Reserve Reporting from the Bitcoin Sector Can't Be Trusted, Claims a U.S. Audit Watchdog

Investors shouldn't rely on proof-of-reserve assessments since they aren't audits, according to the Public Company Accounting Oversight Board.

According to the U.S. authority that regulates auditing standards, proof-of-reserve reports frequently praised by crypto companies to reassure clients that their money transactions are in secure hands shouldn't be trusted.
The reports that tally reserve holdings as evidence a company is protected against financial runs don't provide "meaningful assurance," according to the Public Company Accounting Oversight Board (PCAOB), an industry-funded watchdog operating under the authority of the Securities and Exchange Commission. The board stated in a statement on Wednesday that they are not audits and that they don't adhere to any specific standards.

Proof-of-reserve reports are frequently used by U.S. digital assets businesses, such as Kraken's report that it held $19 billion in bitcoin and ether and Crypto.com's data in December that client assets were fully backed one-to-one, as well as by international platforms like Binance, in the absence of the comprehensive audits typically seen in traditional finance.
These asset verifications are superficial and "do not address the liabilities of the crypto entity, the rights and duties of the digital asset holders, or whether the assets have been borrowed by the crypto entity to make it appear they have sufficient collateral," according to the PCAOB. The board further stated that such records in no way demonstrate a company's internal controls or governance.

"Proof of reserve reports are inherently restricted, and customers should exercise great caution when relying on them to assume that there are sufficient assets to meet customer liabilities," the PCAOB noted in its statement.