1. ⁠A Proof of Reserves casts light on half of the picture. It may prove that the crypto exchange ensures that the clients’ balances it holds are backed by real assets, but if it does not concurrently release a Proof of Liabilities, clients cannot rest assured that it has sound financial standing. If the exchange has its own exchange coin, then an exhaustive Proof of Reserves should also include the information in regards to whether the assets exceed liabilities when this coin is excluded.

2. ⁠A Proof of Reserves only demonstrates that the exchange does possess on-chain funds at the point in which the audit was conducted, but it cannot guarantee that the exchange has sole possession of the private keys. These private keys could very well have been duplicated by attackers. Alternatively, private keys could have been lost since the audit.

3. ⁠A Proof of Reserves cannot be taken as conclusive evidence that the crypto exchange has not borrowed its funds from elsewhere in order to pass the audit. CZ, the founder of Binance, famously said on November 13, 2022, “If an exchange have to move large amounts of crypto before or after they demonstrate their wallet addresses, it is a clear sign of problems. Stay away. Stay #SAFU.” Just because an exchange managed to publish a Proof of Reserves means that it has been reliably holding on to its clients’ assets.

4. ⁠Unless the Proof of Reserves are conducted by competent and independent third parties, there is a lack of mechanisms that safeguard the integrity of the auditing firm. The auditors could collude with the crypto exchange to misappropriate clients’ funds.

References: https://www.kraken.com/proof-of-reserves

originally posted on r/cryptocurrency