- The PROOF Act prohibits fund co-mingling to prevent FTX-like collapses in crypto.
- Monthly third-party PoR audits aim to ensure crypto firms hold user funds securely.
- Publicly disclosed reserve reports will help restore investor trust in digital assets.
Following FTX’s failure, U.S. Senators Thom Tillis and John Hickenlooper have reintroduced the Proving Reserves of Others Funds (PROOF) Act. This bill targets crypto industry risks, focusing on safe handling and openness with customer money.
The planned law confronts key weak points shown by FTX’s failure, like mixing customer and company funds. By setting rules for PoR checks and forbidding fund mixing, the bill aims to restore investor trust and provide clear safeguards for crypto users.
What Does the PROOF Act Require? No Fund Mixing, Monthly Reserve Checks
The PROOF Act sets firm rules for how digital asset institutions manage customer funds. Specifically, it prohibits the co-mingling of customer funds with institutional or proprietary assets.
This practice, a factor in FTX’s failure, used to allow crypto firms to misuse customer deposits for their own purposes, creating huge risks. By enforcing these protections, the bill seeks to create a more secure environment for both institutional and retail investors.
Related: Avoiding Another FTX? Vanuatu Adviser Explains New Crypto Law’s Goal
The bill also requires monthly Proof of Reserves (PoR) inspections by independent auditors meant to confirm that institutions hold assets matching deposits. Auditors must confirm results, sending them to the US Treasury for public release.
This requirement will make it easier for investors to ensure that exchanges and custodians have the necessary assets to fulfill their obligations. Failure to comply with these regulations will result in fines, with penalties increasing for repeat offenders.
How PoR Helps Safety of Customer Money
Proof of Reserves uses crypto tech for openness about a firm’s financial health. Using methods like Merkle trees or zero-knowledge proofs, exchanges and custodians can prove they hold enough assets to cover customer balances.
These processes are already established in the crypto space but have not always been uniformly applied. The PROOF Act seeks to standardize these procedures and ensure that audits are conducted by credible third parties, enhancing the reliability of the information provided.
Can Mandatory PoR Audits and Clear Rules Rebuild Crypto Investor Trust?
The bill also tackles the need for clear rules and standards in an industry that has lacked consistent oversight.
Related: “I Wonder”: CZ Speculates on FTX’s Possible Role in LUNA Collapse
By demanding regular, open PoR checks, the PROOF Act ensures that digital asset institutions are held accountable to the public. This approach provides greater transparency, which is essential for rebuilding investor confidence following major industry setbacks.
Disclaimer: The information presented in this article is for informational and educational purposes only. The article does not constitute financial advice or advice of any kind. Coin Edition is not responsible for any losses incurred as a result of the utilization of content, products, or services mentioned. Readers are advised to exercise caution before taking any action related to the company.
