What’s proof-of-reserves?
At its core, proof-of-reserves is a public demonstration {that a} custodian holds the belongings it claims to carry on behalf of customers, sometimes utilizing cryptographic strategies and onchain transparency.
If each crypto trade can publish a proof-of-reserves (PoR) report, why can withdrawals nonetheless be delayed or halted throughout a disaster?
The reality is that proof-of-reserves will not be a belief assure. It exhibits whether or not verifiable belongings exist on a platform at a single cut-off date, nevertheless it doesn’t affirm that the platform is solvent, liquid or ruled by controls that stop hidden danger.
However even when executed correctly, PoR is usually a point-in-time snapshot that may miss what occurred earlier than and after the reporting second.
And not using a credible view of liabilities, PoR can’t show solvency, which is what customers really need in periods of withdrawal stress.
Do you know? On Dec. 31, 2025, Binance’s CEO wrote that the platform’s consumer asset balances publicly verified by means of proof-of-reserves had reached $162.8 billion.
What PoR proves and the way it’s often completed
In apply, PoR includes two checks: belongings and, ideally, liabilities.
On the asset facet, an trade exhibits that it controls sure wallets, often by publishing addresses or signing messages.
Liabilities are trickier. Most exchanges take a snapshot of consumer balances and commit it to a Merkle tree, typically a Merkle-sum tree. Customers can then affirm that their stability is included utilizing an inclusion proof, with out everybody’s balances being made public.
When completed correctly, PoR exhibits whether or not onchain belongings cowl buyer balances at a particular second.
Do you know? Binance lets every consumer independently confirm their inclusion in its PoR snapshot. By means of its verification web page, Binance generates a cryptographic proof primarily based on a Merkle tree of consumer balances, permitting customers to verify that their account was counted with out revealing anybody else’s knowledge or balances.
How an trade can “cross PoR” and nonetheless be dangerous
PoR can enhance transparency, nevertheless it shouldn’t be relied on as the only measure of an organization’s monetary well being.
After all, a report on belongings with out full liabilities doesn’t reveal solvency. Even when onchain wallets seem sturdy, liabilities might be incomplete or selectively outlined, lacking gadgets equivalent to loans, derivatives publicity, authorized claims or offchain payables. That may present funds exist with out proving the enterprise can meet all of its obligations.
Additionally, a single attestation doesn’t reveal what the stability sheet seemed like final week or what it seems to be just like the day after the report. In concept, belongings might be quickly borrowed to enhance the snapshot, then moved again out afterward.
Subsequent, encumbrances typically don’t present up. PoR sometimes can’t inform you whether or not belongings are pledged as collateral, lent out or in any other case tied up, that means they might not be out there when withdrawals spike.
Liquidity and valuation can be deceptive. Holding belongings will not be the identical as with the ability to liquidate them rapidly and at scale in periods of stress, particularly if reserves are concentrated in thinly traded tokens. PoR doesn’t tackle this challenge; clearer danger and liquidity disclosures would possibly.
PoR isn’t the identical as an audit
Lots of the belief downside comes from a mismatch in expectations.
Many customers deal with PoR like a security certificates. In actuality, many PoR engagements resemble agreed-upon procedures (AUPs). In these instances, the practitioner performs particular checks and experiences what was discovered with out offering an audit-style opinion on the corporate’s general well being.
Certainly, an audit or perhaps a evaluation is designed to ship an assurance conclusion inside a proper framework. AUP reporting is narrower. It explains what was examined and what was noticed, then leaves interpretation to the reader. Underneath Worldwide Customary on Associated Companies (ISRS) 4400, an AUP engagement will not be an assurance engagement and doesn’t categorical an opinion.
Regulators have highlighted this hole. The Public Firm Accounting Oversight Board has warned that PoR experiences are inherently restricted and shouldn’t be handled as proof that an trade has ample belongings to fulfill its liabilities, particularly given the dearth of consistency in how PoR work is carried out and described.
That is additionally why PoR drew elevated scrutiny after 2022. Mazars paused work for crypto shoppers, citing issues about how PoR-style experiences had been being introduced and the way the general public would possibly interpret them.
What’s a sensible belief stack, then?
PoR is usually a start line, however actual belief comes from pairing transparency with proof of solvency, sturdy governance and clear operational controls.
Begin with solvency. The actual step up is exhibiting belongings versus a whole set of liabilities, guaranteeing belongings are larger than or equal to liabilities. Merkle-based legal responsibility proofs, together with newer zero-knowledge approaches, purpose to shut that hole with out exposing particular person balances.
Subsequent, add assurance round how the trade really operates. A snapshot doesn’t reveal whether or not the platform has disciplined controls equivalent to key administration, entry permissions, change administration, incident response, segregation of duties and custody workflows. That is why institutional due diligence typically depends on System and Group Controls (SOC)-style reporting and comparable frameworks that measure controls over time, not only a stability at a single second.
Make liquidity and encumbrance seen. Solvency on paper doesn’t assure that an trade can survive a run. Customers want readability on whether or not reserves are unencumbered and the way rapidly holdings might be transformed into liquid belongings at scale.
Anchor it in governance and disclosure. Credible oversight relies on clear custody frameworks, battle administration and constant disclosures, particularly for merchandise that introduce extra obligations equivalent to yield, margin and lending.
PoR helps, however it may well’t substitute accountability
PoR is best than nothing, nevertheless it stays a slim, point-in-time test (though it’s typically marketed like a security certificates).
By itself, PoR doesn’t show solvency, liquidity or management high quality. So, earlier than treating a PoR badge as “secure,” take into account the next:
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Are liabilities included, or is it belongings solely? Property-only reporting can’t reveal solvency.
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What’s in scope? Are margin, yield merchandise, loans or offchain obligations excluded?
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Is it reporting a snapshot or ongoing? A single date might be dressed up. Consistency issues.
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Are reserves unencumbered? “Held” will not be the identical as “out there throughout stress.”
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What sort of engagement is it? Many PoR experiences are restricted in scope and shouldn’t be learn like an audit opinion.