If we’re going to improve traditional finance, we’d better start playing a role. It is clear how Bitcoin is fixing the full understanding of finance. It’s clear, too, how Bitcoin changes your relationship with money—both financially because you’re more inclined to hold valuable assets—and physically because you can do new things like hold the GDP of a small island nation with a USB. There is one thing, however, that is slowly gaining acceptance and needs to be accepted if we are to truly improve upon the mistakes of the past, and that is Proof of Withdrawal.
Bitcoin has unique test structures baked into the system itself. Bitcoin allows any third party to verify the entire supply of money down to the smallest unit. A third party can do this for free, without any special rights or permissions. It is difficult to overestimate how novel and influential this property of the Bitcoin protocol is and the implications of the guarantees it provides. In context, the total value of the global dollar supply is an estimate and not an exact value at any given time due to various factors including the existence of virtual and digital currency, and the circulation of funds in other countries. The total amount of gold available is an estimate due to completely different reasons especially the lack of certainty when it comes to the volume of mined gold from different mines around the world, gold available in private hands, hidden gold pieces and stones, new mines. , recycling, and unreported sources. There is no true global, untrustworthy source of any currency or asset other than Bitcoin. And this should be the driving force for Bitcoin going forward.
Proof of Reserves (PoR) has been an integral part of the industry almost since its inception. The fall of Mt. Gox scandal of 2014 set the stage for much-needed transparency. The exchange was hacked, 850,000 BTC (~47,617,204,000 USD at the time of this article) was stolen and their customers were unaware. Funds were spent within a few years before the real collapse occurred. The PoR system could have mitigated further financial losses as their customers would have seen trading fees dwindle at an alarming rate. If this sounds like a recent memory rather than an ancient episode of Bitcoin history it’s because the same argument applies to FTX, and the same basic thing happened to FTX. If customers, and the broader market, would have seen the BTC exchange reserves decrease in real time (or the fact that FTX had zero Bitcoin), the risk to the system would have been greatly reduced.
So, what do you think will happen if the single custodian that owns 90% of the Bitcoin that backs these ETFs is hacked and/or misbehaves? Unless the public is informed about the exchange, millions of people will be holding billions of Bitcoin paper. The more we connect ourselves to traditional finance the more risks there are between traditional financial markets and crypto markets. There are two options right now as we continue to mature as an asset class – apply the old hedging and risk management tools to this new technology, or use new, more efficient, risk-adjusted standards to ensure we don’t see a systematic collapse if a certain class of financial products experiences a shock.
A claim can be made that having auditors is enough, that we already have these tools and as regulated financial products, these are actually “taken care of.” This claim, in itself, is valid as it puts audit controls to reduce risk, in fact, the best we have been able to do so far in terms of financial products. But any reasonable inquiry into the work of auditors yields alarming results: PwC vs. BDO in the Colonial Bank Case (2017), Grant Thornton vs. PwC (Parmalat Scandal, 2003), BDO vs. Ernst & Young (Banco EspÃrito Santo, 2014) ), KPMG vs. Deloitte (Steinhoff Scandal, 2017), and this only looks back 20 years. FTX and Enron both had auditors. We use auditors because we don’t trust the people who run the organization and the best we’ve been able to do so far is to establish trust in a different set of people, outside of the organization. But the inherent risks of trusting people and organizations have not been addressed until now. Enron’s biblical downfall was due to an apparent conflict of interest between them and their auditor—namely Arthur Andersen also provided Enron with lucrative consulting services in addition to their audit work and additionally helped them cook their books.
Bitcoin is different, it behaves and lives differently. It behaves in a different way because the cryptographic guarantees that it shows something that cannot be compared to traditional assets. Just as anyone can verify all the money in the system with trusted credentials, so anyone can verify the holdings of a person, or a company, or an ETF, that holds Bitcoin in a completely risk-free manner. It is an important note, that it does not reduce the risk, but it is not risk free. Someone who anonymously proves to any other company that he owns a Bitcoin, say, a loan can do so without question of whether that person is the actual owner of BTC. This can happen repeatedly, with minimal overhead, and can be continuously monitored in real time. No deeds, no external auditor, no review of any books to be done. That data can be entered without question.
So, what does this mean for ETF products? It should be clear at this point that because ETF products are such an important pillar of our modern financial system and because Bitcoin presents unique risk paradigms that the old research standards do not adequately provide, a new risk infrastructure must be implemented in these products. The solution is simple and it’s the same solution that we’ve been climbing on the ice we’re standing on trying to get air. It requires Bitcoin ETF products to launch and comply with proof of depository rules. They should give their investors peace of mind that the underlying assets that underpin these ETFs are there, that they are subject to strict monitoring standards and are not subject to reconsideration. Failure to do so, or unwillingness to do so on the part of the ETF issuer speaks to the issuer’s priorities—namely, that they do not understand the nature of this financial product or that they are more comfortable working with it. light than light. Failure to do this as an industry-wide standard is simply a ticking time bomb.
Hoseki was created for this very purpose, to build pipelines to make Bitcoin money a reality from PoR. Hoseki helps individuals to prove their holdings to their partners through Hoseki Connect and through Hoseki Verified provides services to private and public companies, and ETF issuers so they can publicly verify their Bitcoin holdings building better brands, redefining trust, and reducing risk to have a strong and strong life. financial ecosystem. Contact us at partnerships@hoseki.app to get your organization on board with Hoseki.
This is a guest post by Sam Abbassi. The views expressed are entirely their own and do not reflect those of BTC Inc or Bitcoin Magazine.