PCAOB Issues Alert: Exercise Caution When Relying on “Proof of Reserve” Reports
The Public Company Accounting Oversight Board (PCAOB) has cautioned investors against relying on “proof of reserve” reports. The PCAOB's newly established Office of the Investor Advocate has issued an alert warning investors of the inherent limitations of such reports and the need to exercise extreme caution when relying on them to conclude that there are sufficient assets to meet customer liabilities.
The alert comes in the wake of the collapse of the cryptocurrency exchange FTX, which was compared to the Bank of Credit and Commerce International (BCCI) failure in 1991 by Michael Hsu, Acting Comptroller of the Currency, in a speech to the Institute of International Bankers on March 6. The BCCI failure triggered changes in banking regulations and highlighted the need for a bank's home regulator to have visibility over its entire operations.
Hsu noted the work of international standards bodies regarding cryptocurrency, such as the Financial Stability Board, International Monetary Fund (IMF), and CPMI/IOSCO, and hoped they would subject crypto firms to consolidated supervision, not just compliance with standards. He argued that, by seemingly being everywhere and structuring entities in multiple jurisdictions, crypto firms are effectively nowhere and are able to evade meaningful regulation.
The Fed, FDIC, and OCC issued a joint statement on managing liquidity risks in crypto deposits last month, and are aware of service providers issuing proof of reserve reports to certain crypto exchanges and stablecoin issuers. Such reports try to reassure customers of the safety and availability of their digital assets, but the PCAOB's alert notes that they do not provide any meaningful assurance to investors or the public.
Hsu further urged international bodies to use the BCCI situation as a model to suss out problematic actors in crypto. He also said that any changes to address similar concerns in the crypto industry must occur outside of the banking system.
The Office of the Comptroller of the Currency (OCC), a division of the U.S. Department of the Treasury, is responsible for the supervision of American banks and ensuring the stability of the nation's financial system. The entity can grant or deny authorization for banks to engage in crypto-related activities. Hsu concluded that currently, no crypto platforms are subject to consolidated supervision.
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