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Tron founder Justin Sun has criticized Coinbase – the largest cryptocurrency exchange in the US, for not adopting proof of reserves (PoR) measures.
Coinbase CEO Brian Armstrong responded by emphasizing that the company relies on its business model and regular audits to attract institutional investors, dismissing the need for PoR.
Justin Sun Calls on Coinbase to Implement PoR
Justin Sun asserted that Coinbase is one of the few major exchanges that has not adopted proof of reserves (PoR). He argued that Coinbase’s stance that PoR is not feasible is not enough to prevent risks similar to the problems FTX encountered, when the exchange misused user funds to cover its own losses, leading to a liquidity crunch.
Sun also pointed out that regular audits alone cannot ensure financial transparency, so he urged Coinbase to adopt PoR as a safeguard. He dismissed the notion that Coinbase, as a publicly listed company, could avoid insolvency, using the Signature Bank collapse to highlight that even regulated institutions can fail.
“When all the exchanges in the industry have implemented PoR, we are really puzzled when Coinbase claims that PoR is not feasible. The community does not expect Coinbase to provide a perfect solution immediately, but publicizing all addresses is not a difficult task. Auditing companies cannot prevent disasters from happening — FTX is a clear example. Additionally, being a public company does not prevent insolvency — Signature Bank is an example of this, and at the time, their market cap was higher than Coinbase. In short, implementing PoR is an effective way for Coinbase to self-regulate,” Sun explain.
Following the FTX collapse in November 2022, many crypto companies began publishing proof of reserves (PoR) reports to reassure investors about their financial transparency. These reports often include details about internal controls and risk management practices.
Binance, under former CEO Changpeng Zhao (CZ), implemented PoR measures, with Zhao calling for the use of Merkle trees to prove reserves. In a post in November 2022, CZ call all crypto companies adopt this approach. However, not everyone agrees with this approach. Kraken co-founder Jesse Powell has criticize PoR Merkle trees are a “prejudice,” arguing that they can create a false sense of security.
Other exchanges that offer proof of reserves include Kraken, Bitmex, Coinfloor, Gate.io, OKX, KuCoin, Huobi, Poloniex, Crypto.com, Deribit, and Bitfinex.
Justin Sun’s comments follow recent statements from Coinbase founder Brian Armstrong, who admitted that the company relies on annual audits but denied PoR. Armstrong was defending the company against allegations related to Coinbase’s newly launched Bitcoin wrapper, cbBTC.
“If you want an audit, Deloitte audits us every year, we’re a public company. I doubt our institutional clients want to see all their addresses, and it’s not our business to share them. This is what happens if you want to deposit a large amount of money into Bitcoin,” Armstrong write.
Exchanges Need to Do More Beyond Proof of Reserves
Sun’s grievance lies in the fact that cbBTC lacks proof of reserves and is unaudited, meaning it can freeze balances at any time. As BeInCrypto reported, he described cbBTC as “save me” Bitcoin, implying that a U.S. government call could seize all Bitcoin held through it. Another prominent user on X, Duo Nine, shared this concern.
“Coinbase CEO just admitted that you have to take their word for it. They will not provide any proof of reserves for the BTC they *claim* to hold, nor any proof of support for their new paper BTC called cbBTC. If they print too much paper BTC, they will go the way of FTX,” Duo Nine write.
As pressure to prove reserves increases in the cryptocurrency industry, concerns remain about the transparency and overall effectiveness of these measures. One problem is that risk management processes vary widely between companies, making it difficult for investors and customers to assess the true value of PoR. In many cases, the level of transparency provided is inadequate, and outside observers may not realize whether a company’s reserves are truly secure until a crisis occurs.
“We need to improve risk management, we need more standards…and we need some of that to be integrated into the crypto industry,” WSJ report recently quoted BitGo CCO Jeff Horowitz.
Furthermore, some critics argue that providing proof of reserves without showing liabilities undermines the purpose of these reports. A company could immediately move its funds after presenting a rough picture of its reserves, giving users a false sense of security. Without verifying both assets and liabilities, PoR may not provide a complete view of a company’s financial situation.
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