WASHINGTON, D.C. – U.S. Senators Thom Tillis (R-NC) and John Hickenlooper (D-CO) introduced the Proving Reserves of Others Funds (PROOF) Act, bipartisan legislation that would establish strong safeguards against instances of unethical co-mingling of customer funds while also requiring digital assets institutions to submit to a monthly proof of reserves (PoR) inspection by a neutral third-party auditing firm.
PoR is an already-existing industry best practice that is used to verify whether an institution holds sufficient reserves to back its customer balances. Under the PROOF Act, the results of monthly PoR inspections are submitted to the U.S. Department of the Treasury, which is required to post the information publicly. Failure to submit to this inspection would result in a civil fine, derived through a tiered system that increases penalties for repeat offenders.
“The FTX fiasco was a direct result of mismanagement and grossly unethical decision-making, leading to significant fraud and loss of investor funds. Americans deserve better assurances regarding their deposits and the solvency of these platforms,” said Senator Tillis. “The PROOF Actwould improve regulation of the cryptocurrency industry by explicitly prohibiting the co-mingling of funds, while also setting a strong transparency standard with the already-used industry best practice of PoR. Combined, these two steps will help build trust that investors, both institutional and retail, can engage in digital asset markets.”
“FTX’s collapse made one thing clear: lack of customer protections in crypto will leave consumers in the lurch,” said Senator Hickenlooper. “These commonsense safeguards make crypto companies more transparent and hold them to the same standards as everyone else.”
“The PROOF Act standardizes solvency reporting requirements for digital asset exchanges and custodians in a way that will significantly improve consumer safety. Proof of Reserves (PoR) is an industry best practice that combines the cryptographic nature of digital assets with strong traditional audit standards to achieve greater industry transparency than is possible in traditional finance. Creating a framework that standardizes how digital assets firms indisputably prove the soundness of their platforms is overdue and will help investors, consumers, and even regulators identify and avoid the blowups that rocked the industry last year. We thank Sens. Tillis and Hickenlooper for introducing this important legislation and for their leadership on this issue. We believe this legislation will help grow the adoption of digital assets and blockchain technology while helping to modernize our financial system and ensuring the United States maintains its position as the world’s premier capital market.” – Alex Thorn, Head of Firmwide Research at Galaxy
“In the wake of the FTX scandal, intermediaries in the digital asset industry have settled on a standard of asset and liability disclosures, known as Proof of Reserves. The PROOF Act acknowledges these industry-led self-regulatory efforts and creates a framework to further protect consumers in the digital asset space. This Act ensures that digital asset platforms cannot comingle client and operating capital, and requires disclosures that assets held by platforms match customer liabilities. This unrivaled transparency is uniquely possible due to the cryptographic properties of digital assets. The PROOF Act ensures that another covert insolvency like FTX, Quadriga, or Mt Gox can never again occur.” - Nic Carter, General Partner at Castle Island Ventures
“The PROOF Act is exactly what users of digital assets need in the US. By banning the comingling of assets and requiring PoR, everyday users will be able to use crypto with peace of mind.” – Rich Dewey, Proven
Background:
The implosion of the digital asset platform FTX was largely possible due to two key organizational weakness and failures: (1) FTX co-mingled customer funds with its institutional and proprietary funds and (2) FTX diverted significant portions of its customer deposits to its subsidiary, Alameda Research, resulting in a systemic lack of adequate reserves to back its customer balances.
The Proof Act seeks to address these dual issues by establishing clear and concrete customer protections, while also creating an important mechanism to provide greater transparency into digital asset exchange and custodial operations. Specifically, the PROOF Act would:
- Establish regulatory standards on how digital asset institutions can hold customer assets, including a prohibition of the co-mingling of customer funds
- Require digital asset exchanges and custodians to submit to a Proof of Reserves inspection by a neutral third-party
Full text of the bill may be viewed here. Read more about the bill here and here.
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