TRON founder Justin Sun has criticized Coinbase, the largest US cryptocurrency exchange, for not adopting proof-of-reserves ( PoR ) measures.
Coinbase CEO Brian Armstrong responded by emphasizing that the company relies on its business model and regular audits to attract institutional investors, dismissing the need for PoR.
Justin Sun Calls on Coinbase to Adopt PoR
TRON founder Justin Sun has criticized Coinbase for being one of the few major exchanges that has not adopted proof of reserves (PoR). Sun believes that Coinbase's stance that PoR is not feasible is not enough to prevent risks similar to what FTX faced, when the exchange collapsed after using user funds to cover its losses, leading to a liquidation crisis.
Sun also pointed out that regular audits alone are not enough to ensure financial transparency, urging Coinbase to adopt PoR as a precautionary measure. He also dismissed the notion that Coinbase, as a public company, cannot go bankrupt, using the collapse of Signature Bank as an example to show that even regulated institutions can fail.
“When all the exchanges in the industry have adopted PoR, we find it strange that Coinbase claims that PoR is not feasible. The community does not expect Coinbase to provide a perfect solution immediately, but revealing all addresses is not a difficult task. Auditing firms cannot prevent disasters from happening — FTX is a clear example. Furthermore, being a public company does not prevent bankruptcy — Signature Bank is an example of this, and their market Capital at the time was higher than Coinbase's. In short, adopting PoR is an effective way for Coinbase to self-govern,”
Sun explained .
Following the FTX collapse in November 2022, many crypto companies began publishing proof of reserves (PoR) reports to reassure investors about their financial transparency. These reports often include details about internal controls and risk management practices.
Binance, under the leadership of former CEO Changpeng Zhao (CZ), has adopted PoR measures, with Zhao advocating the use of Merkle-tree Proof of Reserves . In a November 2022 post, CZ called on all crypto companies to adopt the method. However, not everyone agrees with the approach. Kraken co-founder Jesse Powell criticized PoR Merkle-tree as “misunderstood,” arguing that it could create a false sense of security.
Other exchanges offering Proof of Reserves include Kraken, BitMEX, Coinfloor, Gate.io, OKX, Kucoin, Huobi, Poloniex, Crypto.com, Deribit , and Bitfinex.
Justin Sun’s comments follow recent statements from Coinbase founder Brian Armstrong, who admitted that the company relies on annual audits but denied PoR. Armstrong defended the allegations against Coinbase’s newly launched wrapped Bitcoin product, cbBTC,
“If you want an audit, Deloitte audits us every year, we’re a public company. I doubt our institutional clients want people to look at all their addresses, and it’s not our job to Chia them. This is what it looks like if you want a lot of institutional money to go into Bitcoin,”
Armstrong wrote .
Exchanges need more than proof of reserves
Sun’s concern is that cbBTC lacks proof of reserves and is unaudited, meaning it can freeze balances at any time. As BeInCrypto reported, he described cbBTC as “Bitcoin trusts me,” implying that a subpoena from the US government could seize all the Bitcoin held through it. Another popular user on X, Duo Nine, Chia this concern.
“Coinbase CEO just admitted that you have to take them at their word. They will not provide any Proof of Reserves for the BTC they *claim* they have, nor proof of backing for their new paper BTC called cbBTC. If they print too much paper BTC , they will go the way of FTX,”
Duo Nine wrote .
As the push for proof of reserves grows in the cryptocurrency industry, concerns remain about the transparency and overall effectiveness of these measures. One problem is that risk management protocols vary widely between companies, making it difficult for investors and customers to assess the true value of PoR. In many cases, the transparency provided is insufficient, and outside observers may not know whether a company’s reserves are truly safe until a crisis occurs.
“We need better risk management, more guardrails… and we need some of that installed in the crypto industry,”
WSJ reported recently, citing Jeff Horowitz, CCO of BitGo.
Furthermore, some critics argue that providing proof of reserves without showing liabilities undermines the purpose of these reports. A company could move funds shortly after presenting a snapshot of its reserves, creating a false sense of security for its users. Without verifying both assets and liabilities, PoR may not provide a complete picture of a company’s financial health.
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