Four years after FTX, crypto exchanges still prove assets without proving solvency

Here is the latest from the digital-asset markets: A customer opens an exchange account, copies a string of numbers and follows a path through a Merkle tree. The page processes the request and returns a reassuring result: the customer’s balance was included in the exchange’s proof of reserves. The verification is most likely technically sound, establishing that the account appeared in a dataset and that the exchange controlled wallets that contained enough of a particular asset to cover the balances represented there.

However, it can easily leave out whether every customer appears in that dataset, how much the exchange owes to lenders, whether the displayed coins have been pledged as collateral, and whether the company actually controlling the wallet is the same company that's legally required to repay the customer. The interface on most exchanges makes this reserve verification process feel pretty comprehensive and final because people tend to give more authority to cryptographic evidence than to corporate promises. But what many miss is the fact that the result only establishes that an exchange demonstrated control over specified assets at a specified moment.

Market Dynamics

A determination of solvency, on the other hand, requires both a deeper and a wider view of the company’s obligations, ownership structure, and access to funds. What proof of reserves actually proves for exchanges Proof of reserves became an industry priority after FTX collapsed in November 2022, when Binance founder Changpeng Zhao urged exchanges to publish wallet evidence and major platforms began releasing dashboards, Merkle-tree tools, and reserve ratios. documented that initial rush as exchanges tried to contain a crisis of trust, then followed the industry’s attempt to develop more advanced forms of cryptographic verification.

An exchange can publish wallet addresses and sign a message using the private keys attached to those wallets, demonstrating control without moving the assets, while a Merkle tree converts each customer balance into a cryptographic hash and combines those hashes into a single root. A customer can use that structure to verify that their balance contributed to the root without gaining access to anyone else’s account. Newer systems add zero-knowledge proofs, which can confirm that calculations followed a stated set of rules while keeping individual balances private; Binance, for example, incorporated zk-SNARK verification into its reserve system after the first post-FTX disclosures.

Major platforms now publish different versions of this process. Binance provides a reserve dashboard and customer verification, OKX publishes wallet information and downloadable proof files, Kraken offers account-level verification for covered balances, and Crypto. com provides a Merkle-based verification interface.

Market Impact

These systems improve on a model that required users to trust claims. They can expose false claims about asset holdings, make large withdrawals more visible, and allow customers to confirm that their balances appeared in the published dataset. But these systems have limits, and most of them come from the dataset itself.

A Merkle tree can authenticate the records placed inside it, but it can’t identify accounts omitted before the tree was built. It also can’t identify a bank loan, tax bill, legal judgment, or guarantee made to an affiliated company, leaving a rigorous mathematical process tied to a financial perimeter chosen by the exchange. Most reserve reports also measure assets at a particular time and may be published after an accountant, security firm, or internal team has completed its work.

A snapshot can accurately represent just one moment without reflecting the company’s normal position, because assets move before or after the measurement. The resulting total then reveals little about the origin of the funds or their availability during the next withdrawal surge. Historical reporting, frequent snapshots, and permanent wallet archives help outsiders place each measurement in context.

This shift continues to shape the digital-asset landscape, with analysts examining its near-term effects.