Grayscale Says No the Proof-of-Reserve Concept Citing Security Concerns

With the collapse of crypto exchange FTX, crypto exchange Binance said that they would be introducing Proof of Reserve concept to bring in the transparency of crypto holdings by firms operating in this space.


However, Grayscale Investments, the crypto investment product provider has refused to provide on-chain proof-of-reserves or other wallet addresses citing some of the “security concerns”.


While addressing investor concerns last week, Grayscale also laid out the complete information regarding the security and storage of its crypto holdings. They further revealed that all of its crypto assets underlying its investment products are stored in Coinbase’s custodial services.


Furthermore, Grayscale stated: “Coinbase frequently performs on-chain validation. Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure”.


The world’s largest digital asset manager further added that the “laws, regulations, and documents” defining Grayscale’s digital asset products prohibit the underlying products from “being lent, borrowed, or otherwise encumbered”.


Grayscale also shared a letter on Twitter co-signed by Coinbase chief financial officer Alesia Haas and Coinbase Custody CEO Aaron Schnarch. The letter breaks down Grayscale’s holdings by its investment products and also reaffirms that the assets are “secure” and each product has its own on-chain addresses”. It also notes that the crypto always belongs to the applicable Grayscale product.”


The Proof of Reserves basically seeks to improve transparency regarding the user assets held by any crypto firm. It ensure that an independent auditor has studied and proved the reserves of any specific crypto exchange or a business.


As said that proposition of Proof of Reserve gained traction after Binance chief Changpeng Zhao pitched for the same after the FTX collapse.


Binance said that they have decided to work with Ethereum co-founder Vitalik Buterin to implement a new Proof of Reserve protocol which is supposed to be more efficient and secure over the current methods.


The official announcement from Binance reads: “Binance’s CEO said Ethereum’s co-founder Vitalik Buterin may have gotten an idea of how exchanges can prove their reserves. He said Buterin is working on a novel proof-of-reserve protocol and wants Binance to be the first test case of the new protocol. Zhao said the Binance team will closely work with Buterin in that aspect. The estimated timeline for completion of the protocol could be in the next couple of weeks.” 

Furthermore, Binance had also proposed a Merkle-tree proof-of-reserve solution to reinstate and promote industry wide trust and transparency.