The collapse of FTX in November 2022 marked one of the darkest moments in crypto’s history. Billions in customer funds vanished, and regulators uncovered massive misuse of deposits. The disaster destroyed trust in centralized exchanges (CEXs), prompting demands for greater transparency.
In response, many exchanges rushed to publish proof-of-reserves (PoR)—on-chain attestations showing that customer assets were supposedly backed 1:1. On the surface, this was a step toward accountability. But as scrutiny deepened, it became clear that proof-of-reserves has major transparency issues.
PoR is now at the center of a critical debate: does it really protect users, or is it just another marketing gimmick?
What Is Proof-of-Reserves?
Proof-of-reserves is a method by which exchanges demonstrate that they hold enough assets to cover user balances.
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On-Chain Wallets: Exchanges reveal addresses holding crypto.
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Merkle Tree Audits: User balances are hashed into a cryptographic structure, allowing individuals to verify inclusion without revealing private data.
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Third-Party Auditors: Independent firms confirm the reported assets.
In theory, PoR should reassure users that their deposits are safe. But in practice, it often falls short.
The Transparency Problem
1. Assets, Not Liabilities
Most PoR reports focus only on assets held, not liabilities owed. An exchange may show billions in reserves but still be insolvent if it owes more to customers than it holds.
2. Auditor Reliability
After FTX, major auditors like Mazars and Armanino stopped working with crypto exchanges. The remaining audits are often self-attestations or from smaller firms, raising credibility concerns.
3. Snapshots, Not Real-Time Data
PoR is typically based on a snapshot in time. Exchanges could temporarily borrow funds to inflate reserves, only to move them later. This undermines confidence in the process.
4. Selective Disclosure
Some exchanges disclose Bitcoin reserves but omit altcoins or liabilities. Others refuse to show wallet addresses, citing security concerns. The result is incomplete transparency.
5. No Standardization
There is no global standard for PoR. Each exchange uses different methodologies, making comparisons difficult and leaving room for manipulation.
Case Studies
Binance
In December 2022, Binance released a proof-of-reserves report conducted by Mazars. The report was widely criticized for excluding liabilities and failing to meet accounting standards. Soon after, Mazars suspended all crypto audits.
Crypto.com
Published wallet addresses showing billions in reserves but faced backlash when users noticed suspicious transfers—funds sent to other exchanges shortly before the audit snapshot.
Kraken
Praised for pioneering Merkle tree audits and publishing detailed PoR reports. However, even Kraken’s audits have been questioned for not fully addressing liabilities.
Regulatory Pressure
Governments are increasingly concerned about PoR transparency:
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U.S.: The SEC has warned that PoR alone is insufficient for investor protection.
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EU (MiCA): The upcoming Markets in Crypto-Assets regulation will likely impose stricter reporting standards, including both reserves and liabilities.
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Asia: Jurisdictions like Japan already require exchanges to segregate customer assets from company funds, going beyond PoR.
Without regulation, PoR remains voluntary and inconsistent.
Why Proof-of-Reserves Still Matters
Despite flaws, PoR is not meaningless. It has pushed exchanges toward greater transparency than before, encouraging:
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On-Chain Verification: Users can see whether reserves exist at all.
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Industry Pressure: Exchanges without PoR face customer distrust.
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Innovation: Tools like continuous audits and zk-proofs (zero-knowledge proofs) are being explored to improve reliability.
But without addressing liabilities and standardizing practices, PoR risks becoming a false sense of security.
Toward Real Transparency
For PoR to work, the industry must move beyond superficial audits:
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Assets + Liabilities: Audits must cover both sides of the balance sheet.
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Continuous Auditing: Real-time or frequent attestations prevent manipulation through borrowed funds.
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Zero-Knowledge Proofs: zk-technology can prove solvency without exposing sensitive user data.
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Independent Oversight: Trusted, regulated auditors must verify results, not hand-picked firms.
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Segregation of Funds: Clear rules separating customer deposits from exchange operating accounts.
These steps could transform PoR from a PR tool into a true safeguard.
The Self-Custody Argument
Some in the crypto community argue PoR is a distraction. The only true solution, they say, is self-custody—users holding their own keys in personal wallets. Exchanges can collapse, but private wallets remain safe.
This perspective reframes PoR as a band-aid for centralized systems, not a cure. The real lesson of FTX, critics argue, is “Not your keys, not your coins.”
Conclusion: A Fragile Fix for Trust
Exchange proof-of-reserves emerged as a response to collapsing trust in centralized platforms. But the transparency issues—omitting liabilities, questionable auditors, and inconsistent standards—mean PoR often provides little real assurance.
For PoR to restore confidence, it must evolve into comprehensive, verifiable, and regulated solvency audits. Otherwise, it risks being remembered as a marketing tactic that papered over deeper risks.
Until then, users must remain cautious: proof-of-reserves may show what exchanges want them to see, not the full picture. True transparency in crypto will require more than snapshots—it will require a cultural shift toward accountability, decentralization, and user empowerment.
