The U.S. Securities and Exchange Commission (SEC), an agency that is no friend to the crypto business, has issued a warning to all investors, cautioning them that proof of reserves does not necessarily guarantee the safety of their funds.
In a press release, the SEC’s Office of Investor Education and Advocacy reiterated its stance on crypto asset securities, stating that the risks associated with investing in these securities remain significant and that the only money investors should put at risk is money they can afford to lose entirely.
Crypto asset entities, including trading platforms and/or entities that issue crypto asset securities, use the term “proof of reserves” to describe a voluntary method for offering evidence that they have sufficient reserve assets to cover what is held for customers and/or accounts at a given point in time. This is meant to assure customers that their funds are safe and available upon demand.
However, the SEC warns that such assessments may not provide any meaningful assurance that these entities hold adequate assets to back their customers’ balances. In fact, crypto asset entities might use these in lieu of audited financial statements to obscure and confuse customers about the safety of their assets.
A proof of reserves audit is not as rigorous or comprehensive as a financial statement audit and may not provide any level of assurance. Audited financial statements typically require audits of a complete set of financial statements performed by a registered public accounting firm in accordance with PCAOB auditing standards.
With proof of reserves, the SEC thinks there are no specific audit requirements for the engagement or the information reported, allowing an entity full discretion to manage the terms of the engagement.
The SEC is also hinting at potential enforcement action against crypto asset entities that make claims about their reserves without providing any meaningful assurance to customers.
