The crypto world is undergoing a crisis around FTX liquidity. While Binance had already pulled out from the rescue deal, the exchange has filed for bankruptcy with users withdrawing $6 billion from the platform in just 72 hours. Meanwhile, the collapse of the cryptocurrency exchange is under government scrutiny in the Bahamas to find out if any "criminal misconduct occurred."
Given the situation, crypto experts say that is imperative for crypto exchanges to build trust for their users. A simple but effective way for exchanges to build trust amongst their users is for exchanges to declare 'proof of reserves' publicly. Proof-of-reserves is a way to allow customers to monitor the balances of an exchange.
"It can be the first step towards ensuring transparency and the risk exposure of exchanges. Customers, investors and traders will be able to take informed decisions about the platforms they use when exchanges start publishing their assets and liabilities. Giottus is ready to publish its proof of reserves within the next three months. All Indian exchanges can do this exercise in the interest of the crypto investors in the country. It is an ideal point for regulators to mandate proof of reserves from exchanges as part of their compliance or filings,” says Vikram Subburaj CEO of Giottus Cryptocurrency Exchange.
A third-party audit or Merkle proof can be used as a next step to verify the authenticity of the numbers shared. "The Merkle tree proof of reserves is a cryptographic data structure that stores transaction data from the blockchain while maintaining privacy - giving users the ability to verify the exchange's account holdings," says Subburaj.
The trouble started for FTX when CoinDesk, a crypto industry news service, published an article that claimed Alameda, a crypto hedge fund owned by FTX’s founder, Sam Bankman-Fried, held billions of dollars' worth of FTX’s own cryptocurrency, FTT, and had been using it as collateral in further loans. It spiralled into bigger crisis when Binance’s chief executive, Changpeng Zhao, tweeted that his company was selling its FTT holdings, worth about $500m, because of “recent revelations that have come to light”.
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