Bitcoin Forum

GM crypto fam.

So, after the FTX debacle, big exchanges rushed to prove their reserves, and that ended up with Mazars halting all work with crypto firms.


What I dont uderstands is, how can we know which tests will demonstrate the solvency of a centralized crypto exchange? Who is to say that funds cannot be shifted at any time, like SBF did from FTX to Alameda?

Source:

https://app.getresponse.com/view.html?x=a62b&m=BVHuSm&mc=9M&s=BtgXWnG&u=QcLhh&z=ECiRVqJ&

To avoid such scams with the FTX exchange, you need to prohibit the exchange from managing client deposits. For this violation 1,000,000 life sentences. I used to be an anarchist too, but today everyone understands that cryptocurrency exchanges should be under the control of regulators.

I guess The Big 4 (https://big4accountingfirms.org/) would do the work. It's how CEX can prove they have what they say they have...


CZ wrote something similar, how accounting firms don't understand crypto, but Coinbase did it, so whats the problem?



They don't need to be under the control of regulators, but for sure they need to have some proof of reserves. SBF used the client's deposits for his own projects (reserves were in FTT) and with the collapse of FTT he literally ended up with nothing.

Not sure about proving it. But if the exchange says so then they could show and make a way how yo verify this process and investors and users can be able to confirm it. The thing is centralized exchange could did show iy however with their control of thr platform, anything is quite possible. Unless they put it in a decentralized manner.

There is a context missing in regard to why Mazars have a public concern about their proof of reserve reports to those companies. It is explained as follows:


As noted above, the reported Proof of Reserve is not a big picture, in fact, it can't be counted as a variable if someone wants to prove solvency.


Any reports cannot guarantee that. It is the wrong thing to rely on.

Unfortunately, in a cryptocurrency world, handing over one possession to centralized entities is a sure way to make the funds can be shifted without their concern. Not your keys, not your coins. The problem in regard to the current FOMO of exchanges published their proof of reserve is that kind of framework is not enough to attest solvency of exchanges, as already noted above.

Central exchanges (CEXs) can demonstrate their solvency by showing that they have enough assets to cover their liabilities. There are many ways to accomplish this, including:.

1. Regular financial audits: CEXs can hire independent accounting companies to perform periodic financial audits and provide a report on the exchange's financial health. The assets, liabilities, and any potential risks of the exchange should all be disclosed in this report.
2. Keeping enough reserves: CEXs can keep enough reserves in the form of cash or highly liquid assets, like government bonds, to make sure they have the money to pay their debts.
3. Adequate risk management procedures can be put in place by CEXs, such as the use of stop-loss orders or margin limits, to reduce the risk of financial losses.
4. Keeping transparency: CEXs can keep the public and regulatory bodies informed about their assets and liabilities, as well as the state of their finances and business operations.

For CEXs to establish trust with their users and prove their solvency, it is critical that they be accountable and transparent.

Financial report can tell the solvency of those exchanges especially if they are going to declare it properly, and aside from this we can only know they are financially stable when they already experienced problem. There’s no assurance though that they will not use our money to other things, there’s no other way to stop them from doing this aside from the government intervention.

Take, for example, the Kraken platform, as it provides complete evidence of solvency, and in my opinion, there is no excuse or reason for any CEX not to provide this proof of solvency, If the CEX platforms want to restore the confidence of investors and major companies. after the recent collapse of the FTX platform, which affected the confidence of investors in this industry, so the proof of solvency will undoubtedly be the new standard that must be taken by the CEX platforms, as it is proof that CEX is trustworthy and able to save the money of its deposited users, as they can withdraw it at any time without happening like what happened to FTX, We can know the tests that will show the solvency of the central exchange platforms through a complete guide that is presented through them or through reliable companies that are the third party that conducts these audits.

One of the thing that CEX can to to prove it is to provide proof that they have the back up asset they say that they have to pay their customers if there's something bad happen like being hacked and the hacker have successfully stolen some funds and the cex have the funds to refund their customers. That's what they should have to say first to solve the problems or their liability. The other thing that cex can do is to frozen all assets going around their platform to avoid their fundsgl get stolen if getting hacked by a hacker will happen. Proving their back up assets is a good start but it doesn't mean you will get refunded if something wrong happen.

No one because there is no central authority to check for the funds of any exchanges, as you have said, they can just shift funds to their behest just like what Alameda and SBF did that cause the biggest fall in crypto so far.

So it's going to be a gamble for everyone to 'trust' which exchange we want to use for our trading activity.

And that is why it's not safe to put your funds on centralized exchanges because it can collapse anytime.

I would not be so happy about CEX and I don't recommend them at all,their support was really idiots,sorry to say that but that is the minimum,they kept asking me proofs of my source of funds and I gave them everything yet they came up with an answer where is your email of your Bitcoin wallet while I told them I was using Electrum and Exodus which do not need any email,that is the level of stupidity of those guys there,luckily they released all my funds before locking my account because of them not being competent at all in the matter of crypto.

And another reminder because I had a thread sometimes ago for them in Service Discussion section of the forum,after the FTX drama and even before it happened I advised anyone to get their coins out of the centralized exchanges,one of which is Cex.io.

Transparency in short, if they are going to make public their financial plans and status that might give peace of mind to their users and maybe to their investors as well. I agree on yearly releasing of financial report, this can be the basis before you use that exchange and know if they can pay 1:1 if something bad happened to their platform or when they get hacked.

Since they're already centralized, they have to let the regulators do their work on them to have it monitored. We don't want that since crypto is made to be not touched by the government.
But things have changed and there's really a need for their intervention and the strict implementation set by them so that these exchanges are nowhere to go if ever they plan to do the same thing as FTX.

Honestly I don't think they ever could.  The easiest way to solve these issues is to NOT use the exchange as a personal wallet.  Deposit, trade and move your crypto off.  Little to no risk so long as it's a reputable CEX with little time of exposure.

Not much we can do to check, but the auditors for these CEX's can probably help lend a hand. of course you'll pick auditors and accountants that are of good standing and are actually trustworthy, without being bias at all. One day these exchanges may turn rouge and do an FTX against users funds. I suggest that in order to not be a victim just don't leave anything on the exchange when not really trading. This only gives the exchange more money to use for whatever purpose they need (banks, lol).

Almost all users mention it can be done by independent auditor and exchange need to be transparent with their financial report, while it's true but in the reality you wouldn't find such thing. The auditor might doesn't know how Bitcoin and crypto works, so he doesn't really know how to calculate the correct risk and use the correct number. While exchange could be transparent in the partial part and they will hide on the rest part.

The best thing is the centralized exchange should post all of their hot wallet public address and sign message, so anyone can check it.

That's what many people wanted to know from a cex if they can comply with their needs like what we mentioned earlier. Who wouldn't want to know the safety of their funds if they let someone keep their funds instead of themselves storing the funds. This is the reason why some people didn't want to trust other people in keeping their funds safe  order for people to trust them is to do what has to be done in order to earn profit from them. It's a business after all and showing their capabilities of refunding their funds if something wrong happen unexpectedly.

I also recently noticed that there is an icon displayed now that says "'Exchange reserve data available" or even"Reserve audit available" behind the name of the exchange if you look them up at coinmarketcap. So far it seems like that only Coinbase and Kraken have finished their audit of the reserves from the big exchanges and the one from Binance, Kucoin and others are still ongoing.
So in theory it is definitely possible that the reserves of Binance and Kucoin are not really existing in the way they proclaim and that they have just moved around assets in order to make the impression like having enough reserves. So we can just wait for those audits and hope that the auditors are making a good job.

This a problem for exchanges since they would have to expose thier data to regulators and to the company that will audit them. Too risky to do for the exchange especially if the regulators are also the ones who kept attacking them while the exchange is not under thier jurisdiction.

Every country has to regulate and audit thier own crypto industry. Every government has to trust each since they all have a single threat but crypto.

Answer the question, why did all 4 of the world's largest auditors refuse to work with crypto exchanges?
But because the SEC said that they will be very painful to beat on the ass.
Maybe it's better to spend energy on fighting fraud?

I don't particularly trust these confirmations of reserves from various exchanges, just as I don't trust their trading volumes. All these figures may be greatly exaggerated and created only to reassure clients. Every week I see another news that some other exchange has confirmed its reserves. Who confirmed these reserves? The exchange itself? What was the methodology of this audit? Who confirmed it? Or did the exchange verify its own solvency? There are too many questions to these confirmations of reserves.

The best way to check exchanges is to come up with a tradition when all crypto users withdraw all their coins from exchanges for 1 day. It's hard to do, but it will be a very good test. And the exchange that will prevent such a withdrawal will lose its rating.

Nobody can say or give a guarantee that the funds will not be shifted in the future. To avoid such uncertainties, it is better to have your funds stored in your own personal wallet than in a centralized exchange where you are not sure what could happen in the future.
Even while some of the exchanges are going the extra mile to have their proof of reserve known to the public, it is not enough guarantee to offset investors' fears.

I agree, you should not keep anything on exchanges, no matter how secure and trustworthy they may be. A centralized exchange is a time bomb and no one knows which particular exchange and when it will explode, along with your money.

Source: https://beincrypto.com/big-four-accounting-firms-unwilling-audit-binance-despite-long-history-coinbase/ (https://beincrypto.com/big-four-accounting-firms-unwilling-audit-binance-despite-long-history-coinbase/)

Excellent reading, at least I think so. And if I get you right, you say that auditor firms are afraid of SEC, by this article I would say you are right. Their excuse to not audit crypto exchanges can't be interpreted differently.


What do you think, did they know what was happening with FTX?