Elephant in the Room FTX Troubles Force Exchange Executives to Talk About ProofofReserves

On Nov. 9, 2022, a day after the news broke regarding Binance planning to purchase the exchange FTX, the crypto economy dropped 11.17% in 24 hours. The crypto economy has slid under $900 billion for the first time since January 2021. 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.

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. While the exchange FTX did not showcase crypto reserve transparency, people did have the perception that FTX was a financially solid company.

In fact, during the start of the crypto winter after the Terra blockchain fallout, CEO Sam Bankman-Fried was perceived as a savior. 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.

After the exchange Voyager revealed it was suffering from financial hardships, Bankman-Fried said that FTX would help Voyager customers access liquidity. 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. In addition to the aforementioned moves FTX made after the Terra fallout, at the end of June 2022, Bankman-Fried warned that more crypto company insolvencies were coming.

With all that in the backdrop, it seemed as though FTX was financially strong and Bankman-Fried was working to help troubled crypto companies. Then on Nov. 6, 2022, Binance CEO Changpeng Zhao (CZ) explained that Binance would be dumping FTX’s exchange token FTT.

The news caused a significant amount of speculation on whether or not FTX was solvent, and the crypto token FTT plummeted in value. Two days later, reports disclosed that onchain data had shown FTX had stopped processing withdrawals. On the same day, it was revealed that Binance has plans to acquire FTX, after the trading platform FTX sought help from Binance.

The conversation sparked greater interest in another topic (and rightfully so) called proof-of-reserves, a concept that highlights true transparency by companies sharing proof that the firm has all the reserves it claims to hold. 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.

After CZ revealed Binance would acquire FTX, the Binance CEO said that Binance would start to provide proof-of-reserves soon. “All crypto exchanges should do Merkle-tree proof-of-reserves,” CZ said. The Binance CEO added:

Banks run on fractional reserves. Crypto exchanges should not. Binance will start to do proof-of-reserves soon. Full transparency.

Kraken executive Jesse Powell responded to CZ’s tweet and said: “We look forward to your arrival, ser.” In a separate tweet, Powell remarked that consumers should start to demand regular proof-of-reserve audits. 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.

While the Crypto influencer Cobie 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.”