Saylor says onchain proof-of-reserves a ‘bad idea’ due to security risks

Michael Saylor, executive chair of Strategy (formerly MicroStrategy), a major Bitcoin-buying firm, voiced strong opposition to institutions publishing on-chain proof-of-reserves, deeming it an insecure practice that compromises security. He argued that the conventional method of publishing such proofs weakens the security of issuers, custodians, exchanges, and investors. Saylor’s firm, Strategy, has yet to disclose whether it will adopt this transparency measure.

Proof-of-reserves, commonly used by crypto exchanges, verify sufficient crypto reserves to cover customer deposits and confirm adequate holdings for entities like crypto-tracking ETFs. While acknowledging valuable lessons from the FTX and Mt. Gox collapses, Saylor contends that proof-of-reserves are not the appropriate response for institutions. He highlighted the security risks inherent in publicly revealing wallet addresses, making companies vulnerable to tracing and potential attacks. He suggested that a thorough security analysis would reveal numerous vulnerabilities associated with this practice.

The adoption of proof-of-reserves surged after the FTX collapse in November 2022, driven by a need for greater transparency. Several prominent players, including Binance, Kraken, OKX, and Bitwise, have embraced this measure. However, Saylor points out that proof-of-reserves typically only demonstrate asset holdings, omitting crucial information about liabilities. This incomplete picture, he argues, renders the practice ineffective and potentially misleading.

Strategy holds the largest corporate Bitcoin holdings globally, with 576,230 Bitcoin valued at $62.6 million. MARA Holdings follows with 48,137 Bitcoin. Over 110 publicly traded companies worldwide now hold Bitcoin on their balance sheets. Saylor’s perspective underscores a significant debate within the industry regarding the balance between transparency and security in the context of on-chain proof-of-reserves. His concerns highlight the complexity of implementing effective security measures for institutional-level Bitcoin holdings.