While regulatory intervention in the crypto industry can sometimes seem unnecessary or scary, it should be noted that not all regulators are bad guys, some are simply concerned with consumer protection.
On Wednesday, tthe Public Company Accounting Oversight Board (PCAOB), an industry-funded oversight body working under the authority of the Securities and Exchange Commission (SEC) published an advisory report on so-called “proof-of-reserve” crypto companies reveals clients to prove their creditworthiness.
PCAOB Processes “Proof of Reserve” Reports
Proof of Reserve, also known as PoR, is a type of report that industry companies such as crypto exchanges and stablecoin issuers have used over the past few months since the crash of FTX, to tout their protection against bank runs.
While crypto firms described the report as enough evidence to assure customers how well-funded they are, the PCAOB argued otherwise.
According to the PCAOB in a statement issued on March 8, this type of report does not provide any “meaningful assurance” to investors or the public because they are “not audits” and do not conform to any particular standard.
Evidence of reserves can also be seen as an act of proof of verification of a company’s assets, such as a crypto exchange. Asset verification is recorded by taking a snapshot of all sums of particular crypto assets on the exchange.
According to the PCAOB report, this means of verification is not sufficient assurance to prove the stability of exchanges because the procedures “does not address the responsibilities of the crypto entity, the rights and obligations of holders of digital assets, or the fact that the assets have been borrowed by the crypto entity to give the impression that it has sufficient collateral or “reserves” exceeding customer demands”.
The Board further added that the PoR does not provide any assurance regarding the “effectiveness of internal controls or governance” of the crypto firm. Moreover, the PCAOB did not stop there but rather concluded with a warning to investors.
The Council wrote:
Proof of reserve reports are inherently limited, and clients should exercise extreme caution in relying on them to conclude that sufficient assets exist to meet client liabilities.
How did we get here?
It is no longer a news that the fall of FTX has brought a lot of negative impacts on the industry, one of which is the lack of trust within the crypto community. While some were seen abandoning the industry, existing businesses flourished for regain misplaced trust.
In the process, one of the biggest crypto companies in the industry, Binance, started publishing proof of reserve reports as a form of “cash transparency” and to assure the public that the company is fully solvent and that there is still hope for the industry.
After Binance, other crypto companies like Kraken, bitgetand Crypto.com have followed suit and released their respective reserve proofs to improve fund transparency in the industry.
Meanwhile, the crypto market is still in a downtrend. At the time of writing, the global crypto market capitalization is currently down 1.2%, with larger assets such as Bitcoin and Ethereum continuing to drop 8.1% and 7.5% respectively as of this writing. course of the last 7 days.
Featured image from iStock, chart from TradingView
