Kraken CEO Criticizes Binance Reserve System

The collapse of cryptocurrency exchange FTX revealed the importance of proof of reserve (PoR) in avoiding situations involving misuse of users’ funds. While exchanges have started to proactively share wallet addresses to prove the existence of users’ funds, several entrepreneurs, including Kraken CEO and exchange co-founder Jesse Powell, have called Binance’s practice “nonsense” because exchanges do not include obligations.

According to Jesse Powell, a full proof-of-reserve audit should include the sum of client obligations, user verifiable cryptographic proof that each account is included in the total, and signatures proving the custodian’s control over wallets. While Kraken’s proof of reserve allows assets to be verified against the company’s liabilities, Powell continues to call out to other players who missed out on including negative balance accounts.

Powell said CoinMarketCap, which added proof-of-reserve (PoR) data to its platform this week, shared an incomplete proof of reserve because it lacked “cryptographic proof of customer balances and wallet control.” He reiterated that reserves are assets minus liabilities, not wallet lists. Binance’s recently released proof-of-reserve system allows users to verify their holdings using a Merkle tree.

However, Jesse Powell shared his dissatisfaction with the system not including negative balance accounts and said:

“The whole point of this is to understand if an exchange has more crypto under its watch than it owes customers. Hashing a row ID is worthless without the others.”

Powell also urged the media and journalists to avoid exaggerating this and misleading consumers. Instead, he recommended that they take the time to understand the reason behind the proof of reserve.

On the other hand, several community members rejected Jesse Powell’s need for a reliable auditor. On November 19, Binance CEO Changpeng Zhao confirmed that he has started work on creating a secure centralized exchange (CEX), which was put forward by Ethereum co-founder Vitalik Buterin. In that case, it seems like the best-case scenario would be to build a system that does this.