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Be ‘very wary’ of crypto proof-of-reserve audits: SEC official

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Be ‘very wary’ of crypto proof-of-reserve audits: SEC official

investors audits

SEC warns investors to be wary of crypto proof-of-reserve audits

Recently, a senior official from the US Securities and Exchange Commission (SEC) has warned potential investors to be ‘very wary’ of crypto proof-of-reserve audits.

What is a proof-of-reserve audit?

A proof-of-reserve audit is a process which allows investors to check that a digital asset exchange platform has enough of a digital asset in its reserves to cover all its customer assets.

SEC Official Warning

In recent remarks, SEC’s Director of Corporation Finance, William Hinman warned investors not to rely on such audits and instead expected exchanges to “provide a level of disclosure and transparency that investors would reasonably expect to provide in making decision.”

He also cautioned that such audits can “provide a false sense of comfort to investors” because auditors may be limited in their ability to verify the accuracy of a firm’s representations.

Other Potential Risks

Other potential risks associated with such audits include:

  • Auditors typically use a black box approach by looking at the exchange’s own internal systems and records rather than obtaining independent verification from third-parties.
  • Auditors do not evaluate the exchange’s security system or check for any flaws that could lead to a hacking or other types of robbery.
  • Auditors do not examine the exchange’s legal contracts or other documents that could limit customer rights.

The SEC is not only urging investors to be wary of these audits but also requesting digital asset exchange platforms to issue clear disclosure on the limited scope of the audits and their associated risks.

It is wise for digital asset investors to understand the different risks associated with the crypto market and to make well-informed decisions before committing any funds into an exchange platform.

The U.S. Securities and Exchange Commission (SEC) recently warned investors to be “very wary” of crypto proof-of-reserve audits conducted by the exchanges.

In a speech at the Securities Regulation Institute, SEC director of trading and markets Brett Redfearn warned about the limitations of digital asset exchanges and their purportedly independent audits that are used to ensure that customers are not exposed to theft or loss of their funds. He went on to caution investors to take into consideration that transparency reports do not guarantee a guarantee of fund safety.

Redfearn notes that while some exchanges have started to provide some transparency in the form of audit reports, investors should not be misled into believing these reports guarantee the safety of their funds. He said that these reports “do not provide assurance to investors that the covered exchange, wallet, or custodian has audited its system of internal controls for all material risks, or is in compliance with applicable legal requirements and industry best practices.”

In fact, the SEC official added, investors should be “particularly wary” of those “self-audits” that are conducted internally by the crypto exchanges. Redfearn says that while crypto exchanges are touting their transparency, “it is not necessarily a substitute for a comprehensive audit.”

In conclusion, it is important to note that, while not a guarantee, audit reports can provide some comfort to investors who are wary of the risks of investing in digital assets. However, these reports should be taken with a grain of salt, and investors should be sure to consider the limitations and complexity of these audits and the potential risks they may pose. Investors should always do their due diligence and research any potential investment before making a decision.

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