On Saturday, 5/24/14, Bitcoin exchange Bitstamp proved their Bitcoin reserves to BitcoinJ developer Mike Hearn. Mike Hearn is a former Google engineer that has been with the Bitcoin community for many years and has a strong reputation. Bitstamp announced their Proof of Reserves via a report released yesterday. Unfortunately, Proof of Bitcoin Solvency is a far cry from a full financial audit, a point that Bitstamp is quick to acknowledge. Bitstamp is leading the charge for Bitcoin exchange transparency and has committed to more Proof of Solvency tests and a full financial audit that would include fiat reserves. Proof of Solvency is just another transparent step that Bitstamp has taken to differentiate itself from BTC-e in the community’s eyes.
Hearn explains his involvement:
“I was asked to act as a neutral observer during this procedure to help build community conﬁdence in Bitstamp as a large holder of coins,”
[dropcap size=small]S[/dropcap]imilar to Satoshi Vault, Bitstamp went about providing proof of solvency by sending a send-to-self transaction. To this transaction, Bitstamp signed a message from Mike Hearn with their private key. In this way, Bitstamp was able to prove that they control the private keys of the cold storage address. Like all Bitcoin exchange proof of solvency tests so far, consumer-specific private information was left out. However, Bitstamp was unable to use “advanced proof techniques.” In the future, Proof of Solvency will be carried out by an open source program. As such, the need for a trusted third-party, in this case Mike Hearn, to perform the “audit” correctly and as reported is eliminated. In total, Bitstamp proved that it controlled 183,497.40310794 BTC, currently valued at over $100 million USD.
You can view the transaction ID and Bitstamp’s cold storage address at the links below.
Other Bitcoin Exchanges That Have Proven Solvency (In Bitcoin)
It’s important to note that Proof of Solvency, thus far, has been limited to Bitcoin reserves. Due to the distributed and intrinsically “plugged-in” nature of Bitcoin, Proof of Solvency can be done remotely from anywhere in the world. This is exactly what we witnessed when Stefan Thomas helped Kraken and Bitfinex prove Proof of Solvency. In the Bitfinex case, Bitfinex users were able to verify that their Bitcoin balance was included in the proof of solvency test. Bitstamp was unable to provide that service to its users this time but has, along with other Bitcoin exchanges, committed to receiving regular proof of solvency tests in addition to a real financial audit that would include the fiat side of things.
Most of these larger Bitcoin exchanges also store fiat funds for their users. The flow of fiat and the corresponding robustness of the fiat storage system is also important and hitherto unexplored. Mt. Gox’s trickling end to fiat withdrawals was just one of the warning signs that the behemoth exchange was rotting from within. After the Mt. Gox fiasco, many Bitcoin exchanges stepped up to proof their solvency. In contrast, the establishment of a Chinese wall halting the flow of RMB (Chinese Yuan) into Bitcoin exchanges has stifled growth. The centralized bank systems have set procedures for real financial audits of financial institutions. Experts in the field have spent decades perfecting auditing methods for fiat currencies, and we are just beginning to see that entire field replaced by crypto-secured and trust-less systems. So far, the best example of Proof of Solvency is provided by Chinese Bitcoin service: Bifubao. True to its name, Bifubao is currently the only production-scale proof of reserves available on the market for users that require that extra step of security.