Indian cryptocurrency exchanges are taking steps to reassure investors and traders on their platforms by publishing proof of reserve reports and revealing exposure status. This comes after the recent FTX fiasco made investors jittery and concerned about the safety of their funds in centralised exchanges.
Prominent International crypto exchange FTX filed for bankruptcy protection last week as the company’s valuation reportedly fell from $32 billion to zero, leaving investors high and dry. A report on the exchange’s solvency concerns pushed it into a liquidity crisis and the exchange couldn’t manage to get bailout funds as the largest crypto exchange Binance backed off. This debacle rattled the crypto market; it lost billions in value and fell below $1 trillion.
Indian exchange Coinswitch Kuber announced on Thursday that an independent third-party report confirms that its overall holdings of Crypto and INR balances are higher than those of customers’ holdings of Crypto and INR balances on the platform.
Ashish Singhal, Co-founder of Coinswitch, in a blog, wrote: “The extensive independent review of the company’s bank accounts, payment gateways, crypto custody services as well as counterparty relations with crypto exchanges was carried out so that our users have full visibility into their funds and investments reserves on the platform.”
Similarly, CoinDCX, too, put out its disclosures. Sumit Gupta, CEO of the exchange, wrote in a blog: “We do not have any assets/exposure with FTX or any exposure to FTT, or SOL. We do not rely on their liquidity provisions for any of our products. So the FTX fiasco has absolutely zero exposure and impact on CoinDCX.”
It even provided the Reserves to Liabilities ratio snapshot of the top ten assets that it holds on behalf of the users as a percentage of what it owes to the users. “We’re working on publishing the R2L ratio periodically, along with audit certificates. The team is also working on evaluating proof-of-reserve for our reserve assets and publishing them in a simple dashboard, which will make things more transparent,” the blog mentioned.
These moves have bought some assurance to users. Akshay R, a crypto investor told businessline “Yes, the constant updates by the exchanges give some amount of assurance. But, after having seen all the debacles in international crypto markets and their effect, the skepticism always persists.”
Other exchanges too are taking similar measures. Sathvik Vishwanath, CEO of Unocoin told businessline “We are looking for a competent auditing firm, where they could verify users’ funds and company records of holdings and assets. Exposing those reports after proper due diligence by the team would help the exchange be more transparent and thus it would help maintain customer trust as well.”
Gaurav Dahake, CEO & Co-Founder, Bitbns, told businessline, post the debacle it is actively trying to work around an open source tool to figure out cryptographic deposits, assets, and liabilities around an exchange as opposed to relying on an external party to do that.
“We intend to stay cognizant of the need of taking continuous steps towards building a safer ecosystem, not just for institutional investors but anyone that wants to trade in crypto assets,” he added.
Need for a regulatory body
Although exchanges in India have taken the onus to be transparent, experts opine that having a specified disclosure framework by a regulatory body would be more effective in ensuring the safety of user funds and the proper functioning of exchanges in the country.
Mohnish Wadhwa, CEO of a business consulting firm CapDeck Advisors, told BusinessLine, “The proof of reserves is aimed at providing surety to the users that the exchange has adequate balances and wouldn’t be wiped away as it happened with FTX. However publishing proof of reserve per se does not give a holistic picture ideally. There are a lot of aspects that a balance sheet would show, that proof of reserve wouldn’t show.”
He explains that just like how banks are kept in check by the regulatory body Reserve Bank of India by bringing in circulars and notifications. Cryptocurrency exchanges too should be regulated by a separate regulatory body. This he says will ensure the safety of user funds on exchanges.
Corroborating, Vishwanath said: “ Proper regulation is the solution. Cryptocurrency regulation has been difficult to navigate in India, and regulators have so far failed to provide a workable framework for how these services can be offered in a safe and transparent manner.”