Bitstamp Passes Audit Overseen by Bitcoin Developer Mike Hearn

Bitcoin exchange Bitstamp has passed an audit overseen by BitcoinJ developer Mike Hearn.

AccessTimeIconMay 27, 2014 at 1:42 p.m. UTC
Updated Sep 14, 2021 at 2:06 p.m. UTC

Bitcoin exchange Bitstamp has passed an audit overseen by BitcoinJ developer Mike Hearn.

The former Google engineer confirmed in a report that a Bitstamp proof of reserves procedure was executed on 24th May.

"I was asked to act as a neutral observer during this procedure to help build community confidence in Bitstamp as a large holder of coins," he said in the report.

Hearn went on to stress that the procedure is not a financial audit, but confirms that, at this time, "Bitstamp holds sufficient bitcoins to cover their customer deposits, as tracked by their master database".

The report continues:

"As of 13:00 CEST 24/05/2014, Bitstamp held 183,497.40310794 BTC in their cold wallet. Combined with the money that was in their hot wallet this totalled to about 45 BTC more than the total customer deposits and Ripple IOUs recorded in their database.

A precise statement of how much more isn’t possible because the site was not suspended during the verification procedure and so the size of the hot wallet fluctuated throughout, as withdrawals and deposits were processed."

According to the CoinDesk Bitcoin Price Index, 183,497.40310794 BTC is currently worth around $102.9m.

How it worked

In order to prove how many bitcoins the company has stored in its cold wallet, Bitstamp broadcast a send-to-self transaction and then signed a message Hearn selected with the associated private key.

Hearn's report states:

"To prove to me the size of the company's deposits, I was given direct MySQL access to their master database. We ran a SQL SELECT SUM(btc_balance) query on the user_profiles table to determine the total outstanding balances.

Earlier I had reviewed some of the site code to verify that indeed this table was being updated when deposits and withdrawals took place."

He goes on to assure that the procedure didn't expose any customer-specific private information.

When asked why he decided to oversee the procedure, Hearn told CoinDesk: "The Bitstamp guys want to do this semi-regularly with a different observer each time. I was asked to do this, and as I now am self-employed, it made sense to go and visit them."

He went on to emphasise the importance of audits such as this, claiming that they "help dispel rumours and build trust in the ecosystem."

Hearn doesn't, however, believe it's the right time for a standard audit system to be created and used by all bitcoin exchanges.

"It's a bit early to be setting standards yet," he explained.

"There's still a lot of variance in techniques and technologies being used, with new R&D still being done. Once things settle down some more, a standard way to audit exchanges would be useful indeed."

Quarterly audits

This isn't the first audit the company has undergone, and it won't be the last. The company's first audit took place late last year, with the result being announced in early March.

As part of that audit, which was led by, Bitstamp moved 194,933 BTC to a single bitcoin wallet. This transaction didn't go unnoticed and sparked widespread speculation, with some people correctly guessing Bitstamp was behind it, but others suggesting bitcoin's founder Satoshi Nakamoto was responsible.

Bitstamp CEO Nejc Kodrič told CoinDesk his company plans to undergo an audit once per quarter, to prove its transparency and solvency to both its current and potential customers.

"We want encourage other exchanges to do the same. It is a step towards better consumer protection," he explained.

Bitcoin image via Shutterstock


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