In order for cryptocurrency exchanges to adopt better transparency regarding their clients’ funds, Binance CEO Changpeng Zhao says his platform will soon implement proof of reserve. What strongly encourages the entire crypto industry to do the same?
Changpeng Zhao calls for improved exchange transparency
A proof of reserve for all exchanges? In any case, this is what the CEO of Binance Changpeng Zhao wants. Proof of reserve consists of an analysis of the funds held by a custodian to ensure that the company owns the assets of each customer.
After revelations about a potential insolvency of the FTX platform, Changpeng Zhao redirected his 21 million FTT tokens to Binance for eventual sale. As a result, investors massively withdrew their cryptocurrencies from the FTX platform.
Faced with a serious lack of liquidity, FTX CEO Sam Bankman-Fried was forced to find funds to meet demand, and turned to Binance for a buyout deal. But this whole situation might not have happened if FTX had been transparent with its customers.
A day before its exchange fell, Sam Bankman-Fried claimed on Twitter that FTX had no liquidity problems. When his statement was contradicted by the takeover of his company, his tweet was deleted.
In addition, to prevent cryptocurrency exchanges from covering up false claims about their reservesand in order to reassure platform users, Changpeng Zhao encourages companies in the sector to be more transparent about their figures.
All crypto exchanges should do merkle-tree proof-of-reserves.
Banks run on fractional reserves.
Crypto exchanges should not.@Binance will start to do proof-of-reserves soon. Full transparency.— CZ 🔶 Binance (@cz_binance) November 8, 2022
“All cryptocurrency exchanges should implement proof of reserve in the form of a Merkle tree. Banks operate with fractional reserves. Crypto exchanges shouldn’t. Binance will soon implement proof of reserve. Totally transparent. »
This is good news for exchange users: by taking a first step towards more transparency, Changpeng Zhao shows the way for other companies in the sector.
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The proof of reserve to fill the lack of regulation?
Currently, few exchanges are transparent to their users. The most transparent companies are Coinbase, by its legal obligations since its IPO, and Kraken by its proof of reserve associated with a Merkle tree.
Binance wants to develop this proof of reserve by coupling it to a Merkel tree, a system widely used for the proper functioning of blockchains. By using cryptographic methods, this method allows verification of all assets of a given entity.
By being more transparent about its funds, Binance will gain even more trust from its customers. In parallel, its competitors will be forced to use proof of reserve so as not to lose market share.
Consequently, Changpeng Zhao asserts itself as having powers similar to a regulatory authority : by taking this decision, it can force companies in the sector to improve their transparency for their customers.
Despite everything, let’s not forget that decentralization is the main value of cryptocurrencies: by developing more user-friendly applications, exchanges are gradually transforming into banks dedicated to cryptocurrencies.
Bitcoin being originally created to escape the banking system, many investors are moving towards cold wallet solutions. The goal ? Manage their own funds, without an intermediary being able to have control.
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Always enthusiastic about new technologies, I gradually moved closer to Web3-related activities during the year 2021. Over time, I wanted to add my stone to the building. It was then that I became an editor, with the aim of explaining cryptocurrency-related topics to as many people as possible.
Timothy Bourbotte
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