Proof of reserves from Binance is "pointless without liabilities," claims the CEO of Kraken

The failure of the FTX cryptocurrency exchange highlighted the value of proof of reserves in preventing the theft of customer funds.

While some exchanges have disclosed user wallet addresses as proof that their users' funds exist, several entrepreneurs, including Kraken CEO and co-founder Jesse Powell, have criticized this as “pointless” because exchanges do not disclose liabilities.

For Powell's purposes, a proof-of-reserve audit is insufficient unless it reveals the total amount of client liabilities, cryptographically verifiable proof that each account was included in the total, and signatures proving the custodian's control over the wallets.

Powell keeps calling out other players who have failed to include accounts with negative balances, even though Kraken's proof of reserve allows verification of assets against the company's liabilities.

Since it did not provide “cryptographic proof of client balances and wallet control,” Powell has previously criticized CoinMarketCap for sharing insufficient proof of reserves.

He reaffirmed that cash on hand is not a list of wallets but assets minus debts.

Binance now has a proof-of-reserves system, which uses a Merkle tree to verify a user's holdings.

While Powell was speaking, he expressed his disappointment that the system did not include accounts with negative balances, saying, “The whole point of this is to understand whether an exchange has more crypto in its custody than it owes to clients. Putting a hash on a row ID is worthless without everything else.”

He also cautioned reporters and editors against “overselling it and misleading consumers.” Instead, he suggested they look into proof of reserves to see why it was necessary.

Few, however, in the community disputed Powell's need for a reliable auditor. Binance CEO Changpeng “CZ” Zhao responded to the allegation by disclosing upcoming plans for a third-party audit of the exchange's proof-of-reserve results.

The community largely approved of CZ's response to Kraken CEO's complaints. While CZ welcomed “questions and checks,” some members pointed out the hypocrisy in removing public comments from the post.

Ethereum co-founder Vitalik Buterin proposed the idea of a secure, centralized exchange (CEX), and on November 19, CZ confirmed it had begun developing such an exchange.

The ideal solution here would be to devise a system that prevents cryptocurrency exchanges from taking users' deposits without their knowledge or permission.