Proof-of-reserves (PoR) is a method where crypto exchanges publicly demonstrate that they hold the assets they claim to have for users. However, PoR is not a guarantee of trust or solvency, as it only shows assets at a single point in time and may not capture all liabilities.

While PoR can provide transparency, it does not fully ensure a company’s financial health. It may not include all liabilities, such as loans or off-chain payables, and assets can be temporarily borrowed to improve a snapshot. Liquidity, encumbrances, and valuation can also be misleading.

PoR is not the same as an audit and should not be treated as a safety certificate. Many PoR reports resemble agreed-upon procedures and do not provide an overall assurance of a company’s health. Regulators caution that PoR reports have limitations and may not indicate if an exchange has enough assets to meet liabilities.

To build trust, exchanges should pair transparency with proof of solvency, strong governance, and clear operational controls. This includes showing complete liabilities, operational controls, liquidity, and governance. PoR can be a starting point, but accountability goes beyond a simple PoR report.

PoR is a valuable tool, but it cannot replace full accountability and transparency. It is a narrow, point-in-time check that may not prove solvency, liquidity, or control quality. Users should consider if liabilities are included, what is in scope, if the reporting is ongoing, if reserves are unencumbered, and the type of engagement before trusting a PoR report.

Read more at Cointelegraph: Why Proof-of-Reserves Isn’t Enough to Trust Crypto Exchanges