Arthur Hayes warns investors against crypto companies without proof of reserves
Arthur Hayes has cautioned customers against investing in custodians that won’t publish a Proof of Reserves (PoR) Audit. He made the comment on Twitter on November 20, 2022, in light of the FTX contagion that has wrecked several crypto companies.
Dangerous for customers of crypto companies without PoR
Former BitMEX CEO Arthur Hayes believes that investing in crypto firms that won’t publish a proof of reserves audit is reckless and might lead to loss of funds.
He described it as akin to engaging in “pull and pray.”
“When an entity holding crypto won’t publish a proof of reserves, we then get to play a fun game of “Pull and Pray. May the lord be with you.” He tweeted.
Ever since the FTX debacle spiraled into a full-blown disaster that has caused numerous firms a significant amount of exposure and some to the brink of bankruptcy, there have been growing calls for crypto exchanges and financial services to undergo proof of reserve audit to ensure transparency.
A Proof of Reserves is an independent audit conducted by a third party that seeks to ensure that a custodian indeed holds the assets it claims to hold on behalf of its clients. This auditor takes an anonymized snapshot of all balances held and aggregates them into a Merkle tree — a privacy-friendly data structure that encapsulates all client balances.
Proof of Reserves is beneficial to both users and custodians. Consumers can partake in the transparent process of auditing digital asset reserves while the custodians gain their users’ trust, which helps in user customer retention.
Another advantage worth mentioning is that PoR is also an appealing prospect for regulators as this self-regulating measure helps to show that the industry is ready for full-scale global adoption.
Binance recently agreed to work alongside Vitalik Buterin to implement a new proof-of-reserves protocol that is supposed to be more efficient and secure than the current methods.
A number of centralized exchanges (CEXs) including, Kraken, Bitmex, Coinfloor, Gate.io, and HBTC, have completed their proof-of-reserve audits while the likes of OKX, KuCoin, Huobi, Poloniex, Crypto.com have confirmed plans to follow suit.
Grayscale says no to PoR
Despite the growing calls for crypto custodians to perform PoR in the spirit of transparency, some firms have decided not to go down that route. On November 20, 2022, Grayscale said it was not planning to undergo a Proof of Reserves audit.
The billion-dollar crypto fund said it had no reason to do a PoR, citing that the “panic sparked by others is not a good enough reason to circumvent complex security arrangements” that have kept its investors’ assets safe for years.
