Tron founder Justin Sun criticized Coinbase, the largest US-based crypto exchange, for not implementing proof-of-reserve (PoR) measures.
Coinbase CEO Brian Armstrong responded by emphasizing that the company relies on its business model and regular audits to attract institutional investors, dismissing the need for PoRs.
Justin Sun Urges Coinbase to Implement PoR
Tron founder Justin Sun criticized Coinbase for being one of the few major exchanges that have yet to implement proof of reserves (PoR). Sun argued that Coinbase’s stance, which claims PoRs are not feasible, is inadequate in preventing risks similar to those faced by FTX, which collapsed after using user funds to cover its own losses, resulting in a liquidity crisis.
Sun also pointed out that regular audits alone aren’t enough to ensure financial transparency, urging Coinbase to adopt PoR as a safeguard. He further rejected the notion that Coinbase, as a publicly traded company, is immune to bankruptcy, using Signature Bank’s collapse as an example to highlight that even regulated institutions can fail.
“When all exchanges in the industry have already implemented PoR, we are puzzled that Coinbase claims PoR is not feasible. The community isn’t expecting Coinbase to provide a perfect solution all at once, but simply revealing all the addresses is not a difficult task. Audit firms cannot prevent disasters from happening — FTX is a clear example. Additionally, being a public company doesn’t prevent bankruptcy — Signature Bank is an example of this, and their market cap at the time was even higher than Coinbase’s. In short, implementing PoR is an effective way for Coinbase to self-regulate,” Sun explained.
After FTX collapsed in November 2022, many crypto firms began disclosing proof-of-reserve (PoR) reports to reassure investors about their financial transparency. These reports typically include details about internal controls and risk management practices.
Binance, under former CEO Changpeng Zhao (CZ), implemented PoR measures, with Zhao advocating for the use of Merkle-tree proof-of-reserves. In a November 2022 post, CZ called for all crypto firms to adopt this methodology. However, not everyone agrees with this approach. Kraken co-founder Jesse Powell criticized the Merkle-tree PoR as a “misrepresentation,” arguing that it can give a false sense of security.
Read more: What Is Merkle Tree Proof of Reserves?
Other exchanges that offer Proof of Reserves include Kraken, Bitmex, Coinfloor, Gate.io, OKX, KuCoin, Huobi, Poloniex, Crypto.com, Deribit, and Bitfinex.
Justin Sun’s remarks stem from recent assertions by Coinbase founder Brian Armstrong, who acknowledged that the company relies on annual audits but dismissed PoRs. Armstrong was defending against accusations levied on Coinbase’s recently launched Bitcoin wrapper, cbBTC,
“If you want audits, Deloitte audits us annually, we’re a public company. I doubt our institutional clients want people dusting all their addresses, and it’s not our place to share for them. This is what it looks like if you want a bunch of institutional money to flow into Bitcoin,” Armstrong wrote.
Exchanges Need More Work Beyond Proof of Reserves
Sun’s bone of contention is that cbBTC lacks Proof of Reserve and has no audits, which means it could freeze balances at any time. As BeInCrypto reported, he described cbBTC as “trust me” Bitcoin, implying that a US government subpoena could seize all Bitcoin held through it. Another popular user on X, Duo Nine, shared the concern.
“Coinbase CEO just admitted that you got to trust them on their word. They will not provide any proof of reserves for the BTC they *claim* they have, nor any proof of backing for their new paper BTC called cbBTC. If they print too much paper BTC they will go the FTX route,” Duo Nine wrote.
As the push for proof-of-reserves grows within the crypto industry, concerns remain about the overall transparency and effectiveness of these measures. One issue is that risk management protocols vary widely between firms, making it difficult for investors and customers to assess the real value of PoRs. In many cases, the transparency offered is insufficient, and outside observers may not know if a firm’s reserves are truly secure until a crisis occurs.
“We need better risk management, more guardrails…and we need some of that installed into the crypto industry,” WSJ reported recently, citing BitGo CCO, Jeff Horowitz.
Read More: Who Is Brian Armstrong? A Deep Dive Into the Coinbase Founder
Moreover, some critics argue that providing proof of reserves without showing liabilities undermines the purpose of these reports. A firm could move its funds immediately after presenting a snapshot of its reserves, offering a false sense of security to its users. Without verifying both assets and liabilities, PoRs can fail to provide a complete picture of a company’s financial health.
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