Regulators Caution Crypto Investors on “Proof of Reserve” Reports

• The Public Company Accounting Oversight Board (PCAOB) has cautioned investors about relying on “proof of reserve” reports.
• The PCAOB emphasized these reports are not audits and do not follow any specific standard.
• The lack of comprehensive audits in digital asset firms in the US makes them rely on proof-of-reserve reports.

On Wednesday, the Public Company Accounting Oversight Board (PCAOB) published an advisory cautioning investors against putting too much faith into the so-called “proof of reserve” reports that some cryptocurrency businesses have been presenting. The warning comes after the failure of prominent cryptocurrency startups like FTX prompted several auditing firms to stop offering this limited form of assurance.

The PCAOB, an industry-funded watchdog operating under the jurisdiction of the United States Securities and Exchange Commission (SEC), has said that reports that tally reserve holdings as proof a firm is safeguarded from financial runs do not give “meaningful assurance.” In its statement, the board clarified that these reports are not audits and do not follow any specific standard.

In the PCAOB’s view, such proof of reserves is merely a snapshot that doesn’t tell us anything about the crypto entity’s liabilities, the rights, and obligations of digital asset holders, or if the assets have been borrowed by the crypto firm to make it seem like they have sufficient collateral. The board further stressed that such records provide no proof of the efficacy of internal controls or corporate governance.

Due to the lack of comprehensive audits customary in conventional finance, digital asset firms in the United States, these firms usually rely on proof-of-reserve reports. For instance, Kraken’s claim that it had $19 billion in Bitcoin and Ether and Crypto.com’s data from December showing that customer assets were completely backed one-to-one were based on such reports.

In its statement, the PCAOB argued:

Proof of reserve reports are inherently limited, and customers should exercise extreme caution when relying on them to conclude that there are sufficient assets to meet customer liabilities.

Several global platforms, such as Binance, have also employed such reports. Just recently, the firm added 11 new cryptocurrencies to its Proof-of-Reserves (PoR) system, bringing the total to 24 different assets. These tokens include popular options such as Dogecoin, Curve DAO Token, and 1inch, among others.

However, the community believes PoR alone is not enough, with one user stating that proof of reserves is not “enough,” adding that the firm needs to get an audit.