Cryptocurrency Exchanges Proof of Reserves Questionable – Bank of America
Following the collapse of the famous crypto exchange, FTX, and its affiliate, Alameda Research, The Bank of America (BAC), in a research report made public on Thursday, criticised the “proof of reserves” employed by crypto exchanges and recommended reforms going forward.
Proof of Reserves Does Not Hold Water
One of the resultant effects of the demise of FTX and Alameda Research is the number of opinions and reports circulating the internet.
Quite a number of stakeholders have released their opinions as well as reports analysing the current deplorable state of the crypto market, how to curb its effects, and the way forward.
And as such, in a research project reported by the Bank of America (BAC) on Thursday, the bank gave its own perspective and particularly condemned the usage of the concept of “proof of reserves” by crypto exchanges all over the globe.
According to the bank, a public declaration of available assets to pacify users and assure them that their assets are safe is really far from being the ideal thing to do.
To re-instil the confidence of their users in them, especially in light of the whole FTX saga, one would see that quite a large number of crypto exchanges have reported their assets using Merkle trees.
Essentially, the process works by using “harsh trees” that serve as data structures and also as a financial road map for customers.
The Bank of America has however shunned this approach and suggested that reforms should be made if at all the process is considered.
Ample Room For Manipulation
One of the concerns raised by the bank is how publicising assets available at a point in time does not necessarily guarantee fair play.
Ranging from falsifying the report by borrowing assets just before the Proof of Reserves is made to shady acts like partnering with make-believe “audit firms,” there are a number of ways the process could be exploited.
The Bank of America has also expressed the need for stablecoins to be audited and properly regulated. The report asserted that a distinct distinction between trading platforms and market makers is also necessary in the cryptocurrency sector.
It appears as if the market is still. quite fragile given the events of the last couple of days, but the Bank of America has expressed a vote of confidence if necessary measures are taken.
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