Four Years After FTX, Crypto Exchanges Still Prove Assets Without Proving Solvency

A customer logs into an exchange account, copies a string of numbers, and traces a path through a Merkle tree. The verification page processes the request and returns a reassuring result: the customer's balance was included in the exchange's proof of reserves.

The verification is likely technically sound. It establishes that the account appeared in a dataset and that the exchange controlled wallets containing enough of a particular asset to cover the balances represented there.

What it can easily leave out, however, is whether every customer appears in that dataset, how much the exchange owes to lenders, whether the displayed coins have been pledged as collateral, and whether the company controlling the wallet is the same company legally required to repay the customer.

The interface on most exchanges makes the reserve verification process feel comprehensive and final, partly because people tend to assign more authority to cryptographic evidence than to corporate promises. But the result only establishes that an exchange demonstrated control over specified assets at a specified moment. A determination of solvency, by contrast, requires both a deeper and wider view of the company's obligations, ownership structure, and access to funds.

What Proof of Reserves Actually Proves

Proof of reserves became an industry priority after FTX collapsed in November 2022. FTX's failure was not a failure of wallet balances on display; it stemmed from customer funds being transferred to its affiliated trading firm, Alameda Research — precisely the type of related-party obligation that a reserve snapshot cannot capture. Binance founder Changpeng Zhao urged exchanges to publish wallet evidence, and major platforms began releasing dashboards, Merkle-tree tools, and reserve ratios. CryptoSlate documented that initial rush as exchanges tried to contain a crisis of trust, and later tracked the industry's attempts to develop more advanced forms of cryptographic verification.

An exchange can publish wallet addresses and sign a message using the private keys attached to those wallets, demonstrating control without moving the assets. A Merkle tree converts each customer balance into a cryptographic hash and combines those hashes into a single root. A customer can then use that structure to verify that their balance contributed to the root without gaining access to anyone else's account.

Newer systems incorporate zero-knowledge proofs, which can confirm that calculations followed a stated set of rules while keeping individual balances private. Binance, for example, integrated zk-SNARK verification into its reserve system after the first post-FTX disclosures.

Major platforms now publish different versions of this process. Binance provides a reserve dashboard and customer verification. OKX publishes wallet information and downloadable proof files. Kraken offers account-level verification for covered balances. Crypto.com provides a Merkle-based verification interface.

These systems improve on a model that required users to simply trust claims. They can expose false assertions about asset holdings, make large withdrawals more visible, and allow customers to confirm that their balances appeared in the published dataset.

But these systems have limits, and most of those limits originate from the dataset itself. A Merkle tree can authenticate the records placed inside it, but it cannot identify accounts omitted before the tree was built. It also cannot identify a bank loan, tax bill, legal judgment, or guarantee made to an affiliated company, leaving a rigorous mathematical process tied to a financial perimeter chosen by the exchange.

Most reserve reports measure assets at a particular time and may be published after an accountant, security firm, or internal team has completed its work. A snapshot can accurately represent just one moment without reflecting the company's normal position, since assets can move before or after the measurement. The resulting total reveals little about the origin of the funds or their availability during the next withdrawal surge.

Historical reporting, frequent snapshots, and permanent wallet archives help outsiders place each measurement in context. They increase the evidence available across time, but the resulting record remains focused on assets rather than the full financial condition of the company responsible for returning them.

Beyond the Wallets: A Maze of Liabilities

Crypto exchanges hold an unusual advantage over banks and brokerages because much of what they hold can be observed on public blockchains. Liabilities, however, are recorded across internal databases, bank accounts, contracts, and corporate ledgers, so public blockchain analysis provides little visibility into them.

Customer claims are recorded in an exchange database. Fiat balances depend on banks and payment companies. Derivatives produce gains and losses that change rapidly. Lending products, institutional loans, vendor bills, taxes, and legal claims can each belong to several companies operating across multiple jurisdictions.

A dashboard showing $10 billion in crypto provides no comprehensive account of whether the exchange owes $8 billion, $10 billion, or $15 billion, whether another creditor holds a claim over the same assets, or how readily those assets could meet a wave of withdrawals.

The Public Company Accounting Oversight Board has warned investors that proof-of-reserve reports vary widely because they fall outside its audit oversight, and may provide an inadequate basis for deciding whether a company has enough assets to meet its obligations.

The SEC chief accountant's warning addresses a related source of confusion: reviews, attestations, and agreed-upon-procedures engagements usually examine a narrower body of evidence than a financial-statement audit, even when an accounting firm performs the work.

An exchange may advertise the involvement of an outside accounting or security firm, though that firm may have been hired only to compare selected wallet balances with selected customer liabilities. An engagement of that kind can exclude corporate debt, internal controls, related parties, litigation, and the company's ability to remain in business, so its value depends on readers understanding exactly what the firm examined. The fragility of that arrangement became visible when Mazars, the accounting firm that produced one of the earliest post-FTX attestations for Binance, paused its work with crypto clients entirely in late 2022, leaving several exchanges without independent third-party verification.

Corporate Structure Complicates the Picture

The corporate structure of global exchanges adds another layer of difficulty. A single exchange brand can operate through numerous companies: one serving European retail customers, another contracting with institutions, another controlling wallet keys, and another employing staff. Lending, derivatives, and custody services can each operate under separate terms.

A reserve page may refer to assets held across a global group without identifying which company owns each wallet, while the customer agreement may assign repayment responsibility to a particular subsidiary. During insolvency, those distinctions help determine which law applies and how to prioritize creditors. The FTX bankruptcy proceedings made this painfully concrete: restructuring professionals and regulators spent years tracing customer assets across hundreds of shell and operating entities spread across multiple jurisdictions.

The most valuable disclosures identify the legal entities, products, and jurisdictions included in the review. They also explain what exactly is covered — fiat, derivatives, institutional accounts, margin balances, third-party custodians, and the like — and disclose what affiliates can do with customer assets.

There is currently no unified way to provide these results, so they vary across exchanges, producing public records that range from account-level cryptographic checks to broader statements about global holdings.

Coinbase's Audited Model

As a listed company, Coinbase publishes audited consolidated financial statements. Its annual filing covers debt, collateral, derivatives, commitments, subsidiaries, and related-party transactions alongside crypto holdings. Deloitte addresses the financial statements and internal control over financial reporting in its audit reports.

None of that can guarantee that Coinbase will avoid a withdrawal surge, management failures, or technical failures. It does, however, illustrate how much broader the available evidence becomes when reviewers examine the company as an economic whole rather than evaluating a collection of wallets.

The public approaches described here come from the exchanges' reserve pages and Coinbase's audited filing. They should be read as different disclosure models rather than a ranking of financial strength. Strong disclosure cannot guarantee survival, and limited public disclosure does not establish insolvency. The comparison shows what an outsider can establish from each platform's published evidence, and how much interpretation remains once the reader moves beyond wallet balances.

The Limits of Customer-Facing Verification

The industry often presents proof of reserves as a tool available to every customer. In practice, the process can require locating an account code, downloading a file, running software, and understanding how a hash connects to a Merkle root. Even after successful verification, the customer must understand that the result covers one account's inclusion rather than the completeness of the exchange's accounting records.

A user can confirm that their own balance appeared, but they cannot inspect every other customer account, reconcile the liability total with the company's general ledger, or identify an undisclosed corporate loan from a cryptographic branch. For many users, the verification badge becomes the practical endpoint, with phrases such as "verified," "fully backed," or a reserve ratio above 100% carrying a broader financial meaning than the published work supports.

CryptoSlate's analysis of Binance reserve movements illustrated how these dashboards can provide valuable information during periods of heavy withdrawals while also showing how dollar-denominated reserve totals can shift. Reserve data can inform an assessment of an exchange, though that assessment becomes credible only when the asset record is joined to information about liabilities and corporate responsibility.

What Full Financial Accountability Would Require

A credible solvency framework would bring blockchain verification and conventional financial reporting into one continuous system. It would require exchanges to prove control over on-chain assets, reconcile every customer balance with the general ledger, identify the legal entities responsible for repayment, disclose assets pledged to other creditors, and explain how fiat, derivatives, lending products, and institutional accounts are treated.

Historical reports would remain publicly accessible, while external firms would state the exact scope, methodology, and limits of their work. Large custodial platforms would also publish audited consolidated financial statements or equivalent regulatory disclosures covering debt, liquidity, collateral, related-party exposure, and customer-asset segregation.

Some regulators have begun moving toward parts of this framework. The EU's Markets in Crypto-Assets regulation, which began applying to crypto-asset service providers in 2024, requires custodians to segregate client assets from their own and maintain detailed records, bringing parts of the on-chain and traditional accounting worlds closer together.

Within that framework, cryptographic proofs would serve as clear and precise evidence about assets and customer balances, while financial audits and legal disclosures would establish how those assets relate to the obligations of the wider company. Each layer would address a different part of the same financial picture, allowing customers, auditors, and regulators to evaluate custody, accounting completeness, and corporate responsibility together.

FTX made visible reserves a basic expectation for any exchange holding customer funds. The next standard must connect those visible assets to every material liability and legal entity behind them, giving customers evidence that extends from the wallet address to the company responsible for returning their money.