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Binance proof-of-reserves is ‘meaningless without commitments’: Kraken CEO

Disclaimer: The article has been updated to reflect Binance CEO CZ’s response to the concerns raised by Kraken CEO Jesse Powell.

The collapse of the crypto exchange FTX revealed the importance of proof-of-reserves to avoid situations involving misuse of users’ funds. While exchanges have proactively started sharing wallet addresses to prove the existence of users’ funds, several entrepreneurs, including Kraken CEO and co-founder Jesse Powell, called the practice “pointless” as exchanges do not include liabilities.

According to Powell, a full proof-of-reserve audit must include the total of client liabilities, user-verifiable cryptographic proof that each account was included in the total, and signatures proving the custodian̵[ads1]7;s control over the wallets. While Kraken’s proof-of-reserve allows for the verification of assets against the company’s liabilities, Powell continues to call out other players who have failed to include accounts with negative balances.

Powell previously called out CoinMarketCap for sharing an incomplete proof of reserves, as it lacked “cryptographic proof of client balance and wallet control.” He reiterated that reserves are not the list of wallets, but assets minus liabilities.

Binance’s recently released proof-of-reserve system allows users to verify their holdings using a Merkle tree. However, Powell shared his displeasure when the system failed to include accounts with negative balances, stating that:

“The whole point of this is to understand if an exchange has more crypto in its custody than it owes its customers. Putting a hash on a row ID is worthless without everything else.”

Moreover, he asked the media and journalists to refrain from “overselling it and misleading consumers.” Instead, he recommended that they take the time to understand the motive behind proof-of-reserves.

On the other hand, few members of society refuted Powell’s need for a reliable auditor. Following up on the accusation, Binance CEO Changpeng ‘CZ’ Zhao rebutted by sharing Binance’s upcoming plans involving third-party auditors to audit the exchange’s proof-of-reserve results.

The response from CZ to the concerns of the Kraken boss received positive support from the community. However, some members pointed out the hypocrisy of CZ disabling public comments on the post that welcomed “questions and checks.”

Related: Crypto exchange Kraken freezes accounts related to FTX and Alameda

On November 19, CZ confirmed that it had begun work on building a secure centralized exchange (CEX), an idea put forward by Ethereum founder Vitalik Buterin.

In this case, the best scenario would be to build a system that does not allow crypto exchanges to withdraw a depositor’s funds without consent.