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With promises and trusted third parties, Latin bitcoin exchanges test their reserves

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Key facts:
  • There are bags that simply present a list of addresses with a reviewer’s signature.

  • Others seek more sophisticated methods in which the user himself can verify the data.

The failure of bitcoin (BTC) and cryptocurrency exchange FTX over alleged misuse of customer funds has alarmed platform users around the world. Latin America is no exception, and many local brokers and exchanges are trying to reassure their clients by testing their reserves.

The reserves testas defined in Cryptopedia (CryptoNews educational section), consists of. The presentation of verifiable data on the liquidity of a financial platform.For example, a cryptocurrency exchange. They should make it possible to verify that the funds available to the platform are sufficient to meet commitments and debts without having to rely on users’ balances.

Below, we illustrate the type of evidence provided (or not) by some of the most recognized exchanges in Latin America:

Evidence of reservations based on trusted third parties

One of the first Latin American companies to submit such evidence was. Argentina’s Buenbit stock exchange. The company run by Federigo Ogue, submitted a proof signed by public accountant Marcos Zócaro..

This is a list of addresses (or rather address fragments, as shown in the table below) of various cryptocurrency networks, each with corresponding amounts (expressed in digital assets). The company claims to be the owner, proprietor and manager of the wallets listed in the advertisement, as well as of the respective assets held therein.

Zócaro clarifies that it merely verified that the company could send tokens from one wallet to another and that. “does not constitute absolute proof of title or ownership.”.

Buenbit reserves test.
Fragment of Buenbit’s reserve test. Source: Buenbit.

Buenbit’s reserve test does not include a liability entry, although the company has assured to work on one of them.

Almost a week later Buenbit, one of its main competitors, Lemon Cash, did the same.. On November 17, this company made public both a proof of funds and a register of liabilities.

“These two documents validate the fact that 100 percent of the cryptocurrency deposits we receive from our users are guaranteed and held by Lemon,” the company states. In any case, the document (also authored and signed by Zócaro) specifies, “although it is not technically possible to verify the ownership of the aforementioned wallets, one could verify the company’s ability to dispose of the tokens through transfers between different wallets.”

Lemon Cash reservation proof.
Fragment of the Lemon Cash reservation test. Source: Lemon.

One criticism that can be made of this type of reserve test is that. it requires reliance on a third party, in this case the professional validating addresses.

Nov. 23 Lemon added what he calls “live reserve testing” to his application. for cell phones. There you can see the addresses the exchange claims to own and the cryptocurrencies owned by each of them (a fact that can be verified in block explorer, although you have to take Lemon’s word for it that they actually belong to him).

Also The holdings in the exchange accounts are shown.. For example, at the time of writing, Lemon claims to have the equivalent of $4.3 million in cryptocurrencies on the Binance exchange. In this regard, there is no way to verify this in blockchain explorers, so one must trust the veracity of the information provided by the company 100%.

According to the definition given at the beginning of this article, a proof includes evidence, the latter cannot be considered as evidence of reservations.

Lemon's alleged reserves .
Lemon added information about his alleged reservations in the application itself. Source: screenshot – Lemon.

Promises of simple or undefined reserve tests.

At least five companies have not (yet) submitted reserve tests, but have stated that they will-or may do so in the future. Many of them are described in detail in this subheading, promised simple backup testsi.e., 100% dependent on a third-party audit.

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The co-founder of the Argentine stock exchange DecipherJosé del Palacio, wrote on Twitter. that the proof of your company will be a document signed by an auditor, at an early stage. He says he likes the U.S. Kraken exchange model, but explains that it “cannot be implemented in a week.”

Decrypto co-founder's tweet.
Decrypto’s co-founder confirms that, as a first step, he will implement an audit that involves relying on a third party. Source: José del Palacio – Twitter.

CryptoNews also asked. SatoshiTango – one of Argentina’s longest-running stock exchanges-if they had submitted reserve evidence. “It is very likely,” was the response. On the method that would be used, they clarified that “it is not yet defined.” The method chosen will depend on how to verify the legitimacy of the reservation evidence, they explain, adding, “but the privacy of our clients is a priority.”

For SatoshiTango it is important to clarify that they differ somewhat from other exchanges: “We do not provide staking services or pay returns, and we do not place users’ funds with third parties. Cryptocurrencies are 98 percent in cold storage and only 2 percent in hot wallets.”

For his part, the CEO of the Chilean Stock Exchange Buda.com commented on the reserve evidence in the aftermath of the FTX case. Guillermo Torrealba had written. on November 9 on Twitter, “I do not commit to it. [mostrar pruebas de reservas] short term, because in Buda we are already working 150% on other things. I can assure you that we have hired a big-5 auditor to audit the janitors. He will be soon. We are 100% liquid in fiat and crypto.

Torrealba clarified that. it was something they had been planning to do for some time.Before the FTX exchange debacle occurred:

CryptoNews has contacted Buda.com for more details and this article will be updated if there are any responses.

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Another bitcoin and cryptocurrency exchange that talked about what happened at FTX was. Banexcoin. On November 18, this Peruvian company sent an e-mail to its users with the following message:

Mail sent by Banexcoin.

The e-mail was not accompanied by any kind of proof of reservations, so CryptoNews contacted the support center for more details. José De Velasco, product manager, responded.

“Yes, we will publish our booking evidence,” he said, adding:

With all that has been seen in the industry in recent weeks, we feel that it is not enough to show our portfolio reserves on the chain to prove the funds under our management. For this reason, we are evaluating a reputable outside company that issues regular certifications, validating our processes in advance.

José De Velasco, product manager at Banexcoin.

“How can users verify that the proof of reserve they will present is legitimate? How do they know that it is not capital that they borrowed to show something in some directions at a specific time,” this media outlet asked the exchange representative. The answer was, “The certification from the external company will validate that the funds we will hold in reserve are not from another exchange, thus conveying security to our customers and helping to restore confidence in the industry.

It follows from this explanation that in order to find out whether Banexcoin holds the cryptocurrencies it claims to hold, it will be necessary to rely, as with exchanges that base their proof on auditors, on the “outside firm.”i.e., a third party.

Also CryptoMarket, a platform established in Chile in 2016.after learning what was happening with the FTX exchange, immediately clarified that it had no relationship with that company.

Via a tweetCryptoMarket assured, “100% of our users’ cryptoasset balances are backed and guarded to the highest security standards. This includes both online and offline wallets.” In June, through the same social network, had written That clients’ funds be stored offline in a cold wallet.

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CryptoNews asked them if they would submit proof of reserves. This was CryptoMarket’s response:

On CryptoMarket’s part, we are taking actions to further protect our users and, therefore, we uploaded a few weeks ago a request to CoinMarketCap – the most recognized cryptocurrency price monitoring website in the world – to update our page and provide information about booking proof of funds of our customers and other relevant data, so that they can buy and sell cryptocurrencies on our platform with full confidence.

In addition, we are in the process of releasing our proof of funds, reserves and operational liquidity to an external auditor to share this information with our users.

CryptoMarket, bitcoin and cryptocurrency exchange.

That is to say, CryptoMarket will present. a proof of reserves (both fiat money and cryptocurrency) that will result in the verifier being trusted.

Promises of backup testing with lower confidence requirements.

Just as back-up tests requiring 100% reliance on an external auditor have been presented (or have been promised), there are exchanges promising–since there have been no concrete presentations yet–more advanced back-up tests (and which, if performed properly, would be more reliable for users).

Lemon CEO Marcelo Cavazzoli, reported via Twitter that the company is in the process of developing a backup test based on Merkle’s tree. This is a data structure composed of block hashes that summarizes all transactions made.

On behalf of Argentine Stock Exchange Belo, tweetedTo half-measures we prefer the strength of something that really clears up doubts.” CryptoNews has contacted company officials for more details, but so far has received no response.

Ripio, another Argentine exchange, has promised proof of reservesfirst in an e-mail sent to its users and later confirmed it in a communication with CriptoNoticias.

We are working on an audit Proof of reservations (PoR) with Merkle Tree technology [árbol de Merkle]. PoR is a validation mechanism performed by an external auditor to verify whether an entity-in this case Ripio-has (or does not have) the funds it claims. We will publish it soon.

Ripio, Argentina’s bitcoin and cryptocurrency exchange.

The company clarifies that “an external auditor takes an anonymous ‘snapshot’ of each of the users’ balances and adds them to a ‘Merkle tree,’ which is a structure in which users’ data is represented anonymously and their cryptocurrency balance.” This, they explain, will allow them to obtain a “cryptographic footprint” that will uniquely identify the combination of funds.

Also, in parallel,” Ripio explains, “to credit custody on the chain’s assets, [la empresa] cryptographically signs messages demonstrating control over the private keys that hold each of the users’ funds.” In this way, “the auditor determines whether the balances on the chain of those wallets match the users’ funds represented in the Merkle tree.”

Merkle tree structure
Merkle tree structure. Source: Wikipedia.

Ripio indicates that through this procedure “each user can see if their balance has been included in the Reserves Test by comparing the data with the Merkle root and having the ability to see if there have been any changes.” In this way, they say, transparency in movements is achieved and the solvency of the exchange is verified.

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The Mexican-origin exchange, Bitsois another of the exchanges that is on its way to –as reported by– To provide proof of funds.

CryptoNews asked the company’s managing director for Argentina, Julian Colombo, for an explanation. He commented that the backup evidence, in the format in which some exchanges present it (simply a list of addresses), has shortcomings. For one thing, he explains, “they do not prove that the keys needed to withdraw coins from these wallets belong to these bags.” Moreover, he adds that they “do not prove that the coins in these wallets are sufficient to cover all the liabilities of the exchange.”

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Says Colombo: “[Estas pruebas de reservas] do not prove that the keys needed to remove the coins from these wallets belong to these bags. [Además]does not prove that the coins contained in these wallets are sufficient to cover all the liabilities of the exchange.”

To ensure transparency, he says. are working on strategies that include a Merkle tree and solvency reporting. to validate user balances. “It will be ready in about a month and we will make it public as soon as it is available,” he says, explaining that the delay is because they prefer to do things right, rather than in a hurry.

Solvency reporting will require third-party review Colombo says it is looking for “an external partner to validate the liabilities, assets, and solvency” of the company. This will be ready by early 2023. In addition, he explains that, in the future, zero-knowledge (ZK) testing “will allow solvency to be shared without exposing confidential information or requiring a third party to perform trust-based audits and certifications.”

The test that matters for an exchange to be solvent is one that shows that the total balance of coins in the exchange’s custody is sufficient to cover the obligations (or liability) total, that is, the total amount of customer deposits.

Julián Colombo, CEO of Bitso in Argentina.

Back to the basics of Bitcoin: being our own bank.

As described in detail in the aforementioned Cryptopedia, a proof of reservation must meet several requirements to provide a high degree of reliability. These include detailing not only the solvency of the exchange, but also the obligations or liabilities (otherwise it would be an incomplete test).

Also it is desirable that the reserves test involves as little reliance as possible on a third party why believe that an auditing firm or financial professional is telling the truth, however respectable? It is worth noting that many of the promises made in this paper reduce the need for reliance on a third party, but do not eliminate it completely.

All this brings to mind some maxims that are often repeated among bitcoiners. One of these reads. “Don’t trust, verify.”. Anyone who uses BTC and other digital currencies should have a degree of skepticism and verify as much as possible with their own means.

Also, cases such as the fall of FTX (which included the inability to withdraw cryptocurrencies from the exchange) are reminiscent of another maxim of bitcoiners: “If they are not your keys, they are not your bitcoins.”.

Although exchanges can be used for trading, buying and selling bitcoin or exchanging digital assets, it is not advisable to hoard cryptocurrencies on them, but to use them for specific cases.

A few days ago, Argentine programmer Diego Gurpegui said this when CryptoNews asked him about the FTX case, “This world [bitcoin y la industria de las criptomonedas] is a bit like the Wild West. And that’s perfectly fine with me. But this implies responsibility, so more skepticism and responsibility are needed.

To store BTC and other digital assets, a self-storage wallet -which gives the user access to private keys, is always the most secure option. In this way, the user himself is responsible for the safekeeping of his own private keys, without relying on a third party.

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I was saying. Satoshi Nakamotocreator of Bitcoin, in the White Paper which initiated this new digital currency:

We proposed a system for electronic transactions that is not based on trust.

Satoshi Nakamoto, creator of Bitcoin.

Statue of Satoshi Nakamoto.
Statue of Satoshi Nakamoto, creator of Bitcoin, in Budapest, Hungary. Source: stock.adobe.

It is up to each Bitcoin and cryptocurrency user to put these tips into practice and… Take responsibility for “being your own bank.”.

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