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Crypto Exchanges Try to Mollify Investors with Limited Attestations

S.J. Steinhardt
Published Date:
Dec 6, 2022

Prompted by the collapse of FTX, cryptocurrency exchanges have hired outside auditors to provide a proof-of-reserves report to show that these businesses are solvent and have enough assets to cover their liabilities, The Wall Street Journal reported.

These types of attestation are meant to reassure investors, but are limited. Most crypto exchanges are privately held and, as such, are not required to file financial statements with the Securities and Exchange Commission (SEC) or get them audited.  Auditors don’t personally sign the attestations, unlike reviews of a public company’s annual financial statements.

One exchange, Kraken, shares reserves data with its customers and allows them to independently verify that its balances are backed by assets secured by the exchange.

While such third-party verification marks progress toward more transparency around crypto exchanges, many find this to be insufficient.

“Investors might assume that this attestation is similar to a full audit when in reality it is not complete and does not disclose the full assets or liabilities nor does it discuss any controls,” Deniz Appelbaum, an assistant professor of accounting and finance at Montclair State University, told the Journal. She said that a proof of reserves typically does not include noncrypto assets. And because of the high trading volatility of crypto assets, she added, such verifications are useless unless auditors continually provide them.

The SEC has not directly commented on the platforms’ use of proof of reserves. Last week, according to Thomson Reuters, Public Company Accounting Oversight Board (PCAOB) Chair Erica Williams said that, “it’s important to understand that PCAOB-registered firms only have to follow PCAOB standards and rules when they’re auditing public issuer[s] or broker dealer[s] under our jurisdiction, not for any other clients. We don’t have authority to inspect their audit of other clients like FTX.”

For now, crypto exchanges “are desperate to do something because the level of trust has plummeted,” Campbell Harvey, a finance professor at Duke University, told the Journal.  

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