Crypto Sector’s Reserve Reports Can’t Be Trusted, Says U.S. Audit Watchdog
March 9, 2023
Proof-of-reserve reports routinely touted by crypto firms to assure customers their financial transactions are in secure hands shouldn’t be trusted, according to the U.S. organization that oversees auditing standards.
The Public Company Accounting Oversight Board (PCAOB) – an industry-funded watchdog working under the authority of the Securities and Exchange Commission – said the reports that tally reserve holdings as proof a company is protected against financial runs don’t provide “meaningful assurance.” They’re not audits, the board said in a Wednesday statement, and they don’t comply with any particular standard.
In the absence of the full-scale audits typically seen in traditional finance, proof-of-reserve reports are commonly used by U.S. digital assets businesses, such as Kraken’s report that it held $19 billion in bitcoin and ether and Crypto.com’s data in December that client assets were fully backed one-to-one. They are also used by global platforms such as Binance.
These verifications of assets take a simple snapshot and “do not address the crypto entity’s liabilities, the rights and obligations of the digital asset holders, or whether the assets have been borrowed by the crypto entity to make it appear they have sufficient collateral,” according to the PCAOB. And such documents definitely don’t prove anything about a company’s internal controls or governance, the board added.
“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,” the PCAOB said in its statement.