The Proof of Reserves Does Not Hold Up Under Closer Inspection

The number of opinions and reports that have been circulating on the internet as a direct result of the failure of FTX and Alameda Research is one of the results of this failure.

Numerous parties with a stake in the crypto market have voiced their opinions and published reports analyzing the current precarious state of the market, the ways in which its effects can be mitigated, and the next steps that should be taken.

And as a result of this, the Bank of America (BAC) gave its own perspective in a research project that was reported on Thursday. In particular, the bank condemned the usage of the concept of "proof of reserves" by cryptocurrency exchanges all over the world.

The bank believes that making a public declaration of the available assets in order to appease customers and reassure them that their possessions are secure is not even close to being the best course of action to take.

One can see that quite a few cryptocurrency exchanges have reported their assets by using Merkle trees in order to regain the confidence of their users, especially in light of the entire saga involving FTX. This is especially true in light of the fact that FTX was involved.

The "harsh trees" that are used are essentially data structures that also act as a financial road map for the consumers. This allows the process to function well.

The Bank of America, on the other hand, has rejected this strategy and advocated for the implementation of changes in the event that the process is ever taken into consideration.

Large Margin for Manipulation Available

The bank has expressed some of its concerns, including the fact that making the availability of assets at a certain period in time public does not always ensure that the game will be played fairly.

It is possible to take advantage of the process in a variety of different ways, including fabricating the report by borrowing assets right before the Proof of Reserves is made, engaging in shady acts such as forming partnerships with "audit firms" that do not exist, and so on.

Additionally, the Bank of America has emphasized the need of stablecoins being subjected to third-party audits and having appropriate regulatory oversight. According to the findings of the paper, there should also be a clear difference in the cryptocurrency industry between the roles of market makers and trading platforms.

It would appear that there is no movement in the market. quite precarious in light of the events that have transpired over the course of the past few days, despite the fact that the Bank of America has expressed a vote of confidence if the necessary steps are taken.