Binance has announced its proof of reserves
Binance has taken solid steps to increase confidence in the platform. The first step has been showing solid proof of reserves, albeit only for Bitcoin at this stage.
This is nice. But, reserves are not meaningful by themselves. This is for at least two reasons: debt and reserve form.
Debt
Basic capital structure theory tells us that a firm’s debt can be more than its cash holdings. And, the debt can be on various terms, collateral requirements, and interest rates.
Binance has asserted that it has no debt. While we have no reason per se to disbelieve Binance and its CEO – CZ – many said the same about FTX before its fall. Thus, it would be helpful to have more information about Binance’s debt.
Reserve form
The form of the reserves matters. If the reserves are in a volatile form, they can easily dissipate. Alternatively, if the reserves are in an illiquid or tightly controlled cryptocurrency, the notional reserve amount might well be fanciful.
At the time of writing, Binance has asserted that it holds client assets 1:1, implying that it holds one BTC for every BTC deposited. However, their proof of reserves so far only covers BTC. They have not yet released proof for other cryptocurrencies. Nevertheless this is a step in the right direction.
Hopefully others will follow
Binance has shown leadership in attempting to increase confidence in the crypto space. Taking steps to show reserves in near real time is a positive step. This will be even more the case as they show reserves for other popular cryptos. The main missing piece is debt. At present, we can only take Binance’s word for it that they have no debt. But, trust in the crypto space has been eroded. Further, proof or evidence of this would greatly enhance their reserve disclosures.