Cryptocurrency Exchanges Report from Bank of America: “Big Shortcomings!”

After the collapse of FTX and Alameda Research, cryptocurrency trading platforms compete to show clients that their assets are safe and not used for speculation.

“The ‘Proof of Reserves’ Study Offered by Cryptocurrency Exchanges Has Major Shortcomings”

But “proof of reserves, at least as presented, lack too much to inspire confidence,” Bank of America (BOA) said in an investigative report Thursday.

The bank states that many exchanges report or plan to report their holdings through proof of reserves using Merkle Trees.

These are efficient data structures called “hash trees” that can be verified securely. They act as a map of clients’ funds and work even when reserves get complicated.

The shortcomings include displaying assets at a specific moment in time, which allows for manipulations such as borrowing assets just before the snapshot is taken.

In addition, proof of liabilities is required to determine leverage and security of assets, and proof of reserve procedures often rely on third-party audit firms that can be manipulated or “even created by the trading platform itself.”

According to the bank, stablecoin reserves need to be audited, not just viewed.

The report stated that even if it is not considered a lack of proof of reserve, the crypto industry needs a clear definition between trading platforms and market makers.

The bank added that due to FTX’s regulatory status in the Bahamas, it is unclear whether founder and former CEO Sam Bankman-Fried is breaking any laws, as FTX is not regulated as a brokerage house. By company bitcoin and cryptocurrency exchanges need regulation.

Decentralized exchange (DEX) trading volumes are expected to continue to rise until confidence is restored, the note said.

*Not investment advice.