Binance Pledges ‘Proof-of-Reserve’ To Avoid Crisis

Check out the biggest breaking crypto market updates for today:

Binance Proof-Of-Reserve Pledge Gains Support Following FTX Crisis

According to a tweet posted yesterday by Binance CEO Changpeng Zhao (CZ), the crypto exchange will soon start a Proof-of-Reserves audit system to allow verification of its digital asset holdings. 

The announcement follows the drama that unfolded after FTX’s liquidity crunch on Tuesday. 

CZ pledged to implement a Proof-of-Reserve mechanism that makes use of Merkle Trees to provide “full transparency.” 

Merkle Trees are a data structure used to encode blockchain data more efficiently and securely. The announcement saw many other crypto exchanges also post similar tweets stating that they had or would be implementing a Merkle tree-based Proof-of-Reserves system. 

CZ tweeted: 

“All crypto exchanges should do merkle-tree proof-of-reserves. Banks run on fractional reserves. Crypto exchanges should not. @Binance will start to do proof-of-reserves soon. Full transparency.” 

A Proof-of-Reserve audit is usually conducted by an independent third party to ensure the custodian’s assets are owned as claimed. 

The Binance CEO’s intention to implement Proof-of-Reserves comes after Binance agreed to buy rival cryptocurrency exchange FTX on Nov. 8, who’s been rumored to be on the brink of financial collapse despite CEO Sam Bankman-Fried initially dismissing the claims. 

Chainlink CEO Sergey Nazarov expressed his views in a Nov. 8 tweet that a cryptographic-based Proof-of-Reserves mechanism could paint investors with a more clear picture of the solvency situation of a trading venue or financial firm, and “is becoming the new industry standard.” 

Nazarov said: 

“It is clear that cryptographically proving the solvency of trading venues and financial institutions is becoming the new industry standard. Proof of Reserves is a great example of a cryptographically guaranteed financial world that starts in crypto going on to mainstream finance.” 

Meanwhile, crypto exchange Kraken has already implemented its “advanced cryptographic accounting procedure” to allow users to verify their token balances since February 2022. 

Crypto exchange OKX also announced its plans to roll out a Merkle tree-based Proof-of-Reserves audit system in a Nov. 8 Twitter post – something they consider to be an “important step” in establishing a “baseline trust” in the industry. 

The idea of more Proof-of-Reserve audits received near-full backing from the Twitter community, with crypto industry figures weighing in on the move by Binance. 

Host of The Daily Gwei podcast Anthony Sassano and founder of open-source crypto exchange ShapeShift, Erik Voorhees, both suggested Proof-of-Reserves are already integrated into decentralized finance (DeFi) and automated by smart contracts. 

The founder of crypto market intelligence platform Messari, Ryan Selkis, took things one step further, arguing that regulators should direct their attention to focus on the more centralized players in the industry: 

“The fact we are debating DeFi protocol regulation before responsible disclosures like proof-of-reserves and liquidity from the mega-funds like a16z and Alameda shows just how far off the ball we are on policy right now,” he said.

But not everyone agreed. Antonio Juliano, founder of crypto derivatives trading platform dYdX, argued that a Proof-of-Reserves wouldn’t disclose all necessary information needed to verify an exchange’s holdings. 
“The issue is that CEXs *can’t* do proof of reserves,” he said, “So what if you show a wallet with $20B? How do you know the sum of user balances isn’t $30B? How do you know if the entity has outstanding loans? How do you know what contracts they’ve entered into?”

New Treasury Sanctions Link Tornado Cash To North Korea’s Nuclear Weapons Program

Despite pushback from the industry, the U.S. Treasury is not giving an inch in the fight over its sanctions on Tornado Cash. 

The US Treasury’s Office of Foreign Asset Control (OFAC) has reportedly added a new designation to the Ethereum-based crypto mixer. 

Tornado Cash has now been designated by OFAC under an order on North Korea’s nuclear proliferation in addition to the original sanctions from August under an executive order on cybercrime. This announcement effectively signals that OFAC views Tornado Cash as a threat to national security. 

The announcement reads, 

“This action is part of the United States’ ongoing efforts to limit the DPRK’s ability to advance its unlawful weapons of mass destruction (WMD) and ballistic missile programs… Today OFAC is sanctioning Tornado Cash pursuant to E.O. 13722 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, the Government of the DPRK, a person whose property and interests in property are blocked pursuant to E.O. 13722.” 

The double designation also flies in the face of multiple lawsuits from the crypto industry and advocates aiming to roll back the original sanctions. 

Those suits argue that Tornado Cash, as a decentralized smart contract, cannot be an “entity” as the terms of OFAC’s sanctioning authority lay out. 

OFAC “exceeded their statutory authority because Tornado Cash is used to complete functions that do not include ‘any property in which any foreign country or a national thereof has any interest,” the nonprofit CoinCenter argued in their case. 

A new FAQ from OFAC addresses this argument, saying “OFAC designated the entity known as Tornado Cash, which is a ‘partnership, association, joint venture, corporation, group, subgroup, or other organization’ that may be designated pursuant to IEEPA,” the office wrote in its latest guidance. 

“Nothing they’ve announced changes our strategy in this lawsuit,” said Peter van Valkenburgh, Coin Center’s director of research, in a tweet following the announcement. “These developments underscore the arbitrary and capricious nature of Treasury’s actions and their continued misunderstanding of the technology.” 

In March of this year, an exploit saw bad actors get away with almost $600 million from Ronin, an Ethereum sidechain that Axie Infinity ran on. 

OFAC linked the hack to North Korea only weeks later.

Bored Ape Founders Propose New NFT Royalties Model & Decry OpenSea’s Stance As “Not Great”

Top NFT marketplace OpenSea announced over the weekend that it may follow the trend of no longer enforcing creator royalties on secondary sales. Which has caused more prominent artists and creators to speak out against this potential decision. 

In a blog post shared today by Bored Ape Founders Gordon Goner, Garga and Tomato, along with 10KTF CTO Randy “Melonpan” Chung, Yuga Labs criticized the current NFT industry trend of optional payment of creator royalties. 

They instead suggested a DAO-governed allowlist model that will let creators approve secondary trades done only through marketplaces that honor royalties. 

This means a transaction will be denied if a marketplace’s smart contract is not on the list. 

However, standard wallet-to-wallet transfers would be unaffected as it’s impossible to tell whether someone’s harmlessly swapping an NFT between their wallets or attempting a trade that bypasses royalties. 

“The NFT ecosystem would be a tiny fraction of what it is today if it weren’t for creator royalties,” the authors wrote. “The leading marketplaces of the past couple years would be nowhere if they hadn’t supported them.” 

The founders note that when the Bored Ape Yacht Club launched in 2021 at a price of around $220 worth of Ethereum apiece, Yuga set a 2.5% creator royalty on secondary sales because that’s the amount that OpenSea charged for its own marketplace fee. 

It’s lower than the royalty fee chosen by many other NFT creators–typically between 5% and 10% of the sale price. 

“The end result has been that OpenSea has made around $35 million dollars from Bored Ape sales on its platform, not including any of our other collections,” they wrote. “We’ver never met the founders, but perhaps they have a beach house somewhere with a plaque for us.” 

Yuga Labs, meanwhile, has earned more than $147 million from creator royalties on secondary sales of its various projects–including the Mutant Ape Yacht Club and Otherside metaverse game– based on data collected by Galaxy Digital in October. 

However, NFT royalties as they exist today aren’t durable. They can be set by creators in the smart contract–or code that powers NFTs and autonomous decentralized apps– but they aren’t fully enforceable on-chain. 

Marketplaces must choose to honor them, which most of the largest players have until recently.

Luke Baldwin

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