Kraken at the forefront of crypto PORs

Jesse Powell, CEO of Kraken, one of the largest crypto exchanges, recently criticized the Proof of Reserves lists launched in recent weeks, saying that the PoR audit requires cryptographic proof. 

This is what was stated in yesterday’s tweet on the official Bitcoin News account: 

Kraken’s Jesse Powell stressed that a #crypto POR audit “requires cryptographic proof of client balances and wallet control.” https://t.co/0lDQDHCLNI

— Bitcoin News (@BTCTN) November 23, 2022

“Kraken’s Jesse Powell stressed that a crypto POR audit requires cryptographic proof of client balances and wallet control.”

Let’s examine in more detail what is going on. 

Proof of Reserve for crypto: Kraken’s CEO speaks

On Tuesday, among the many conversations regarding Proof of Reserves for the cryptocurrency exchange, Kraken CEO Jesse Powell shared a screenshot of the Proof of Reserves dashboard recently launched by CoinMarketCap.

Powell on the matter said he wanted to be more assertive in reporting problems and pointed out that a PoR audit requires cryptographic proof of customer balances and portfolio control. 

Kraken’s Jesse Powell had much to say about the recent FTX meltdown, as the CEO of the exchange recently said that the fallout from the trading platform was a massive setback. 

Powell also talked about the Proof of Reserve (PoR) subject in recent times, as Kraken has been a member of Nic Carter’s Proof of Reserve or “Wall of Fame” list for a while. 

The Kraken exchange is known to have a “Full PoR” and is described as auditor-assisted user validation with a Merkle approach, point in time. 

Recently, cryptocurrency price aggregation website CoinMarketCap (CMC) announced the launch of a Proof of Reserves dashboard and Binance CEO Changpeng Zhao (CZ) tweeted about the CMC PoR dashboard: 

“Coinmarketcap has released a new exchange reserve dashboard feature.”

On the same day of CZ’s tweet, Kraken executive Jesse Powell in turn tweeted about the new CMC feature, writing: 

“I said I would be more assertive in reporting the problems. This is one of them. Reserves = assets minus liabilities. Reserves = list of portfolios.”

In addition, Powell added that the Proof of Reserves audit requires cryptographic proof of client balances and portfolio control, adding: 

“The Proof Of Reserves audit must have: 1. the sum of the client’s liabilities (auditor must exclude negative balances). 2. user-verifiable cryptographic proof that each bill was included in the sum. 3. signatures proving that the custodian has control of the portfolios.”

The need for PoR: another consequence of FTX 

After the collapse of the FTX exchange and the subsequent collapse of the entire crypto market, many demands were made on major exchanges as investor confidence began to waver. 

These include the PoR (Proof of Reserves), which is not difficult to fully implement. However, one wonders whether the CEOs of the exchanges will keep their promises of Merkle-proof audits. 

Indeed, the POR topic comes at a time when the crypto community is nervous and, at the same time, exchanges have promised to share PoR audits with Merkle proof. Thus, numerous exchanges have shared address lists and, even the analytics firm Nansen, has published a dashboard of exchange portfolios. 

When Powell shared his views on Twitter, he also shared a link from archive.org to a document titled “Proving Your Bitcoin Reserves.” The paper discusses how flat lists of accounts/sales can be obtained, the Merkle approach to proving liabilities and proving assets. 

Specifically, the paper states: 

“Proving control of assets is the intuitive and straightforward solution: sign a declaration of ownership with all relevant private keys.”

While the paper and Jesse Powell explain that full PoR is easily obtained through The Merkle approach and by demonstrating ownership of private keys, a number of exchange CEOs have promised to share not only cold and hot wallet addresses, but also audits based on the Merkle approach. 

One thing is certain: the crypto community remembers such promises, thus exchange CEOs must now take action. 

Even crypto exchange Kraken is on high alert after FTX collapse 

Just over a week ago, the Kraken exchange also had to act to protect itself after the disastrous FTX collapse. Indeed, the exchange blocked a number of crypto accounts at the direction of the authorities because they could be traced back to FTX, Alameda Research and their executives.

Indeed, Kraken, like all other exchanges in this bearish and uncertain market phase, has raised the bar in terms of both security and balance sheet hedging. 

The closure of some crypto accounts has come to light following the detection of accounts that appear to have been used to make unauthorized transfers on FTX. Following this discovery, investigations began, leading to the problem and the subsequent closure of some crypto accounts for Kraken. 

Kraken’s official profile spoke about this on Twitter, writing: 

“Kraken spoke to law enforcement regarding a handful of accounts owned by bankrupt FTX group, Alameda Research and their executives. Those accounts have been frozen to protect their creditors. Other Kraken customers are not affected. Kraken maintains full reserves.”

Many of these actions, not just on Kraken’s part, were necessary in order to distance themselves from what happened to FTX. Trust has begun to waver, investors are now afraid, and the only way out for exchanges is to be clear and transparent in every move. 

As more evidence and hard data is available about the security and strong liquidity of exchanges, the more secure and protected users feel, despite everything. That is why Kraken is blocking activities, even though, as the platform itself points out, it was only and only related to accounts traceable to FTX.