In the wake of growing concerns over exchange solvency and user fund safety, major cryptocurrency platforms Kraken, Coinbase, and Gate.io have taken a pioneering step by publishing proof of reserves with liabilities as part of their audit disclosures. This move marks a significant advancement in transparency within the crypto industry, especially following the high-profile collapse of FTX in late 2022.
While many exchanges have adopted proof-of-reserves (PoR) mechanisms to reassure users, most only verify asset holdings—leaving out a critical component: liabilities. Kraken, Coinbase, and Gate.io stand out by including both assets and obligations, offering a more complete picture of their financial health.
Why Proof of Reserves with Liabilities Matters
Proof of reserves is a cryptographic verification method that proves an exchange holds sufficient cryptocurrency to cover customer balances. Traditionally, this has involved Merkle tree structures that allow users to confirm their funds are accounted for without revealing sensitive data.
However, proof of assets alone is incomplete. Without disclosing liabilities—the total amount owed to users—an exchange could appear solvent while actually being undercapitalized.
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By integrating liability reporting into their audits, Kraken, Coinbase, and Gate.io provide a true solvency check, aligning closer to traditional financial auditing principles. This dual verification helps users assess whether an exchange can meet its obligations even during market stress.
Core Keywords:
- Proof of reserves
- Cryptocurrency exchange transparency
- Exchange solvency
- Proof of reserves with liabilities
- Crypto audit
- User fund security
- Merkle tree proof
- Exchange trustworthiness
The Catalyst: FTX Collapse and CZ’s Call to Action
The push for greater transparency was accelerated by the November 2022 collapse of FTX, which exposed systemic risks in centralized exchanges. Millions of users lost access to their funds, revealing a lack of accountability and poor risk management.
In response, Binance CEO Changpeng Zhao (CZ) publicly advocated for all exchanges to adopt proof-of-reserves. He proposed using Merkle tree technology to cryptographically verify holdings—a move widely praised across the industry.
Yet, while Binance was among the first to publish its PoR, it notably did not include liabilities in its initial reports. This omission highlighted a gap between symbolic transparency and meaningful financial disclosure.
Kraken, Coinbase, and Gate.io filled that gap by going a step further—publishing not just asset proofs but also detailed liability assessments as part of their audit processes.
Industry Response: Who Else Is Publishing Full Proof?
Following the leaders, several other platforms have moved toward full transparency:
- Crypto.com and Huobi have already released their proof-of-reserves and confirmed they are finalizing liability reports for public release.
- OKX and MEXC Global are actively working on comprehensive PoR frameworks that will include both assets and liabilities.
Meanwhile, some exchanges like Bitfinex, MEXC Global, and Bybit have published asset-only proofs but have not yet disclosed liabilities. While they’ve committed to future updates, the absence of current liability data limits the usefulness of their disclosures.
This divergence underscores a key issue: not all proof-of-reserves are created equal. Users must look beyond headlines and examine whether both sides of the balance sheet—assets and liabilities—are verified.
How Proof of Reserves with Liabilities Works
A complete proof-of-reserves system involves three core components:
- Asset Verification: Using blockchain analytics and Merkle trees, exchanges prove they control private keys to wallets holding user funds.
- Liability Calculation: Aggregating all user account balances to determine total obligations.
- Matching Assets to Liabilities: Demonstrating that total reserves equal or exceed total liabilities—ideally with a reserve ratio greater than 100%.
When both asset and liability data are independently audited and made public, users gain confidence that their deposits are backed 1:1—or better.
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Third-party auditing firms often assist in validating these figures, adding another layer of credibility. Some exchanges now publish monthly PoR reports, turning what was once a reactive measure into an ongoing commitment to transparency.
Challenges and Limitations
Despite progress, challenges remain:
- Real-time accuracy: Reserves can fluctuate rapidly due to trading volume and withdrawals.
- Off-balance-sheet liabilities: Loans, derivatives, or staking commitments may not always be reflected.
- Audit frequency: Annual or quarterly audits may not suffice during periods of volatility.
Moreover, publishing data doesn’t guarantee honesty—users must trust the auditor and methodology. That’s why open-source tools and community-verifiable formats like Merkle proofs are essential.
Still, including liabilities represents a major leap forward. It transforms PoR from a marketing tool into a genuine risk-assessment mechanism.
Frequently Asked Questions (FAQ)
✅ Why is including liabilities important in proof of reserves?
Including liabilities allows users to verify if an exchange holds enough assets to cover all customer deposits. Without this, an exchange might appear solvent while actually being insolvent.
✅ How do exchanges prove they hold user funds?
Exchanges use cryptographic methods like Merkle trees to show they control wallet addresses containing user funds, without exposing private keys or individual balances.
✅ Is proof of reserves the same as an audit?
Not exactly. Proof of reserves verifies asset holdings, but a full audit includes reviewing liabilities, operational practices, and financial statements. True transparency requires both.
✅ Which exchanges currently publish full proof of reserves with liabilities?
As of early 2025, Kraken, Coinbase, and Gate.io lead the industry by including liabilities in their published PoR reports. Others like Crypto.com and Huobi are preparing similar disclosures.
✅ Can users verify proof-of-reserves themselves?
Yes—many exchanges provide tools or hashed user IDs so individuals can check if their balance is included in the total liability calculation.
✅ Does proof of reserves prevent exchange hacks?
No. Proof of reserves confirms fund backing but doesn’t protect against security breaches. It should be paired with strong custody solutions and insurance.
The Road Ahead: Building Trust Through Transparency
The actions of Kraken, Coinbase, and Gate.io set a new benchmark for accountability in the crypto space. As regulatory scrutiny increases and user expectations evolve, transparency is no longer optional—it's foundational.
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Other exchanges must follow suit by adopting regular, comprehensive audits that include both assets and liabilities. Only then can the industry rebuild trust after past failures.
For users, the message is clear: choose platforms that go beyond basic proof-of-reserves. Look for those that publish frequent, independently verified reports covering both sides of the ledger.
In a world where digital asset security is paramount, full disclosure isn’t just good practice—it’s essential.