In the wake of the past week’s fall of FTX, many ask what could have gone differently. FTX as an exchange should have protected users’ funds, but they failed. The cracks didn’t show until it was too late to save the situation. Could proof of reserves make a difference for FTX?

Proof of reserve is an audit of a company’s balance sheet. The audit must be independent to prove that the company has enough assets to offset the liabilities of its customers. While the audit is a critical aspect of good financial governance, it’s one of the more aspects required to uphold best practices. A company must make sure it handles its internal and customer funds transparently and in compliance with international standards. Strong corporate governance is another vital aspect of ensuring financial transparency.

For crypto exchanges, this concept is a critical part of building trust. In the recent week, it is in current discussions as a measure for exchanges to prove they are in good financial standing.

A crypto exchange or digital asset service provider holds customer funds in custody. This custody is in trust that users can trade crypto for cash at their discretion. Given that exchanges operate in different jurisdictions and sometimes with limited regulatory oversight, transparency and trust are critical.

When a major digital asset service provider fails to prove its own financial health, users suffer. It’s unfortunate that the fall of FTX was not new, as Quadriga and Mt Gox before it had fallen to different financial malpractices. The difference between the crypto industry as a whole and exchanges is that the latter facilitates liquidity.

Liquidity, in simple terms, is the ability to convert an asset or holding into cash. Digital asset service providers play a critical role in providing liquidity for trade. It’s therefore clear why they must have sufficient reserves for users to transact seamlessly.

In the unfortunate fall of FTX, which was at its height worth $32 billion, the question of its reserves came into the picture. There were rumors of insolvency ongoing after a Coinbase report indicated its financial state was in question. This was in the wake of key staff resignations in the company. In less than a week, one of its first investors, Binance, indicated they would liquidate their FTT (FTX’s token) holding worth over $500 million. FTX initially indicated they could facilitate the liquidation.

This, however, undoubtedly triggered market speculation about the real state of FTX. What followed was panic selling. The former FTX CEO, Sam Bankman-Fried initiated an acquisition proposal with Binance. The Binance CEO, Chang-Peng Zao, also known as CZ Binance confirmed that the company would explore acquisition as guided by due diligence.

The investigation’s result was that the acquisition of FTX could not proceed as intended. FTX was on the real verge of collapse. No other companies were willing to extend funding or liquidity to FTX. The situation was beyond salvaging. In the wake of its collapse, digital asset service providers are under intense scrutiny about the state of their reserves. Many are looking to liquidate their crypto holdings from exchanges without clear proof of reserves.

The FTX case could shatter trust in exchanges, or prompt a higher level of reliability in them. What counts is that exchanges can prove clear proof of their reserves if they intend to protect their users amid the influence of the bear market.