Grayscale's Refusal to Post Proof of Reserves Concerns the Cryptosphere

Grayscale’s Refusal to Post Proof of Reserves Concerns the Cryptosphere

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Source: Adobe/Ascannio
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The crypto investment company Shades of grey refused to reveal the composition of its reserves, citing “security problems”. The move sparked a lot of speculation about the company’s financial health.

In a tweet on Saturday, the company said that one of the leading crypto exchanges in the market, Coinbaseused by Grayscale as a custodian, periodically performs an “on-chain validation” process. The company also added that they are unable to share their proof of reserves due to security risks.

“Given the security risks, we cannot make this information publicly available through proof of reserve, or other advanced crypto accounting procedure,” the company said.

In the crypto sector, proof of reserves is a mechanism by which an independent third party verifies whether or not an exchange or company has the assets made available to it by its customers. Merkle trees are used to capture data and obtain a set of fingerprints that allow users to verify that their funds have been properly audited by a third party.

Grayscale acknowledged that its decision to keep its reserve information private would be a “disappointment” to some investors. However, the company claimed that “the panic unleashed by other players is not reason enough to circumvent the complex security arrangements that have allowed us to keep our investors’ assets safe for years.”

However, this decision further eroded user confidence in Grayscale. It seems that the vast majority of crypto users are unconvinced by the company’s reasoning, especially since other major exchanges, including Binance and Crypto.comhave chosen to share this information.

“I was not concerned about the solvency of GBTC until I read this statement, can someone please explain to me how the reserve evidence poses a security risk?” said ChainLinkGod.eth, a prominent member of the crypto community and an ambassador for the Chainlink community.

Prominent cryptographer Adam Back also claimed that Grayscale’s statements don’t make “much sense”.

“Tracking companies know about UTXOs, and it’s not hard to ask around for an export of the data. You could argue that if Coinbase moves or changes custody of the assets, it could reveal their IP address to the geolocation on p2p. But in this case, just use Tor,” he added.

Why do crypto exchanges have to share their proof of reserves?

The unprecedented collapse of FTXwhich was the third largest player in the market and considered by many to be the savior of the sector during the recent events around Terra/Luna, has caused many observers to worry about the reliability of centralized players.

In an attempt to alleviate skepticism, executives of top crypto companies have begun sharing proof of reservations. For example, Crypto.com has published its crypto addresses, revealing how much and which cryptocurrencies it stores on behalf of its customers.

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