Bitcoin exchange Kraken has passed a cryptographically verifiable proof of reserves audit with flying colours.
The audit, which was carried out by Stefan Thomas on 11th and 22nd of March, proved that more than 100% of Kraken's bitcoins are held in reserve.
The process was designed to allow the auditor to verify that the total amount of bitcoins held by Kraken matches the amount required to cover an anonymized set of customer balances.
Covering all balances
Thomas said the audit was very strict, but at the same time it maintained "absolute privacy" for customers. He also added that Kraken have expressed interest in conducting regular audits in the future, with different auditors each time. Thomas said:
Using the ‘Merkle Tree’ technique originally proposed by bitcoin developer Greg Maxwell, the auditor went on to explain the gritty technical details. He was provided with a JSON file from Kraken, which contained the list of the exchange's addresses and balances. The file was then compared against a copy of the block chain.
The results were in order, Thomas concluded: "The actual holdings were very slightly (< 0.5%) above the required holdings, meaning Kraken had greater than 100% reserves at the audit block height."
A competitive edge
Following the Mt. Gox crisis, many exchanges are keen to distance themselves from the troubled exchange and other bitcoin outfits with a chequered track record. Security and transparency have become selling points, hence exchanges appear to be doing their best to reassure investors on a regular basis.
As investors demand more security and transparency, exchanges have to oblige or suffer the consequences and lose their competitive edge. Low fees are just one way of remaining competitive, but transparency and sound reporting practices might prove more important in the long run.