A lot goes on behind the scenes in any business, but when you throw a volatile market into the mix, there’s a lot more that needs to be accounted for when ensuring the numbers are not only running smoothly, but also creating a positive impact across the board.
However, unfortunately for some, impact is only one word you can use to describe the goings on – and it’s not always a good thing.
Now, before we dive into whether proof of reserve (POR) audits are sufficient, let’s cover what they are!
What is a proof of reserves?
In simple terms, A proof of reserves is an independent audit of a company’s balance sheet conducted by a third party. These cryptographically reconciled public reports allow customers to verify that the digital asset service providers they use do indeed hold enough assets on their balance sheets to offset their customers’ liabilities.
Given the recent collapse of FTX and many other major platforms, the requirement for these reports is needed more than ever, however, is there a robust framework in place to ensure that this process is meeting the necessary standards as well as the full transparency consumers need.
Mazars, the auditing firm working with Binance and other crypto exchanges on proof-of-reserves statements, has paused all work for crypto clients, Binance said in an emailed statement.
Given the high risk nature of the cryptocurrency industry, it isn’t much of a surprise that the leading accountancy firms are opting to stay away from this type of work. This again stresses the desperate need for regulation and guidelines for the industry to follow.
So, what really are the issues with POR for the big dogs to be staying at arms length from them?
What are the issues with POR?
The below are just a few reasons as to why the current proof of reserve reports aren’t sufficient for their current purpose:
1. Cryptocurrency proof of reserve reports provide only limited assurance.
These reports provide evidence that the cryptocurrency is backed by a reserve of assets, but they do not provide assurance that the reserve is sufficient to cover all liabilities. This means that users of the cryptocurrency can never be certain that the reserve is sufficient for their needs.
2. Cryptocurrency proof of reserve reports are not audited.
The reports are usually created and maintained by the cryptocurrency’s issuer, and there is no independent third-party assurance that they are accurate and up-to-date. This means that users cannot be certain that the reserve is actually as large as it claims to be.
3. Cryptocurrency proof of reserve reports are often opaque.
Many times, the reserve is composed of a variety of assets, and the report does not provide sufficient detail to understand the composition of the reserve and its true value. Without this transparency, users have no way of knowing if the reserve is actually sufficient for their needs.
4. Cryptocurrency proof of reserve reports often contain errors.
These errors can range from minor mistakes to significant errors that can affect the value of the reserve. These errors can lead to unexpected losses for the user.
In conclusion, cryptocurrency proof of reserve reports are not sufficient to provide assurance that the reserve is sufficient for the user’s needs. For this reason, users should seek additional assurance from an independent third-party auditor when considering the use of a given cryptocurrency.
How can Myna help to install confidence in your numbers?
Having a crypto native finance function is crucial for any crypto project to be successful. Cryptocurrency is still alien to the majority of traditional accountants which can result in the incorrect treatment and presentation of cryptocurrency data (see FTX as an example).
Myna specializes in the cryptocurrency field having staff who have directly invested, worked and interacted with cryptocurrency projects. Decentralised Finance (DeFi) is one of the many areas that isn’t understood due to the range of DeFi products involving loans, staking and liquidity pool provision to name a few. Having a team of DeFi savvy accountants who understand the different functions of decentralized finance as well as how to report on them will help to eliminate any concerns surrounding crypto financial reporting.
If Proof of Reserve is something that a project is interested in getting done by a third-party auditor, Myna should be the first step taken before this to ensure that all the figures are captured, reconciled and presented correctly which will allow a smooth audit process.
Reach out to us if this is of interest to you.
