TD₿: Proof of Reserves: A Report on Mitigating Crypto Custody Risk by Matthew Pines and David Zell
TL;DR Centralized exchanges should perform Proofs of Solvency to pass through Bitcoin’s assurances to their depositors.
Hey Bitcoiners,
Rumors are swirling around the potential bankruptcy of Genesis Global Capital and the possible impact that it could have on its parent company, Digital Currency Group (DCG), as the crypto contagion continues.
DCG is a massive company that has its tentacles sprawled across every part of the broader cryptocurrency industry. If DCG somehow went under, it would make the current environment even more chaotic than it already is.
Below is a graphic that shows the sheer size of DCG’s portfolio as of March 2022.
Genesis has been caught up in just about every “crypto” blowup this year, so it should come as no surprise that it is now under immense financial pressure itself.
The New York Times reports that Genesis has now hired Moelis & Company to explore its options, including a potential bankruptcy that could come as early as this week if they are not able to raise funds successfully.
The question on everyone’s mind is, what would a Genesis bankruptcy mean for DCG, and how would this impact Grayscale Investment’s Grayscale Bitcoin Trust (GBTC), another company owned by DCG? GBTC is currently the largest Bitcoin fund in the world, with approximately $10.5 billion under management
This is another dynamic situation that is changing by the hour, so only time will tell what becomes of this Genesis/DCG debacle.
But one thing that many market participants want to know now is whether Grayscale has all the bitcoin that underlies GBTC. Given that FTX was recently discovered to have ZERO bitcoin on its balance sheet, many understandably want some assurance that similar paper Bitcoin shenanigans aren’t occurring here.
This led Coinbase, who is the qualified custodian for GBTC, to release a PDF that confirmed that they indeed have all the bitcoin that underlies the trust.
This is reassuring and concerning at the same time. For starters, Coinbase is an audited public financial institution that is saying they have the bitcoin, but at the same time, they could easily prove this cryptographically by simply signing a transaction.
PDFs that show audited financials are no longer acceptable in a world with a truth ledger that is fully auditable. Grayscale argues that Coinbase did not prove their bitcoin holdings cryptographically due to “security issues,” but it remains what those security issues are exactly.
Personally, I believe that Coinbase does, in fact, have all the bitcoin it says it does. To say otherwise is to suggest that they are running a fraudulent operation, which I give a non-zero, but extremely low probability of being the case.
As an industry, we should demand Proof of Reserves from all of these centralized exchanges in order to develop standards that increase transparency and improve consumer protection.
Hoseki is well on the way to making this a reality by creating a real-time Proof of Reserve page accessible to every institution and entity.
To learn more about Proof of Reserves, check out this new report from David Zell and Matthew Pines. (11/14/2022)
By making Proof of Reserves an industry standard, we will hopefully help consumers avoid exchanges that fail to perform the procedure, indicating that they may not be solvent or honest operators. This could go a long way in self-regulating the industry by using Bitcoin’s transparent nature to our benefit.
Having said all this, I want to be clear…there is no better alternative than taking self-custody of your bitcoin to remove all counterparty risk. There is no need to wait for an exchange to prove its solvency if you already own bitcoin in a self-sovereign manner.
Tick tock next block,
Sam Callahan
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Quote of the Day
“You want proof of reserves? Then take off all your Bitcoin from the exchanges.” - calle, Bitcoiner building Cashu
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Meme of the Day
"PDFs that show audited financials are no longer acceptable in a world with a truth ledger that is fully auditable."
Yeah, 100% agreed!
Why not sign a transaction confirming that they really have it? They could foster trust and show that they are transparent. Which is very needed at the moment!!! "Security concerns" sounds like a weak excuse... if they have security concerns doing it, then their security structure shouldn't be trusted to begin with.