As the regulators in the United States are keeping a strict eye on the crypto sector, a recent comment from the watchdog has brought the firms under question. The audit standards overseeing body has raised speculations over the crypto firms and their methods.
According to a statement released by the Public Company Accounting Oversight Board (PCAOB), the proof-of-reserve reports which are routinely released by crypto firms to assure customers that their financial transactions are in secure hands shouldn’t be trusted.
The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. It is an industry-funded watchdog that works under the authority of the Securities and Exchange Commission (SEC).
In its press release, the watchdog said the reports that tally reserve holdings as evidence of the company’s protection against financial runs don’t provide “meaningful assurance.” Additionally, it claimed that they’re not audits and they don’t comply with any particular standard.
Sources reveal that in the absence of the full-scale audits which are ideally present in the traditional finance system, proof-of-reserve reports are commonly used by U.S. digital assets businesses. Companies like Kraken mentioned in its report that it held $19 billion in Bitcoin and Ether and Crypto.com’s report from December highlighted that client assets were fully backed one-to-one.
According to the PCAOB, these reports and their assessments follow a flawed mechanism and have loopholes that eventually hurt investors. It stated:
These verifications of assets take a simple snapshot and “do not address the crypto entity’s liabilities, the rights, and obligations of the digital asset holders, or whether the assets have been borrowed by the crypto entity to make it appear they have sufficient collateral.
Additionally, the PCAOB claimed that such documents (the firms’ reports) definitely don’t prove anything about a company’s internal controls or governance. It said that the “proof of reserve reports are inherently limited, and customers should exercise extreme caution when relying on them to conclude that there are sufficient assets to meet customer liabilities.”
However, this is not the first time the regulators have raised concerns over the proof-of-reserve reports. In December, the SEC said that they were closely observing these reports and felt that they omitted a lot of necessary data. Paul Munter, the interim chief accountant, claimed that the authorities are becoming more aware of what’s happening in the industry. They will consider making a reference to the division of enforcement if they discover actual patterns that they believe to be problematic.