Kraken’s Jesse Powell says he’ll flag crypto issues, weighs on exchanges showing proof of reserves – Reuters

Founder and former chief executive of Kraken, Jesse Powell, said he was looking to publicly flag issues in the crypto space, starting with the issue of exchanges sharing their proof of reserves.

Following the highly publicized collapse of FTX, crypto exchanges scrambled to provide evidence of a one-to-one ratio between investors’ reserves and assets in an effort to increase transparency.

According to Powell, a reserve proof audit is valid if it come with proof of customer balances and wallet control.

“I said I was going to be more firm in pointing out the issues. This is one of them.

‘Reserves’ = assets minus liabilities. ‘Reserves’ = list of wallets…

The audit of the proof of reservations must have:
1. sum of the client’s liabilities (the auditor should exclude negative balances)
2. User-verifiable cryptographic proof that each account was included in the sum
3. signatures proving that the custodian has control of the portfolios.

The Kraken founder points out that using a Merkle tree to allow users to verify the crypto they own on an exchange is “useless” because it does not reveal the responsibilities of the centralized platform.

Merkle trees are data structures that can allow users to quickly check certain information without displaying a complete data set.

Said Powell,

“The Merkle tree is just a bit fiddly without an auditor to make sure you don’t include accounts with negative balances. Asset status is useless without liabilities.

It’s simply, ‘Here’s a hash of your record in the BTC spreadsheet.’ Ok… but what’s the point? The goal is to understand if an exchange has more crypto in its custody than it owes customers. Putting a hash on a row ID is worth nothing without everything else.

Earlier this month, Ethereum (ETH) designer Vitalik Buterin suggested a system where users can check their personal balances on crypto exchanges through Merkle Trees.

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Feature image: Shutterstock/VolodymyrSanych/Natalia Siiatovskaia