Don’t trust, verify. Why everyone needs a Proof of Solvency.
The rise of digital assets like Bitcoin has not been without controversy. Major incidents — such as the loss of user funds through fraudulent or negligent behaviour — have eroded trust in the ecosystem. At the same time, these incidents highlight a lack of transparency between custodial services globally and their customers.
In February 2014 Mt Gox halted all Bitcoin withdrawals from its platform. By the end of the month all trading would be suspended, visitors to the site were greeted by a blank page and the unfortunate news that Mt Gox had filed for bankruptcy. Internal documents appeared to indicate that Mt Gox had been trading insolvent for many years, after losing nearly 750,000 Bitcoins (~US$ 7.5 Billion at today’s prices) through thefts. Only a year before the incident, Mt Gox was the largest Bitcoin exchange in the world, processing more than 70% of all global Bitcoin transactions. Now, in August 2019, those that trusted Mt Gox with their Bitcoin are still waiting for compensation.
Fast forwarding to 2019, the unexpected death of QuadrigaCX’s CEO and its subsequent bankruptcy filing revealed long-term fraudulent activity in Canada’s largest cryptocurrency exchange. Since 2016, fake accounts were created on the QuadrigaCX platform to embezzle user funds into the CEO’s personal accounts in other exchanges. Over US$200 million of user funds were stolen by QuadrigaCX over three years. It would hide its insolvency by using user deposits to fund withdrawals, similar to a Ponzi scheme. At the time of writing, only $33 million have been recovered by creditors.
Sadly, these are not isolated incidents. In 2018, scams and thefts led to US$1.7 billion being stolen. In just the first three months of 2019 nearly US$1.2 billion of funds have been lost. This is expected to hit US$4.3 billion by the end of 2019. The risks associated with custodial services are clear. Many custodial services operate opaquely with little ability for customers to verify the status or security of their funds.
Many custodial services operate opaquely with little ability for customers to verify the status or security of their funds.
We want this to change.
Our customers should be able to audit and verify our holdings, and they should have the peace of mind that their funds are secure (i.e. we have not stolen or lost them). The addition of Proof of Solvency to the Bamboo platform is a key part of enabling this. This protocol will enable proactive transparency between us and our users, fostering greater trust and assurance with those that invest with us.
Next week we’ll go into some of the details of how the protocol works, beginning with how we intend to prove our assets.
– With 🌱 from the Bamboo Team
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