FTX Auditor Is Pioneering Proof of Reserves

The proof-of-reserves specialists have audited many in crypto — including FTX

article-image

Source: Shutterstock

share

As FTX customers lament their missing funds, other major crypto exchanges including Kraken, Gate.io, Ledn and Nexo are taking steps to verify their holdings. But each of these companies share something in common with FTX — an auditor.

California-based Armanino is a top-25 accounting firm that began working on crypto in 2014 and has perhaps become crypto’s most recognizable auditor. Armanino’s calling card is proof of reserves, where it gained a first mover advantage after launching a cryptoasset assurance platform in 2020.

Read more: What Is Proof of Reserves and Can It Build Back Trust?

“They are the only accounting firm in the world to issue independent proof of reserve attestations so engaging another firm wasn’t an option at the time [that Nexo began its proof of reserves],” a Nexo spokesperson told Blockworks.

Armanino is smaller than the auditors that deal with most major financial firms, but some exchanges deploy the longtime digital asset auditor selectively. A spokesperson for Ledn said the company uses big-four accounting firm Deloitte as its external auditor, but it relies on Armanino for its proof of reserves.

But Armanino also does more bread-and-butter auditing for crypto companies that are still underregulated. FTX, which frequently touted its self-regulation and auditing, employed Armanino to check the finances of its US arm in 2021.

Armanino gave FTX US a clean audit, though the privately-owned FTX did not have to follow the strict accounting standards of a public company. The firm stood by the validity of its FTX audit in a comment to the Wall Street Journal. FTX CEO John Ray said in a bankruptcy court declaration that the company’s former audits should not be trusted.

Even if Armanino isn’t entirely to blame for its positive FTX audit, some still find the firm’s huge market share a cause for concern. 

“I think you want more than one auditor for each exchange,” Nicholas Gans, the director of research and development at Inca Digital, said. “And if you have one that’s kind of representing the whole crypto ecosystem, and that all the exchanges go to, I think that presents a lot of potential conflicts of interest.”

Gans said he hopes to see an agreed-upon framework for crypto company audits, where the space is more clear on what data firms are expected to share with auditors. 

Until then, proof of reserves is crypto’s trust-builder du jour.

Some in the cryptosphere are questioning Armanino’s proof of reserves systems, which sometimes rely on software and information from the companies being audited. Ethereum’s Vitalik Buterin has advocated for using more-advanced cryptographic proofs to show solvency.

But auditing best practices often become obvious only after audits fail.

“A lot of it’s post-hoc: Things blow up, and they find out risk factors that way,” Gans said.

Armanino, Kraken and Gate.io did not return requests for comment.


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

MON - TUES, OCT. 7 - 8, 2024

Blockworks and Bankless in collaboration with buidlbox are excited to announce the second installment of the Permissionless Hackathon – taking place October 7-8 in Salt Lake City, Utah. We’ve partnered with buidlbox to bring together the brightest minds in crypto for […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Research Report Templates.png

Research

ZKPs enable efficient offchain transaction processing and validation, resulting in increased throughput and reduced fees. Solana's ZK Compression leverages ZKPs to minimize onchain storage costs, while Sui's zkLogin streamlines user onboarding by replacing complex key management with familiar OAuth credentials.

article-image

Plus, is Polymarket this cycle’s breakthrough mainstream app?

article-image

The crypto asset manager lowered its planned fee from 0.25% to 0.15%, undercutting its competitors

article-image

Plus, a look at planned ETH ETF fees and how they differ from their BTC counterparts

article-image

North Korea suspected in breach of Indian exchange’s multisig wallet

article-image

Plus, Sanctum’s CLOUD token has officially launched — but not without problems

article-image

It’s not yet clear whether Donald Trump is pumping bitcoin. But an unofficial memecoin is still seeing benefit.