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SEC Increases Scrutiny on Cryptocurrency Companies

SEC Increases Scrutiny on Cryptocurrency Companies

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As investors continue to seek a safe haven after the collapse of crypto exchanges, cryptocurrency companies have begun to resort to new ways to restore confidence. The most important issue in the market is whether cryptocurrency companies have enough assets to cover their customers' funds.

Nine leading Crypto Exchanges said they will publish proofs of their reserve amounts. Crypto exchanges are trying to take their minds off fears of a collapse in the wake of the liquidity problems at FTX. For this, they announced that they will publicly publish their fund reserves. It is expected that the problem of lack of trust affecting investors can be solved to a large extent in this way.

Two different methods will be used to inform investors. The first method is to issue a Merkle tree reserve certificate, the second method is to prepare a transparency report.

So what is the Merkle Tree?

The Merkle tree is a data structure used in computer science applications., Merkle trees allow for more efficient and secure encoding of blockchain data in Bitcoin (BTC) and other cryptocurrencies. Crypto assets are recorded in a separate ledger, regardless of who owns them with this method, called Merkle reserve testing. This allows blockchain data to continue to be encoded more efficiently and securely, while also allowing it to be audited for quantity on a third party.

Will the transparency report be transparent?

The second method was to have a third-party auditing firm prepare a report for investors containing evidence of reserves. This so-called transparency report will continue to protect privacy but will also allow users to verify the stability of their assets on exchanges. The first question is how much confidence can be placed in the accuracy of the information that cryptocurrency companies will declare during the preparation of the report. another question is Which audit firms are ready to work on this report.

First Statement from SEC

Following this move by the companies, the US Securities and Exchange Commission (SEC) informed the public that it would increase its audits. In fact, the biggest reason for increasing these audits is to protect investors and create resources to access accurate information.

"Investors should not rely too heavily on a company saying it has received evidence of reserves from an audit firm," Paul Munter, the SEC's acting chief accountant, said in a Wall Street Journal report. "Having such a report is not enough information for an investor to assess whether the company has sufficient assets to meet its obligations," he added.

While these developments were taking place, Binance, the largest crypto exchange by trading volume, commissioned a report on evidence of reserves. Shortly after the report was published, the report was withdrawn after the audit firm it hired announced that it no longer works with crypto firms.

The fact that the SEC will tighten and expand its current audits is the most reliable source for making confusing reports understandable. It seems that the lack of trust in crypto exchanges will continue to exist for a while.

By Onur Kucuk, Managing Partner and Berk Recber, Trainee, KP Law

KP Law at a Glance

KP Law is an independent law firm providing multidisciplinary solutions to the clients worldwide. Established by former KPMG Turkey Legal Services Partner Mr. Onur Küçük, Attorney at Law, the firm aligns itself with KPMG Global Legal Services thus operates through a global network delivering value with proven local success models.

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