Investor sentiment has always been a critical driver in the crypto space. Both positive and negative sentiment influence ongoing trends — be they pric
Investor sentiment has always been a critical driver in the crypto space. Both positive and negative sentiment influence ongoing trends — be they price movements, product launches or regulations. In 2022, sentiment worldwide suffered as major crypto firms and ecosystems collapsed, further straining investors amid an unforgiving bear market.
While many showed resilience as Terraform Labs, Celsius and Voyager, among others, closed down, Sam Bankman-Fried’s alleged misappropriation of FTX customers’ funds drove even the most die-hard crypto investors to question the integrity of those running the show.
A series of scams, crashes, bankruptcy filings and court cases have forced investors to rethink how they store crypto and seek accountability from crypto exchanges. Proof of reserves (PoR) became the de facto standard adopted widely among crypto exchanges to publicly showcase and reassure investors that funds exist.
Sumit Gupta, co-founder and CEO of CoinDCX — a Mumbai-based crypto exchange — has opted for the same approach of being transparent with investors. Speaking to Cointelegraph, Gupta discussed the thought process behind proof-of-reserves standards, healing investor sentiment, a new era of trust-building and more.
Cointelegraph: While many exchanges have opted to reveal their proof of reserves, the outflow of assets from exchanges remains a growing trend. Do you think this new standard will help regain investors’ trust?
Sumit Gupta: The collapse of FTX, which is actually a case of malpractice and manipulation of the market, has shaken the industry. Unfortunately, the fiasco has been linked to the integrity of the crypto market, questioning the safety and security of crypto assets.
It is imperative for users to worry about their funds being secured on exchanges, and it is the duty of the crypto industry to give users confidence about the safety of their funds in a transparent manner. PoR is one of many steps to assure users that their funds are safe. Therefore, CoinDCX, in the pursuit of complete transparency, published a full proof of reserves with an audited report furnishing both sides of its reserve balance — i.e., assets and liabilities.
Building trust in any ecosystem is an ongoing process that requires continuous attention and effort. While PoR is one step in this direction, the other steps to regain users’ trust include ring-fencing digital trading assets, such as websites, apps and trading platforms. Couple this with a robust security framework to prevent hacks, creating top-class standards, benchmarks and preventive policies that ensure the safety of users’ funds at the utmost level. Regular checks and balances in the form of standard operating procedures and audits lend more credibility and trust. The other major step to regain the confidence of users is to regulate the market, as this will result in the exit of bad players, and only serious, trustworthy exchanges will survive.
CT: Why have some exchanges opted for the PoR route while others are still contemplating the move? How does this choice impact the credibility of the organization?
SG: Publishing reserves is going to become table stakes, and very soon, users will demand or shift to those exchanges that are more transparent and publish their reserves. It is a user’s right to demand proofs of reserves, which gives them confidence about their funds being safe on an exchange.
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At CoinDCX, we believe in complete transparency and understand the importance of maximizing communication when the industry is going through a trust deficit phase. Nonetheless, sharing proof of reserves is one of the steps; but to build credibility among investors, the industry must continue to maintain the highest standard of transparency, develop robust business practices and stay self-compliant. Transparency and consumer protection must take precedence over everything.
CT: What factors have investors historically considered when trusting crypto exchanges for storing assets?
SG: Over the past few years, exchanges in India did see a new generation of investors onboarding who were not exposed to traditional asset markets but were keen to explore opportunities in virtual digital assets. Therefore educating this new investor class became critical. While post-FTX debacle, there are more conversations around transparency, compliance and security. These have formed the core of our investors’ education strategy for the past three years.
Secondly, we never expose user funds to price and credit risk. We never lend or take any actions with users’ assets without prior consent. All customer assets are held 1:1, allowing customers to access their funds at any time. We do not have a native token, as this exposes users to asset concentration and…
cointelegraph.com