How proof of reserves works
The firm shows what it holds by publishing its wallet addresses, or by signing a message with their keys, so that anyone can read the balances on the blockchain.
The firm shows what it owes by building a Merkle tree from all customer balances. Each customer receives a short proof that their own balance is part of the tree, and only the tree's root is published, so no one else's balance is revealed. An outside auditor usually compares the two totals at a stated date and time.
What proof of reserves does not show
- Debts outside the tree, such as loans the firm has taken
- Whether the assets were borrowed for the day of the snapshot
- Whether the assets are pledged to someone else
- Money held in banks, which no blockchain can show
- Anything that happened after the snapshot
What EU law asks of a custodian
Proof of reserves is an industry practice, and MiCA, the EU's crypto-asset regulation, does not use the term. Article 70 requires a provider that holds clients' crypto-assets to safeguard their ownership rights and to prevent the use of those assets for its own account.
Article 75 requires a custodian to keep a register of positions in each client's name and to hold clients' crypto-assets separately from its own on the distributed ledger. The custodian also sends each client a statement of position at least once every three months.
Proof of reserves, audit or segregation?
- Financial audit
- Covers a firm's whole balance sheet over a period, under accounting standards. Proof of reserves covers customer crypto-assets and the balances owed against them, at one moment.
- Stablecoin reserve audit
- Concerns the assets backing a token, not customer balances. MiCA requires the issuer of an asset-referenced token to mandate an independent audit of its reserve every six months.
- Segregation
- The duty to keep clients' assets apart from the firm's own. Proof of reserves is evidence that assets exist, not the duty itself.
Where Proof of reserves shows up in a platform
Modules that do the work
- Custody & walletsWallets on every major chain, with MPC custody from leading providers or your own keys.
- LedgerThe double-entry book of record behind every balance, fee and transfer.
- Compliance reportingTransaction monitoring, the Travel Rule and regulatory reports, ready for your regulator.
Platforms that need it
Guides that go deeper
Where it is written
The laws and standards this page's facts come from.
General information, not legal advice: what applies to you depends on your services and your market.