CoinMarketCap Proof Of Reserves Addition Not As Sophisticated As Market Requires

CoinMarketCap.com, the world’s largest crypto data website, announced via Twitter on November 22 the launch of a feature showing the proof of reserves (PoR) for crypto exchanges. Users of the site’s popular exchange page tables, which received about 104 million visits in September, will now see a small mark alongside the names of seven exchanges that have recently gotten on the proof-of-reserve bandwagon: Binance, Kucoin, Bitfinex, Crypto .com, Huobi, OKX and Bybit.

Surprisingly, the list did not include the names of five other crypto exchanges that have announced publicly they are conducting full proof-of-reserves verifications: Kraken, Gate.io, BitMEX, Coinfloor and HBTC
HBTC
. The site also failed to recognize proof of reserves done by Upbit, who informed Forbes that it carries out quarterly attestations certified by CER. Live on the proof of funds criteria. And the current version of CoinMarketCap lacks word on the partial proof of reserves offered by Luno, Bitbuy, and Revix. In short, it is an incomplete launch, lacking basic information that could educate users on the topic.

The current format of the data shows Binance as the exchange with the largest reserves, but there is no discussion about the fact that, as seems to have been the case at FTX, Binance’s reserves could be encumbered or somehow deficient. The firm’s limited discussion and selective set of exchanges to launch its product hints of a favoritism that could ultimately erode trust.

CoinMarketCap Proof-of-Reserves Functionality

PoR Fruit Basket

Proof of reserves comes in different shapes. The elements present in a serious PoR discussion specify:

  • If the data is auditor-assisted or self-assessed
  • Whether it offers users a so-called Merkle validation
  • If the validation is continuous or for particular points in time

Audited-assisted includes expertise provided by an outside party. A Merkle validation lets users verify cryptographically that they own a unique hash counted in the exchange inventory. Exchanges offering full proof of reserves have both auditor assistance and Merkle user validation.

Thus, the CoinMarketCap functionality shows a near-real-time measure of what the selected exchanges’ asset reserves are possessed in designated wallets, but the information is not guaranteed to be accurate. Furthermore, the figures are not audit-assisted nor do they offer end-user Merkle validation.

Kraken CEO Jesse Powell chimed in on the CoinMarketCap announcement saying via Twitter that “the proof of reserves audit requires cryptographic proof of client balances and wallet control,” and this must include an independent attestation of liabilities (who controls wallet proceeds).

Powell further asserted that proof-of-assets audits must have the following three elements:

  1. Sum of client liabilities (auditor must exclude negative balances)
  2. User-verifiable cryptographic proof that each account was included in the sum
  3. Signatures proving that the custodian has control of the wallets

Meaningless Data

Exchanges based in island tax havens lack basic regulatory oversight and can declare publicly that they own this and that wallet which has this many tokens, while failing to disclose that it has pledged those tokens-so in reality they are not freely available to clients.

The risk of meaningless PoR data will likely remain until exchanges agree to submit financial statement disclosures to credible auditors who can attest that the firms have sound internal controls. Alternatively, an exchange could submit to regulators that perform random audits, for added credibility.

CoinMarketCap discloses that its proof-of-reserve pages have affiliate links that generate revenue for the firm.

Investor takeaway

Proof of reserves is a topic that will keep on getting hotter. The CoinMarketCap announcement illustrates its importance in what is a first step. The firm’s treatment of this functionality appears biased and sloppy and lacks the depth evident in other parts of its website.

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