US Senators Thom Tillis and John Hickenlooper have reintroduced the PROOF Act, a legislative measure aimed at preventing digital asset custodians from mixing customer funds with institutional or proprietary capital. The bill also mandates monthly third-party inspections of custodial reserves to ensure transparency and build on existing standards in the digital asset sector. The PROOF Act was initially introduced in response to the collapse of the crypto exchange FTX and aims to address systemic failures that led to losses of over $8 billion.
The PROOF Act proposes two key requirements for digital asset exchanges and custodians. Firstly, it establishes regulatory standards that explicitly prohibit the co-mingling of customer and institutional funds. Secondly, it obligates these platforms to undergo monthly Proof of Reserves (PoR) inspections conducted by a neutral third party, preferably a certified auditing firm. The results of these inspections would be submitted to the US Department of the Treasury for public disclosure, with entities facing civil penalties for non-compliance.
The bill defines PoR as a cryptographic method that allows exchanges and custodians to verify the backing of user deposits without disclosing sensitive information. Techniques such as Merkle trees or zero-knowledge proofs are used to demonstrate reserve holdings while maintaining transparency and protecting the privacy and security of the platform and its users. The PROOF Act seeks to standardize reserve verification across platforms that custody digital assets and provide American users with clear assurances about the solvency of custodial institutions.
While some crypto firms have voluntarily published reserve attestations, the PROOF Act aims to move towards mandatory requirements for Proof of Reserves. Chainlink has supported the bill’s reintroduction, calling it a critical step in establishing transparency and accountability in the digital asset industry. As more real-world assets move onto the blockchain, legislation like the PROOF Act becomes essential in ensuring the integrity of digital asset custodians and exchanges.
In conclusion, the PROOF Act reintroduced by Senators Tillis and Hickenlooper seeks to address systemic failures in the digital asset sector and prevent future collapses like that of FTX. By establishing regulatory standards and monthly inspections, the bill aims to bring transparency and accountability to custodial institutions holding user deposits. As the industry continues to evolve, legislation like the PROOF Act will play a crucial role in ensuring the stability and trustworthiness of digital asset exchanges and custodians.
