Alameda,” Tether CTO Paolo Ardoino said. “0. Null. It might be time to go elsewhere. We’re sorry. Try again.” Additionally, the crypto options giant, Deribit, told the crypto community that the firm has no exposure to FTX. “Deribit does not have any special terms for Alameda or large & risky positions,” Deribit tweeted.
Before the slew crypto executives explained that their companies were not exposed to FTX they had one person stressed: “If your crypto exchange / bank doesn’t provide proof-of-reserves or deposit insurance, don’t deposit funds.” Currently, according to Nic Carter’s POR web portal, only eight crypto businesses have declared POR with a Merkle tree approach. Many well-known exchanges do not appear on the POR List.
At least today, the POR listing includes companies such as Kraken, Nexo and Coinfloor. Revix and Bitbuy have given partial validations. We are yet to see if an influx of exchanges offers proof-of-reserves using a Merkle Tree approach. However, many exchanges have declared that they will soon offer some type of POR solution due to the FTX scandal.
How do you feel about the proof of reserve discussion? Please comment below on your views about the subject.
Credit to ImageShutterstock. Pixabay. Wiki Commons
DisclaimerThis article serves informational purposes. This is not an invitation to purchase or sell directly, nor a suggestion or endorsement of products, services or companies. Bitcoin.com is not a provider of investment, tax, legal or accounting advice. This article does not contain any information, products, or advice that can be used to cause or alleged result in any kind of damage.