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- Two US senators have introduced the PROOF Act to prevent incidents like FTX’s collapse and enhance safeguards in the crypto industry
- The bill mandates baseline account standards, proof of reserves, and submission of audit results to the US Department of the Treasury
- The PROOF Act aims to bolster accountability and protect customer funds by prohibiting fund co-mingling while establishing transparency standards
US Senators Thom Tillis and John Hickenlooper have introduced the Proving Reserves of Others Funds (PROOF) Act, a bipartisan bill aimed at preventing incidents like the FTX collapse by establishing safeguards. The legislation seeks to combat the unethical co-mingling of customer funds and requires monthly proof-of-reserves (PoR) reports from neutral third-party auditing firms. The bill builds on the voluntary PoR system to which many exchanges signed up following the collapse of FTX in order to reinforce customer confidence.
Exchanges Would Report to the Treasury
The PROOF Act mandates that digital exchanges set baseline account standards to protect customer funds, requiring verification of cryptographic proof of reserves and proof of a company’s liabilities. According to the PROOF Act, the outcomes of monthly PoR audits must be provided to the US Department of the Treasury, which is obligated to make this information publicly accessible. The bill outlines a set of civil penalties, including fines for non-compliance.
Proof-of-reserves can be relatively easily implemented due to the computational properties of digital assets, positioning the crypto industry as more transparent compared to the legacy financial system. The PROOF Act aims to enhance accountability and safeguard customer funds in the crypto space, addressing concerns about co-mingling and potential collapses like the FTX incident.
FTX “Fiasco” Driving New Mission
In the announcement of the bill, Senator Tillis referenced the collapse of FTX, saying that the “fiasco was a direct result of mismanagement and grossly unethical decision-making, leading to significant fraud and loss of investor funds,” before explaining how the PROOF act would guard against a repeat:
Americans deserve better assurances regarding their deposits and the solvency of these platforms. The PROOF Act would improve regulation of the cryptocurrency industry by explicitly prohibiting the co-mingling of funds, while also setting a strong transparency standard with the already-used industry best practice of PoR. Combined, these two steps will help build trust that investors, both institutional and retail, can engage in digital asset markets.
Senator Hickenlooper added, “These commonsense safeguards make crypto companies more transparent and hold them to the same standards as everyone else.”
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