In an effort to increase transparency and strengthen the trust of its customers, FTX Japan has unveiled a blockchain-based technology known as Proof of Solvency (PoS). This initiative was announced by Seth Melamed, the COO of FTX Japan, through a series of tweets on September 28, 2023. The newly introduced Proof of Solvency mechanism allows the company to invariably prove that the exchange’s reserves exceed the assets held in custody for clients.
Proof of Solvency (PoS) is a method used to demonstrate a company’s ability to meet its long-term financial obligations, combining traditional financial audit practices with blockchain transparency. The ICONOMI blockchain audit conducted by Deloitte on April 5, 2018 shows that PoS includes two core components: Proof of Liabilities and Proof of Reserves. Through the Merkle Tree approach, individual users can verify their account balances and overall liabilities without revealing personal information, ensuring data integrity. Proof of reserves involves disclosing total reserves, including digital and fiat assets, verified via blockchain addresses, bank and exchange account information. Deloitte’s audit, which included 80 digital assets, confirmed that ICONOMI’s reserves of $210.2 million exceeded liabilities of $133.6 million, establishing solvency. This PoS framework improves transparency, security, and trust among stakeholders while maintaining user privacy.
The PoS is an important step toward addressing a central problem in the cryptocurrency market and, by extension, traditional financial markets. The technology aims to provide market participants, who have entrusted their assets to stock exchanges or financial institutions, with greater security and information transparency. In doing so, it tackles the technical problem of information provision in a secure and transparent manner, which worries many in the industry.
FTX Japan adheres fervently to regulatory requirements by strictly managing the separation of customer assets. However, with the introduction of PoS, the reliance on subjective verification or management claims has been replaced by cryptographic proofs such as Zero-Knowledge Proofs. These evidences and the associated results are reflected on the blockchain, allowing objective verification of the asset management status of FTX Japan’s clients.
The PoS service is available to all FTX Japan customers and the Liquid Japan platform. Customers can easily verify their balance with just three clicks via the Liquid GUI. Furthermore, according to Melamed, the details of the PoS will be published weekly on the Ethereum blockchain. This initiative is seen as a crucial step towards resumption, and FTX Japan believes it is a high-quality service for all participants in the cryptocurrency ecosystem.
The launch of the Proof of Solvency by FTX Japan underlines the growing importance of transparency and trust in the evolving digital asset market. By utilizing blockchain technology, FTX Japan has established a robust mechanism to provide clear evidence of its financial solvency to its customers, setting a positive industry precedent in terms of security and transparency.
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