FTX Auditor Is Pioneering Proof of Reserves

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As FTX cus­tomers lament their miss­ing funds, oth­er major cryp­to exchanges includ­ing Krak­en, Gate.io, Ledn and Nexo are tak­ing steps to ver­i­fy their hold­ings. But each of these com­pa­nies share some­thing in com­mon with FTX — an auditor.

Cal­i­for­nia-based Armani­no is a top-25 account­ing firm that began work­ing on cryp­to in 2014 and has per­haps become crypto’s most rec­og­niz­able audi­tor. Armanino’s call­ing card is proof of reserves, where it gained a first mover advan­tage after launch­ing a cryp­toas­set assur­ance plat­form in 2020.

Read more: What Is Proof of Reserves and Can It Build Back Trust?

“They are the only account­ing firm in the world to issue inde­pen­dent proof of reserve attes­ta­tions so engag­ing anoth­er firm wasn’t an option at the time [that Nexo began its proof of reserves],” a Nexo spokesper­son told Blockworks.

Armani­no is small­er than the audi­tors that deal with most major finan­cial firms, but some exchanges deploy the long­time dig­i­tal asset audi­tor selec­tive­ly. A spokesper­son for Ledn said the com­pa­ny uses big-four account­ing firm Deloitte as its exter­nal audi­tor, but it relies on Armani­no for its proof of reserves.

But Armani­no also does more bread-and-but­ter audit­ing for cryp­to com­pa­nies that are still under­reg­u­lat­ed. FTX, which fre­quent­ly tout­ed its self-reg­u­la­tion and audit­ing, employed Armani­no to check the finances of its US arm in 2021.

Armani­no gave FTX US a clean audit, though the pri­vate­ly-owned FTX did not have to fol­low the strict account­ing stan­dards of a pub­lic com­pa­ny. The firm stood by the valid­i­ty of its FTX audit in a com­ment to the Wall Street Jour­nal. FTX CEO John Ray said in a bank­rupt­cy court dec­la­ra­tion that the company’s for­mer audits should not be trusted.

Even if Armani­no isn’t entire­ly to blame for its pos­i­tive FTX audit, some still find the firm’s huge mar­ket share a cause for concern. 

“I think you want more than one audi­tor for each exchange,” Nicholas Gans, the direc­tor of research and devel­op­ment at Inca Dig­i­tal, said. “And if you have one that’s kind of rep­re­sent­ing the whole cryp­to ecosys­tem, and that all the exchanges go to, I think that presents a lot of poten­tial con­flicts of interest.”

Gans said he hopes to see an agreed-upon frame­work for cryp­to com­pa­ny audits, where the space is more clear on what data firms are expect­ed to share with auditors. 

Until then, proof of reserves is crypto’s trust-builder du jour.

Some in the cryp­tos­phere are ques­tion­ing Armanino’s proof of reserves sys­tems, which some­times rely on soft­ware and infor­ma­tion from the com­pa­nies being audit­ed. Ethereum’s Vita­lik Buterin has advo­cat­ed for using more-advanced cryp­to­graph­ic proofs to show solvency.

But audit­ing best prac­tices often become obvi­ous only after audits fail.

“A lot of it’s post-hoc: Things blow up, and they find out risk fac­tors that way,” Gans said.

Armani­no, Krak­en and Gate.io did not return requests for comment.


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