(Kitco News) - In the mad dash to calm worried investors and prevent bank runs as the FTX contagion spreads throughout crypto land, cryptocurrency exchanges across the ecosystem have started issuing proofs of reserves in an effort to halt the outflow of assets from their books.
This involves the release of wallet addresses for both hot and cold wallets, allowing users to check the amount of funds controlled by the platforms, although it doesn’t provide insight into any liabilities.
The process is facilitated by what’s known as a “merkle proof,” which is a cryptographic tool that helps create a summary of funds held in an exchange’s wallets and generates a proof that can be verified on-chain, all without exposing sensitive customer information.
Amid the liquidity crunch that forced FTX to file for Chapter 11 bankruptcy on Friday, crypto investors have been pulling their tokens off exchanges to avoid the possibility of lost funds. Data from the on-chain data provider CryptoQuant shows that BTC has been increasingly pulled off exchanges since Sunday.
Bitcoin: exchange netflow for all exchanges. Source: CryptoQuant
In order to stem this outflow and reestablish trust, exchanges are now looking to prove their reserves and calm anxious investors.
Binance and KuCoin prove their reserves
One of the first firms to prove its holdings was Binance, the world’s largest and most active cryptocurrency exchange, which for a brief moment considered acquiring FTX to help limit its damage.
According to a blog posted by the exchange, it currently has 475,000 Bitcoin (BTC), 4.8 million Ether (ETH), 17.6 billion Tether (USDT), 21.7 billion BUSD, 601 million USD Coin (USDC) and 58 million BNB. This list only includes the top assets held by the exchange which currently supports more than 600 tokens.
On-chain data provider Nansen used the data provided to compile a dashboard that shows Binance reserves. At the time of writing, the dashboard indicates that Binance’s net worth currently stands at $72,661,359,625.28.
The firm has since received requests from multiple exchanges asking for the creation of a similar dashboard that displays the value of the assets held in their wallets.
Top 5 exchange KuCoin also posted an overview of its wallet holdings on Twitter after rumors started to spread that it had significant exposure to FTX.
Here, see an overview some of our hot and cold wallet addresses and their current holdings.
— Johnny_KuCoin (@lyu_johnny) November 11, 2022
BTC ( 20,504 BTC)
ETH ( 180,299 ETH)
USDT ( 1,075,909,241 USDT)
USDC ( 365,722,839 USDC)
KCS (69,601,075 KCS)
A follow-up tweet from the exchange noted that it currently supports more than 700 tokens and will provide additional data on those holdings in the future. “Protecting user funds is the top priority at KuCoin. We will release the Merkle tree proof of reserves or POF in about one month,” KuCoin CEO Johnny Lyu said.
Kris Marszalek, the CEO of Crypto.com, was also quick to provide insight into the funds held in its wallets as rumors of massive exposure to FTX circulated.
“This represents only a portion of our reserves: about 53,024 BTC, 391,564 ETH, and combined with other assets for a total of ~US$ 3.0b,” Marszalek tweeted.
The CEO previously tweeted that the firm's direct exposure to FTX was “less than $10m in our own capital deposited there for customers’ trade execution,” adding “That’s very little compared to our global revenues surpassing US$1 billion for two consecutive years.”
Representatives from multiple other exchanges, including OKX and Bybit, have indicated that they intend to publish crypto addresses or implement a proof of reserves system in the near future to help assuage customer concerns.
This is a positive development in a realm that has historically been secretive and opaque, but more work is needed to truly restore trust. As mentioned earlier, proof-of-reserves provides insight into an exchange's holdings but shines no light on potential liabilities, without which an accurate sense of an exchange’s health is impossible.
