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The PROOF Act prevents fund co-mingling in order to prevent crypto-like collapses.
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Third-party audits of crypto firms’ PoR monthly aim to ensure that user funds are held securely.
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Publicly disclosing reserve reports will help restore investor confidence in digital assets.
After FTX’s failure in the United States, U.S. Senators Thom Tillis, John Hickenlooper and others have reintroduced The Proving Reserves of Others Funds Act (PROOF). This bill focuses on the crypto industry’s risks, with a focus on safe handling and transparency of customer money.
The proposed law addresses the key weaknesses revealed by FTX, such as mixing company and customer funds. The bill will set rules for PoR checks, and prohibit fund mixing. It aims to restore investor confidence and provide clear protections for crypto users.
What does the PROOF Act require? No Fund Mixing and Monthly Reserve Checks
The PROOF Act establishes firm rules on how digital asset institutions will manage customer funds. It prohibits, in particular, the co-mingling or mixing of customer funds and institutional or proprietary assets.
This practice, which was a major factor in FTX’s failure, allowed crypto firms to misappropriate customer deposits for their purposes, creating enormous risks. The bill aims to create a safer environment for institutional and retail investors by enforcing the protections.
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The bill also requires independent auditors to conduct monthly Proof of Reserves inspections to confirm that institutions have assets matching their deposits. Auditors must verify results before sending them to US Treasury for public disclosure.
This requirement will allow investors to easily verify that exchanges and custodians are able to meet their obligations. If you fail to comply with the regulations, you will be fined. Repeat offenders will face increased penalties.
How PoR helps to protect customer money
Proof of Reserves is a crypto-technical tool that allows for transparency about a company’s financial health. Exchanges and custodians are able to prove that they have enough assets on hand to cover their customers’ balances using methods such as Merkle trees or zero knowledge proofs.
These processes have been in place for a while, but they are not always applied uniformly. The PROOF Act aims to standardize these processes and ensure that audits conducted by credible third-parties, enhancing the credibility of the information provided.
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The bill also addresses the need for clear standards and rules in an industry which has been lacking consistent oversight.
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The PROOF Act holds digital asset institutions accountable by requiring regular, open PoR. This approach allows for greater transparency which is crucial to rebuilding investor confidence after major industry setbacks.
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