An illustration of a bank vault with stacks of coins.
Illustration: VikiVector/Getty Images; Protocol

Crypto isn’t as transparent as it claims

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Monday: why crypto firms are publishing proof of reserves and everything you need to know about the FTX collapse.

Off the chain

Crypto is all about transparency and accountability now! I think I read that on Twitter, unless the person who wrote it deleted their tweet, which seems to be happening a lot now. On Thursday, Pershing Square’s Bill Ackman praised then-FTX CEO Sam Bankman-Fried: “I have never before seen a CEO take responsibility as he does here.” Bankman-Fried politely thanked him … and then Ackman removed his tweet. “The problem with Twitter is that it is too easy to tweet,” Ackman then posted. “The good news is that you can recall the missile before it causes too much collateral damage.” FTX customers might define “collateral damage” a little differently here.

— Owen Thomas (email | twitter)

The wonder of transparency

A common theme in the liquidity crunches that struck crypto firm after crypto firm this year is allegations — often later substantiated — that they mishandled customer funds. Even if they hadn’t, how would they prove they were above board? That lack of transparency has only fueled the bank-run-like behavior of crypto customers. With Celsius and Voyager Digital’s bankruptcies fresh in their minds, FTX customers piled on the withdrawal orders before it, too, filed for Chapter 11.

In the case of FTX, suspicions were well-founded: Despite CEO Sam Bankman-Fried’s claims otherwise, his firm lent out more than half of customer assets — up to $10 billion — to Alameda Research, the investment firm he also controlled, according to The Wall Street Journal.

To save crypto, the industry’s turning to the blockchain. A number of crypto exchanges are pledging to publish “proof of reserves,” blockchain-based evidence that they actually hold the assets they claim.

  • Why doesn’t this already exist? That’s a fair question, and the lack of answers shows the opaque business practices that have sprung up around crypto. Think hedge funds but with even less regulation. It took the collapse of one of the world’s largest exchanges to force a rethink.
  • “We need consumers to have more trust in crypto in order to drive more mainstream adoption,” said Jason Baptiste, CEO and co-founder of crypto app YDY. “Proof of reserves does this.”
  • After CEO Changpeng “CZ” Zhao pledged to publish Binance’s reserves, the exchange put up a page on its website that links to various crypto wallets it claims to control. Binance says it has $2.2 billion in bitcoin and $2.5 billion in ether, among other tokens.
  • OKX and Huobi also said they’d publish proof of reserves.

Transparency is just a stopgap. This type of transparency is a good step by the industry to demonstrate security and solvency, said Michael Fasanello, crypto compliance officer at Anchain.AI, but ultimately regulation is necessary to ensure safety and security of assets, he added.

  • Congress is considering bills to regulate crypto, but none are close to passage. The EU’s MiCA rules are expected to roll out in 2024. Until those arrive, the industry will have to come up with its own measures, including proof of reserves or a self-regulatory organization like FINRA, to provide peace of mind to consumers and investors, Fasanello said.
  • There is no standard for what or how companies should publish, which is a problem, said Denelle Dixon, CEO and executive director of the Stellar Development Foundation: “Simply publishing documents without consistent standards doesn’t help the investing public much."
  • Coinbase argued in a blog post that there can’t be a bank run at Coinbase because it keeps all its customer funds secure and does not trade or use customer assets without their consent. “As you can review in our publicly filed, audited financial statements, we hold customer assets 1:1. Any institutional lending activity at Coinbase is at the discretion of the customer and backed by collateral,” wrote CFO Alesia Haas.

The outside world is now considering centralized crypto exchanges’ lack of transparency, but insiders in the DeFi camp have long criticized it. DeFi applications, they point out, automatically provide transparency on the blockchain. The problem with centralized crypto is that they haven’t fully embraced the blockchain, to their thinking. “The whole damn point of crypto is so that you don’t have to say, ‘I wonder what that company is actually doing with my money,’” Robert Leshner, founder of DeFi firm Compound Labs, wrote on Twitter. The real wonder is that we’ve had to wonder at all.

— Tomio Geron (email | twitter)


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On the money, FTX edition

On Protocol: FTX filed for bankruptcy Friday, sending further shockwaves through the crypto industry. Reuters reported that at least $1 billion in customer funds had gone missing.

Even before that, FTX had the White House's attention. “The administration has consistently maintained that without proper oversight, cryptocurrencies risk harming everyday Americans,” press secretary Karine Jean-Pierre said Thursday.

The fallout goes international. The Securities Commission of The Bahamas already suspended FTX’s license. Now, it’s “working closely” with the country’s Financial Crimes Investigation Branch to look into possible criminal misconduct.

Also on Protocol: Circle CEO Jeremy Allaire said FTX’s collapse will speed the arrival of regulation.

FTX.US resigned from the Crypto Council for Innovation.

FTX Arena is no more. Miami-Dade County and the Miami Heat have terminated their relationship with the bankrupt crypto exchange. The signage is already coming down.

On the money, everything else edition made a $400 million oopsie. The exchange accidentally transferred 320,000 ether to another exchange rather than a cold wallet. recovered the assets.

Toast shares soared after reporting a positive outlook. The payments and software company boosted its guidance for the fourth quarter and the full year as it reported earnings Thursday.

JPMorgan Chase and Mastercard have teamed up on direct payments. The pay-by-bank product would allow merchants to take ACH payments directly from a person’s bank account.

On Protocol: Fraud is the most common type of crypto complaint sent to the CFPB.

Credit card interest rates are going up — way up. The cost of carrying a balance on your credit card is now the highest it's been in more than 30 years.


Struggling to explain the FTX crisis to people outside the industry? You’re not alone. Here’s what podcaster Laura Shinis going with: “It’s like if the person you thought was Hermione actually turned out to be Voldemort.”

The Bank Policy Institute had its own spin: “Trading one token for another token or for a nonbank stablecoin is unconnected to the real economy. So, concerns about financial stability risks of crypto appear to have been overstated.”

And former SEC official John Reed Stark had a historical call-back: This is Bank of America buys Countrywide redux.”

Kristin Smith, executive director of the Blockchain Association, took the occasion to tidy up her Twitter timeline: “Just unfollowed SBF on Twitter. Felt good. Excited to move forward. Lots of work to do.”

Coming up

The Financial Brand Forum, which started Sunday, continues through Wednesday in Las Vegas. Magic Johnson, Jay Leno, and “Shark Tank’s” Daymond John are among the speakers and performers.

The Fintech Talents Festival is today and tomorrow in London. FTT brings together credit unions, technology providers, and fintechs to discuss how to evolve U.K. banking.

FinVolution Group reports earnings today. Its EPS was $0.34 for this quarter last year.

The U.S. House Committee on Financial Services will have a hearing tomorrow on U.S. capital flows to foreign adversaries. Congress is considering several bills meant to increase transparency and accountability in business dealings with foreign companies, particularly those in China.

The U.S. Senate Committee on Banking, Housing, and Urban Affairs will also have a hearing on Tuesday. The hearing covers regulatory oversight of banks and credit unions, with witnesses representing the Board of Governors of the Federal Reserve System, the National Credit Union Administration, the FDIC, and the Office of the Comptroller of the Currency.

The sixth annual RegTech Summit happens in New York this Wednesday. The all-day event focuses on compliance innovation and supporting regulatory change.

FIMA Europe is this Wednesday and Thursday in London. The financial data management trade show includes speakers from HSBC, Deutsche Bank, and BNP Paribas Fortis.


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Thanks for reading — see you tomorrow!

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