According to Kraken CEO, Binance’s proof-of-reserves are useless without liabilities.

Powell claims that in order for a proof-of-reserve audit to be complete, it must include the total of client liabilities, user-verifiable cryptographic proof that each account was included in the total, and signatures demonstrating the custodian’s authority over the wallets.

Disclaimer: The post has been updated to include CZ, CEO of Binance, answer to Jesse Powell, CEO of Kraken, on his concerns.

The failure of the cryptocurrency exchange FTX highlighted the value of proof-of-reserves in preventing circumstances involving the theft of users’ money. Despite the fact that exchanges have proactively begun disclosing wallet addresses to demonstrate the presence of users’ assets, many business leaders, like Kraken CEO and co-founder Jesse Powell, have criticized the move as “pointless” because exchanges do not account for liabilities.

Powell claims that in order for a proof-of-reserve audit to be complete, it must include the total of client liabilities, user-verifiable cryptographic proof that each account was included in the total, and signatures demonstrating the custodian’s authority over the wallets. Powell continues to criticize other participants who have neglected to include accounts with negative balances, despite the fact that Kraken’s proof-of-reserve does allow verification of assets against the company’s obligations.

In the past, Powell criticized CoinMarketCap for publishing a proof-of-reserves that was insufficient since it lacked “cryptographic evidence of client balances and wallet management.” He emphasized that reserves are assets less obligations, not a list of wallets.

A Merkle tree can be used by users to verify their assets utilizing Binance’s recently introduced proof-of-reserves technology. Powell expressed his disappointment that the system did not take into consideration accounts having negative balances, adding that:

The goal of the whole thing is to determine whether an exchange has more cryptocurrency in its possession than it owes to customers. A row ID’s hash is useless without the rest of the row ID.
Additionally, he urged journalists and the media to avoid “overselling it and misleading customers.” He advised them to instead take the time to comprehend the rationale behind proof-of-reserves.

Few, though, in the neighborhood disagreed with Powell’s assertion that a reliable auditor was necessary. In response to the charge, Binance CEO Changpeng ‘CZ’ Zhao denied it by outlining the company’s planned plans, which call for external auditors to examine the exchange’s proof-of-reserve data.

The community endorsed CZ’s answer to the issues brought forward by the CEO of Kraken. Some members, however, criticized CZ for being hypocritical in preventing public commentary on the post that welcomed “questions and checks.”

On Nov. 19, CZ announced that it had begun developing a secure centralized exchange (CEX), a proposal proposed by Vitalik Buterin, the co-founder of Ethereum.

The best-case scenario in this situation would be to create a mechanism that forbids crypto exchanges from withdrawing a depositor’s money without authorization.