Investor skepticism about the exchange after the FTX exchange spill is not a big deal. FTX was playing with investors’ money and giving investors’ money to other companies. After the FTX outbreak, it was understood that crypto exchanges used investors’ crypto. Because this issue became huge on social media and people were constantly asking crypto exchanges and their investors about the safety of their funds. In such a situation, CZ, the founder of crypto exchange Binance, talked about Proof of Reserve. Proof of reserve means that the exchange makes public the crypto it holds and also makes public its wallet addresses. All this so that it can be known that in reality the exchange is holding the crypto of the investors properly.
Since Binance started the talk of Proof of Reserve, it is obvious that they were the first to make their fund public and they had already prepared for it. This happened and the exchange reported that as of November 10, 2022, they had 475,000 bitcoins, 4.8 million ether, 17.6 billion USDT, 601 million USDC, 58 million BNB and 21.7 billion BUSD held on their exchange. The proof of reserve was published by the exchange after an internal audit. There is a lot of doubt in the third party audit report provided by Binance. It is very difficult to verify a four year old Merkle tree so quickly. Additionally, third party audits revealed irregularities in large amounts of bitcoin holdings.
Large transactions during Proof of Reserve??
On November 10, Binance made its Proof of Reserves public after conducting a private audit. After this, during the third party audit, 1,27,351 bitcoins were sent from Binance’s cold wallet to another wallet.
Ten days before this, a similar amount of bitcoin was sent to an address on the exchange. When this information came on social media, CZ clarified by tweeting that it was done for proof and reserve audit. The auditor has said to move a certain amount of bitcoins from one place to another so that we can see that it is under your control. And the rest went to the changed address which was the new address. So the input transaction was large, so it was changed. Now the thing to be understood here is that why would an audit firm ask to do such a huge transaction? It can be known even from a small transaction whether you are holding a wallet or not.
Along with this, CZ wanted to tell through another tweet that in the next few hours and days there can be a big transaction from cold wallet, so don’t give alert. But this made it clear that the exchange can move investors’ funds whenever it wants.
There is also a big question here, what is the reason for keeping such a large amount of bitcoin on the exchange? There cannot be such a large number of bitcoin retail investors. Why are large investors keeping their bitcoins on exchanges?
What will happen with Proof of Reserve?
Now it is a matter that even if the exchange shows you the proof of reserve, how difficult is it? It is not that Binance is the only one that has released its Proof of Reserves, but many exchanges have already done so. The problem is that Proof of Reserve is not transparent. On November 10, Binance issues its proof and reserves, and three days later, crypto.com exchange mistakenly sends 320,000 ether to gate.io. Shortly thereafter, gate.io sent the ether back to the crypto.com exchange.
The thing to be understood here is that when ether was being given in such a large quantity, it should have been checked many times? Withdrawal was given, so someone must have put a request for this withdrawal? Before giving this withdrawal, didn’t the exchange check whether the account from which this withdrawal was done has so much crypto or not? If the exchange was automatically transferring this ether, then how did they get the address of the other exchange? Did only one person give permission to give such a huge withdrawal? The CEO of Crypto.com gave information about this through a tweet but it is very difficult to believe.
In short, all this is being done to mislead the investors.
How accurate is the Proof of Reserve of the Indian Exchange?
When the entire crypto community is talking about Proof of Reserve, how can India be left behind. Here too, proof of reserve was being demanded from the exchanges. coindcx has shared its proof of reserve and wallet. wazirx has given this information in a tweet that he will soon give information about the Proof of Reserve. The information provided by CoinSwitch Kuber is incomplete, neither the cold wallets are made public nor the transactions can be seen by Merkle tree, only the exchange has said that they have more funds than investors’ crypto. Is. Kuber’s proof of reserve is enough. Indian crypto exchange is also not giving withdrawal of crypto for a long time. Many Indian crypto exchanges are currently under government scrutiny.
Even if Indian crypto exchanges were to make public their proof of reserves, it would be incomplete. Third party audit is rarely done by any Indian exchange and even if it happens, there will be a lot of doubt in that too. Currently, only Indian Rupee can be withdrawn from Indian Exchange and not any crypto. In such a situation, even if the exchange shows the reserve fund, it will not make any sense. Transactions of many exchanges are still under investigation by government departments and in such a situation it will not be easy for the exchange to make this information public and some exchanges may have to take permission from the government department for this.
Proof and Reserve is a startup started by Binance. It is very easy for the central exchange to hide whose funds are in the cold wallet, how it came and when and where the exchange sent it and whether it was used or not. Binance itself has sent large amounts of crypto from one wallet to another once the wallets were made public. Tron founder Justin Sent 100 million USD to Binance today.
Justin’s activities at FTX also raise suspicions when he was sending large amounts of crypto from his account to FTX and the rest of the exchange. Today it is not a big deal for some big people to help any exchange to show their proof of reserve by giving huge funds.
Also CZ and Binance have had a big hand in this. No crypto holder sells any holding by stating that he had held it for a long time. CZ did it smartly and made it public on Twitter that the exchange was selling its FTT holding. The sale of any crypto in such a large quantity becomes the reason for the price to fall in the market and it happened. Meanwhile, CZ shared on Twitter about buying FTX and after that the price of FTT token dropped from $15 to $22. During this period almost all FTTs were shorted and most of the positions were liquidated. Shortly after US government departments started investigating CZ buying FTX, CZ backtracked and after that those who were long in FTT were liquidated again as the price fell. How much money did the exchange make during this period is a matter of investigation? In this case your proof of Showing the reserves is not a difficult thing for Binance. So far Binance has not given the exact details of its trading profits and losses. If the exchange is properly investigated, then many irregular transactions will come to the fore here.
Investors may be happy to see proof and reserve information for some time but the math behind it is very bad. The exchange’s own stablecoins are enough to manipulate the market. Binance has more than 21% of its reserve funds only in their own stable coin BUSD. Sometime ago Binance has informed that they are stopping the withdrawal of USDC as the token is being swapped for USDC.
If we look at the current situation, the crypto market is going through a bad phase where big players are playing with the investors and trying to keep their investors by showing Proof of Reserves. It remains to be seen what will be known when the truth behind this game comes out?
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