To get cryptocurrency exchange platforms to adopt better transparency about their customers’ funds, Binance CEO Changpeng Zhao says his platform will soon implement a proof of reserve. This is a strong incentive for the entire crypto industry to do the same
Changpeng Zhao calls for improved transparency of exchanges
A show of reserve for all exchanges? This is what Binance CEO Changpeng Zhao wants. The proof of reserve is an analysis of the funds held by a custodian to ensure that the company has the assets of each client.
After revelations about a potential insolvency of the FTX platform, Changpeng Zhao redirected its 21 million FTT tokens to Binance for eventual sale. As a result, investors massively withdrew their crypto-currencies from the FTX platform.
Faced with a significant cash shortage, FTX CEO Sam Bankman-Fried was forced to find funds to meet the demand, and turned to Binance for a buyout deal. But this whole situation might not have happened if FTX had been transparent with its customers.
A day before the collapse of his exchange, Sam Bankman-Fried claimed on Twitter that FTX had no liquidity problems. When his statement was contradicted by the takeover of his company, his tweet was deleted.
In addition, to prevent cryptocurrency exchanges from hiding false claims about their reserves, and to reassure platform users, Changpeng Zhao is urging companies in the sector to be more transparent about their numbers.
All crypto exchanges should do merkle-tree proof-of-reserves.
Banks run on fractional reserves.
Crypto exchanges should not.@Binance will start to do proof-of-reserves soon. Full transparency.
– CZ Binance (@cz_binance) November 8, 2022
” All cryptocurrency exchanges should implement a proof of reserve in the form of a Merkle tree. Banks operate with fractional reserves. Crypto exchanges should not. Binance will soon implement a proof of reserve. Totally transparent. “
This is good news for exchange users: by taking a first step towards more transparency, Changpeng Zhao is showing the way for other companies in the sector to follow.
Proof of reserve to fill the regulatory gap
At present, few exchanges are transparent to their users. The most transparent companies are Coinbase, through its legal obligations since its listing, and Kraken through its proof of reserve associated with a Merkle tree.
Binance wishes to develop this proof of reserve by coupling it to a Merkel tree, a system widely used for the proper functioning of blockchains. By using cryptographic processes, this method allows for the verification of all assets of a given entity.
By being more transparent about its funds, Binance will gain even more trust from its customers. At the same time, its competitors will be forced to use the proof of reserve in order not to lose market share.
As a result, Changpeng Zhao is asserting himself as having powers similar to a regulatory authority: by taking this decision, he can force companies in the sector to improve their transparency for their customers.
However, let’s not forget that decentralisation is the main value of crypto-currencies: by developing more user-friendly applications, exchanges are gradually turning into dedicated crypto-currency banks.
As Bitcoin was originally created to escape the banking system, many investors are turning to cold wallet solutions. The goal? To manage their own funds, without an intermediary in control.