Topic
What is proof of reserves?
Last reviewed:
- Quick fact 1
The SEC’s chief accountant warned that proof of reserves work is not the same as a financial statement audit.
- Quick fact 2
Such reports may not show whether a platform’s liabilities exceed its assets.
- Quick fact 3
FDIC insurance does not cover a crypto company that fails.
Source: FDIC: What the public needs to know about FDIC deposit insurance and crypto companies
The short lesson
Proof of reserves is a report a crypto exchange or custodian publishes to show it holds the assets its customers deposited. Often it uses blockchain data to show the company controls certain wallets at a point in time.
That sounds reassuring. But the SEC’s chief accountant has warned investors not to treat these reports like audits. Here is what they can miss:
- Liabilities. Showing assets does not show what the company owes. A company can hold a lot and still owe more.
- A single moment. Assets could be borrowed for the snapshot and moved away after.
- Control and ownership. Holding keys to a wallet is not the same as owning the assets free and clear.
- Scope. The report may cover only some assets or some accounts.
A report is better than nothing, but it is a starting question, not an answer. The deeper lesson is what a custodian is and who holds the keys.
Related terms
Go deeper in Lesson 7: What an exchange is
Common questions
Is proof of reserves an audit?
No. It usually gives much less assurance than a full financial statement audit.
Does it prove an exchange can pay everyone back?
Not by itself. It may not show what the company owes.
Who checks the report?
Sometimes an outside firm does limited work. Read what it actually checked.
What else can I do?
Learn who holds your keys, and read the company’s terms about how it holds customer assets.