Following the implosion of FTX earlier this month and its subsequent bankruptcy proceeding exposing the depths of the company's mishandling of customer finances, multiple cryptocurrency companies have jumped to release proof-of-reserve audits.
A proof of reserve audit is a way for both clients and potential investors to prove that an independent auditor studied and proved the state of an exchange or business' reserves. In the wake of FTX's collapse, this served as the main method crypto companies used to win back investor confidence amid concerns that their businesses might be sorely affected by the FTX scandal. (Related: Crypto Nostradamus John Perez: Cryptocurrency scam is THE SCAM of the century.)
Notable crypto companies have already provided their own proof of reserve audits, while others like Binance have agreed to publish their own audits soon. However, Grayscale has bucked the trend and remains adamant about keeping the state of its reserves secret.
"Due to security concerns, we do not make such on-chain wallet information and confirmation data publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure," said Grayscale in a statement.
The company said it is aware that failing to provide proof of reserves is a "disappointment to some," but pointed out that "panic sparked by others is not a good enough reason to circumvent complex security arrangements" that have kept its investors' assets "safe for years."
In a subsequent message, Grayscale assured its clients and investors that its cryptocurrency is held by the custody service provided by crypto exchange platform Coinbase, which is the only regulated and publicly traded cryptocurrency exchange in the United States. Grayscale noted that Coinbase regularly performs on-chain validation, and as such its own audits are unnecessary.
Grayscale currently holds the largest cryptocurrency trust in the industry. A recent report published by Coinbase showed that it holds a little under 635,236 bitcoin on behalf of GBTC. This amounts to around $10.72 billion worth of bitcoin as of press time.
In the wake of the FTX meltdown, notable industry heavyweights like Terra, 3AC and Celsius have lost a lot of their market cap and are themselves on the brink of collapse. Grayscale's refusal to provide proof of reserve audit has not assuaged concerns from investors, but has instead fueled speculation that the company's finances are direr than it is letting on, despite Coinbase's recent report on its holdings.
These rumors are not helped by the loss in value of bitcoin. Over the last 12 months, bitcoin has traded 72 percent lower and is currently trading at a multi-year low of below $17,000. Grayscale's flagship fund, the Grayscale Bitcoin Trust, known by its stock market ticker as GBTC, has also recorded an 82 percent loss in value in the last 12 months and is currently trading at a 45 percent discount to the price of its underlying asset.
Grayscale is also using Coinbase to hold over a dozen other cryptocurrency assets, including the Grayscale Ethereum Classic Trust with over $238 million worth of Ethereum Classic; the Grayscale Ethereum Trust with nearly $3.89 billion worth of Ethereum; and the Grayscale Litecoin Trust with over $119.5 million worth of Litecoins.
Instead of its own proof of reserve audit, Grayscale redirected clients, investors and analysts to Securities and Exchange Commission filings on its website for off-chain validation, which is required by law. It also confirmed that each of its over a dozen trusts are registered as separate legal entities to prove that each product is segregated from Grayscale's main fund.
Watch this clip from Fox News featuring a former FTX investor saying the company's scandal is a "big lesson" for the crypto community.