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Crypto Exchanges With Proof Of Reserves

Written By

Tobias Robinson

Written By

Tobias Robinson

Tobias is a partner at DayTrading.com, director of a UK limited company and active trader. He has over 25 years of experience in the financial industry and contributed via CySec to the regulatory response to digital options and CFD trading in Europe. Toby’s expertise and dedication to financial education make him a trusted voice in the industry, including a BBC investigation into digital options.

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Edited By

Jemma Grist

Edited By

Jemma Grist

Jemma is a writer, editor and fact-checker focused on retail trading and investing. Jemma brings a unique perspective to the forex, stock, and cryptocurrency markets and works across several investment websites as a researcher and broker analyst.

» Jemma Grist Profile Page

Fact Checked By

William Berg

Fact Checked By

William Berg

William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.

» William Berg Profile Page

Updated

Jul 15, 2024

Following the collapse of FTX in November 2022, traders are increasingly looking for cryptocurrency exchanges that can survive the equivalent of a run on the bank. Proof of reserves audits are conducted by a third party and essentially verify whether a crypto company is securely holding customer funds at a particular point in time.

This article explains how proof of reserves work and looks at whether the accounting procedure is the solution the digital asset industry needs, detailing both their merits and shortcomings. We also list the top crypto exchanges with proof of reserves in 2024 and explain how you can check if a firm has been audited.

What Is A Proof Of Reserves Audit?

A proof of reserves audit is a verification process that determines whether a cryptocurrency company has sufficient cash reserves.

The auditing party checks whether a firm has assets equal to or greater than the sum of all client funds currently on the exchange. This will show whether the company will be able to facilitate all customers withdrawing their money at once.

However, proof of reserves audits only look where the client, i.e. the crypto exchange, wants them to look. In addition, such reports do not analyze a firm’s liabilities, so they do not paint a complete picture.

How Proof Of Reserves Audits Work

The blockchain-enabled process involves collecting information on client funds and storing it in a mathematical formal called a Merkle Tree. To form the tree, each node (or ‘leaf’) is tagged with the encrypted hash of a single data block, which provides a summary of the transaction history from the block.

This is used together with a Merkle Root, which verifies the information presented in the Merkle Tree, effectively an audit-proof archive. With the root, you can validate all transactions that have taken place on the exchange and therefore user balances. This allows the auditing party to review evidence of all the assets available on the exchange at the moment that the information was collected.

Cryptocurrency exchanges and firms entrust an independent party to complete a proof of reserves audit. For example, Armanino, one of the 25 largest accounting firms in the US, has audited several exchanges including Gate.io and Kraken.

How To Check An Exchange Uses PoR Audits

Contact The Exchange

If a crypto exchange has completed a proof of reserves audit, you can expect them to advertise the results to show they are transparent. For example, in the days following the collapse of FTX, OKX explained on its social media accounts how users can find information about their latest audit.

If you cannot find information on a firm’s social media channels, blogs or website, you can speak to the customer service team regarding plans to carry out a proof of reserves audit.

Certain exchanges also allow clients to complete their own verification. For example, BitMEX has created open-source proof of reserves software that clients can use to carry out an audit as and when they like.

Other exchanges such as Kraken allow their customers to verify if their account and funds were included in the firm’s most recent audit.

Check The Auditor’s Website

Armanino, a popular choice for proof of reserves audits, has a dashboard on its website where you can check your balance and download reports from exchanges it has audited.

This is a good way to verify if a firm has been audited and you can see if your funds are covered as of the most recent audit.

Third-Party Websites

CoinMarketCap, a useful website for tracking token values and market caps, launched a proof of reserves tracking service. On the ‘Exchanges’ page, you can see which firms have completed a proof of reserves audit – they have an ‘exchange reserves data available’ icon next to the name.

Alternatively, we have reviewed the top crypto exchanges and ranked those with proof of reserves audits.

Benefits Of Crypto Exchanges With Proof Of Reserves

• Demonstrates a crypto firm has robust and transparent accounting procedures
• Verifies that customers should be able to withdraw their funds
• Conducted by an independent third-party

Drawbacks Of Crypto Exchanges With Proof Of Reserves

• Relies on the auditor being independent and trustworthy
• Proof of reserves do not account for a firm’s liabilities
• Auditors only look where the client (crypto exchange) wants them to look and check
• Auditors only use momentary snapshots of the blockchain for the Merkle Tree, meaning that, in theory, exchanges could borrow funds for the audit so they appear to have sufficient capital

How To Compare Crypto Brokers With PoR Audits

While a proof of reserves audit is a good indicator of the trustworthiness and reliability, there are other factors to consider:

• Supported Tokens – The best crypto exchanges and brokers offer hundreds of established and emerging tokens, including Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), and Litecoin (LTC). Binance for example offers over 600 cryptos and stablecoins while Kraken offers more than 100 and OKX offers over 350.
• Products & Features – Do you want to spot trade cryptos? Perhaps you’re interested in trading derivatives or yield farming, staking, and NFTs. Some exchanges like Binance offer all of these products while others, such as Gemini, only facilitate spot trading.
• Payment Methods – How can you buy and sell cryptocurrencies? Entry-level means that you can make fiat-crypto transactions, so you can use currency such as USD, EUR and GBP to purchase cryptos. Popular examples include Coinbase and eToro. Exchanges such as PancakeSwap, on the other hand, only facilitate crypto-crypto transactions. On entry-level exchanges, look for deposit and withdrawal methods such as debit and credit cards, bank transfers and e-wallets like PayPal, Neteller and Skrill. Additionally, check transfer limits and expected wait times.
• Fees – Another key aspect outside of proof of reserves audits is the cost of trading with a particular exchange. Keep in mind that taker and maker fees, transfer charges, and account subscriptions will offset your profits. Competitive maker fees are between 0% and 0.20% while decent taker fees are often between 0.10% and 0.30%.

Final Word

In an industry that prides itself on being decentralized, it can be hard to know which crypto exchanges you can trust and which firms are securely managing customers’ funds.

Proof of reserves audits are certainly an indicator that a company is protecting client capital. However, they are not totally reliable. There is a risk that exchanges may be able to borrow funds to artificially inflate the cash they have at the time the audit is taken. Also, the audits are only as reliable as the third parties that undertake them. In addition, proof of reserves do not paint a complete picture – they do not take into account a firm’s liabilities, for example.

With this in mind, consider the other factors outlined in this review when choosing a provider. Alternatively, use our list of top-rated crypto exchanges to get started.

FAQs

What Is A Proof Of Reserves Audit?

A proof of reserves audit analyzes the funds that a cryptocurrency exchange holds to ensure it could pay customers should a large number of users request withdrawals.

It is not a review of revenue but rather the total assets a company holds. The auditor essentially provides reasonable assurance that an exchange has sufficient funds to cover all client capital.

What Evidence Is Reviewed In Proof Of Reserves Audits?

The funds the firm holds and the tokens in which they are held are reviewed. This is to ensure that a company holds capital equal to the summation of what its clients hold in each token. For example, if altogether an exchange’s customers hold $1,000,000 worth of Bitcoin, the exchange must also hold at least $1,000,000 of Bitcoin.

Can I Trust Proof Of Reserves Audits?

This depends on the exchange and the firm that is conducting the proof of reserves audit. If the auditor is well-known and respected, such as Armanino LLP, you can rely on them to produce a trustworthy report. Regarding the risk with the crypto firm, it is possible for the company to borrow funds solely for the purpose of the audit so it seems they have sufficient capital when in reality they do not. For this reason, evidence of a proof of reserves audit should not be the deciding factor when comparing exchanges and brokers. See our guide for other ranking factors.

How Often Are Proof Of Reserves Audits Carried Out?

The frequency of proof of reserves audits depends entirely on the exchange as there is no set law or regulation stating how often they should be conducted. Kraken, for example, aims to release proof of reserves reports twice a year. On the other hand, Gate.io completed its first in May 2020 but waited over two years before completing a second audit.

Do All Crypto Exchanges Use Proof Of Reserves Audits?

While there are some exchanges such as ByBit and Binance that use proof of reserves audits, there are some that do not. However, with the industry instability caused by the failure of FTX, we expect more brands will start conducting proof of reserves audits and publishing the results. Head to our list of the best crypto exchanges that use proof of reserves audits to find a trustworthy brand.