Grayscale Keeps Proof of Reserves Hidden, Claiming It Is Due to Security Concerns

Proof of reserves kept hidden: The collapse of FTX put a lot of people on guard, with many running from exchanges as fast as possible. In response, crypto exchanges like Binance, AAX, and KuCoin have made efforts to improve transparency. Details often shared include proof of reserves as a way to reassure investors. However, crypto investment firm Grayscale has chosen to go against the trend, refusing to share proof of reserves.

The reason: Many crypto players are doing anything it takes to reassure investors, but Grayscale claims it is keeping the information hidden due to security concerns. Even as Bitcoin and Ether reach new lows, the firm remains firm in its decision, saying it knows the decision would disappoint some investors, “But panic sparked by others is not a good enough reason to circumvent complex security arrangements that have kept our investors’ assets safe for years.”

• Friday on Twitter, the firm explained its reasoning: “Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.”
• There has been increasing pressure for crypto firms to share information, particularly when it comes to the health of their reserves.

Other problems: While FTX filing for bankruptcy protection has affected everyone in the crypto industry in recent days, Grayscale has other concerns as well. Grayscale Bitcoin Trust (GBTC) has recently hit record lows, and the Ether product is no exception. Moreover, its parent company, Digital Currency Group, connects Grayscale to the struggling Genesis Global Capital.

• Digital Currency Group has denied contagion fears in the wake of FTX, but problems with entities related to it have sparked concerns.

Grayscale Bitcoin Trust: Attention is on Grayscale Bitcoin Trust due to Genesis Global Capital halting customer withdrawals due to fallout from the FTX collapse. Reports indicate that it will not directly impact GBTC even if Genesis cannot raise funds and declares bankruptcy since creditors would have no claim on GBTC assets. According to analysts, the trust’s structure protects its holders.

• Grayscale Bitcoin Trust, Grayscale’s flagship fund, trades at a significant discount of over 40% compared to the price of the underlying Bitcoin. It traps investors in something they can only exit after a lock-in period.
• The trust is the largest Bitcoin investment vehicle, with over $10 billion in assets being managed. The trust has recorded significant losses as of late, with the value of assets it holds decreasing considerably, much like the rest of the industry.

Coinbase Custody Trust: As an investment arm of Coinbase Global, Coinbase Custody Trust holds assets on behalf of others. That includes around 635,000 BTC for Grayscale Bitcoin Trust and millions of Ether (ETH) for other Grayscale trusts.

• As of September, Coinbase Custody Trust held more than three million ETH for Grayscale Ethereum Trust and nearly 12 million ETH for Grayscale Ethereum Classic Trust.
• In relation to the request for transparency and proof of reserves, Grayscale shared a note from Coinbase Custody and reassured investors that “Coinbase frequently performs on-chain validation.”

Binance sows doubt: Binance CEO Changpeng “CZ” Zhao tweeted numbers that undermined Grayscale and Coinbase. Coinbase CEO Brian Armstrong responded, and shortly after, Zhao deleted the tweet and sent another message that said he was informed the numbers were wrong, adding, “Let’s work together to improve transparency in the industry.”

• Many believe Zhao played a role in the collapse of FTX when he announced the selling of the FTX token, triggering the initial panic that sealed the crypto exchange’s fate.
• Zhao has also been vocal when it comes to others in the industry, such as when he warned people away from Crypto.com.