US Senators Thom Tillis (R-NC) and John Hickenlooper (D-CO) have reintroduced the Proving Reserves of Others Funds (PROOF) Act, a legislative measure aimed at protecting digital asset custodians and their customers. This bill seeks to prevent the co-mingling of customer funds with institutional or proprietary capital, a practice that led to the collapse of the crypto exchange FTX.
The PROOF Act requires digital asset exchanges and custodians to adhere to two primary requirements. Firstly, they must comply with regulatory standards that explicitly prohibit the mixing of customer and institutional funds. Secondly, these platforms are mandated to undergo monthly Proof of Reserves (PoR) inspections conducted by a neutral third party, such as a certified auditing firm. The results of these inspections will be submitted to the US Department of the Treasury for public disclosure.
Failure to comply with the PROOF Act will result in civil penalties under a tiered enforcement structure. The bill defines PoR as a cryptographic method that allows exchanges and custodians to verify asset backing for user deposits without compromising sensitive information. This process ensures transparency while maintaining the privacy and security of the platform and its users.
The reintroduction of the PROOF Act has been praised by Chainlink, who called it a “critical step toward establishing Proof of Reserve requirements for digital assets.” The bill aims to standardize and oversee reserve verification practices across platforms that custody digital assets, providing American users of crypto exchanges with clear assurances about the solvency of custodial institutions holding their deposits.
In conclusion, the PROOF Act addresses gaps in standardization and oversight within the digital asset sector, moving the practice of reserve verification from voluntary to mandatory. This legislation is essential in ensuring transparency and accountability in the industry as more real-world assets transition to blockchain technology.