Moves by cryptocurrency exchanges to reassure markets about their stability are having little effect on jittery users, who keep pulling funds from the venues.
Platforms from Binance to Crypto.com have made full or partial disclosures outlining their assets since FTX.com unraveled last week. Yet clients’ stampede for the exits has persisted, with exchange reserves of Bitcoin, Ether and stablecoins falling sharply, according to data from CryptoQuant.
The problem is many so-called proof of reserves published so far have left out liabilities, haven’t been vetted by outside auditors and don’t provide clarity on which, if any, of the assets exchanges hold have been pledged as collateral for loans. With the disarray in FTX’s finances now laid bare to the broader public, anything short of a complete accounting will likely fail to fully restore confidence, market watchers said.
“The issue is proof of reserves are a snapshot in time of funds in certain wallets,” said Maya Zehavi, a cryptocurrency angel investor. “People need to verify the exchange’s total liabilities, and that no client tokens were pledged as collateral, as well as the health of those assets put up as collateral.”
Crypto Contagion | Exchange outflows of tokens has persisted since FTX turmoil
started
A full-blown crisis of confidence in exchanges would have dire consequences for the crypto industry because the venues often operate as brokers, custodians and clearing houses — meaning the collapse of one platform can kick off a daisy chain of failures reaching into every corner of crypto.
Contagion from FTX is already spreading, with crypto brokerage Genesis announcing on Wednesday that it’s been forced to suspend redemptions at its lending unit. The same day, Tyler and Cameron Winklevoss’ Gemini Trust Co. delayed redemptions in its Earn program. BlockFi Inc., which has close links to FTX US, is preparing to file for bankruptcy, Bloomberg News reported this week.
In FTX’s case, oversight and record-keeping of assets were so poor that new CEO John J. Ray III compared it unfavorably with Enron Corp., whose liquidation he oversaw. Advisers have located “only a fraction” of the digital assets that they hope to recover during the Chapter 11 bankruptcy, Ray said.
The fact that FTX was able to keep such glaring deficiencies hidden for so long shows accounts must be audited and assets valued by third parties, some crypto executives said.
Where’s the Proof?
Binance, the world’s largest cryptocurrency exchange, on Nov. 10 disclosed what it called a “snapshot” of its major token holdings and said more data will be shared later in a “full audited report.” A Binance spokesperson said the exchange will publish audited reserves and liabilities in coming weeks.
“Proof of reserves doesn’t require lawyers or traditional auditors,” said Matt Luongo, the co-founder of blockchain privacy service provider Threshold. “The whole process is voluntary. Therefore, while this type of disclosure may have helped head off the FTX disaster, there is no proof that any centralized exchange doesn’t have liabilities senior to its customers’ deposits.”