- Confidence in the exchange is understandably lost, with customers withdrawing thousands of Bitcoins in the last month
- A proof of reserve does nothing to broker trust in its current form
- It’s because the industry is running out of control that regulators need to intervene.
November. Not good in the crypto market.
But what does the future look like when you turn the page in December?
Lowest Exchange Trust Ever
First. The FTX demise has shown the world how opaque these centralized companies can be. The reality is that it’s almost impossible for the average customer to know what’s going on behind the scenes.
Sam Bankman-Fried (SBF) has graced the cover of Forbes magazine, addressed the U.S. Congress, and was President Joe Biden’s second largest donor during the 2020 campaign. Who is safe when SBF can fall?
Customers have responded by withdrawing bitcoin from exchanges. Below is the net flow of bitcoin to and from exchanges since FTX imploded.
I had previously analyzed this response in detail the week after implosion.
Will proving reserves solve the problem?
The response, largely led by Binance CEO Changpeng Zhao (he nicknamed another acronym CZ), was to plant evidence of reserves on the chain. Because, ironically, blockchain was meant to be perfectly positioned to solve all of this.
As the debacle began to unfold, I tweeted this to CZ.
However, the proof of reserves currently implemented by some exchanges is redundant. They include posting wallet addresses with funds. fine. But what’s the point of proof of reserve without proof of liability?
There is no doubt that hitting any address online will not give you an answer. How can the exchange know that it has access to those funds? Like Kraken CEO Jesse Powell, who is in the process of resigning, “A proof of reserves audit includes the client balance and A cryptographic proof of wallet control is required.”
Cryptocurrencies need to grow. This twisted version of “audit” doesn’t do that.
CZ says it is working with multiple individuals, including Ethereum founder Vitalik Buterin, to address some of these concerns through a more robust Merkle Tree Reserve system. Let’s pray that it will arrive as soon as possible.
Crypto needs regulation
It used to be a blasphemous view. Then it was polarizing. It’s hard to argue against that now. Cryptocurrencies need regulation.
I’m tired of seeing people hurt so badly. In an interview with Bankman-Fried, he only heard a letter from an investor in which he lost $2 million as part of his FTX debacle read out during the New York Times clown show. It was one event. There are thousands of other stories of people like this being crushed, and it’s heartbreaking.
Regulators aren’t the only reason this happened, but like it or not, they bring something of a reality to what has become a wild west full of fraud, fraud and violent risk management. It is the responsibility of regulators to help with the cryptocurrency, as it clearly shows that it is not working in its current state.
Let’s start by defining what security is and filtering cryptography into this framework. BlockFi (now bankrupt), Celsius and Voyager Digital, among the most struggling lending products, have been the most prominent players in this nebulous legal framework.
Then, once we have defined what cryptocurrencies really are, we can move on to policing them. This is because it is no longer a niche game played by internet geeks. An exchange with $8 billion in customer funds has disappeared. As you know, this followed a number of other bankruptcies earlier this year that saw billions of customer funds go bankrupt.
At this point, I have seen this movie many times. Proving reserves is a step in the right direction, but the way it has been implemented so far is completely pointless. Regulators – It’s time to do what you have to do.