Crypto Giant Grayscale Says Providing On-Chain Proof of Reserves Threatens Its Clients’ Security

Crypto asset management giant Grayscale says it doesn’t want to provide precise on-chain proof of its reserves because of security risks.

Since the revelations that former crypto exchange FTX was mishandling its customer funds, other exchanges and firms have moved to provide proof-of-reserves to assure clients of solvency.

In a Twitter thread, Grayscale says that all of its digital assets that underlie its products are stored under the custody of Coinbase Custody Trust Company, but for security reasons, the firm won’t release cryptographic proof of its reserves.

Says Grayscale,

“Coinbase frequently performs on-chain validation. Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.

We know the preceding point, in particular, will be a disappointment to some, but panic sparked by others is not a good enough reason to circumvent complex security arrangements that have kept our investors’ assets safe for years.”

Grayscale is the largest public holder of BTC, with 635,256 coins in its possession or more than 3% of the total supply, according to BitcoinTreasuries.net. However, Grayscale’s Bitcoin wallets are not known to the public, unlike some other large entities like Binance or Bitfinex.

Grayscale says that it does not lend, trade or rehypothecate any of its digital assets and that all of the BTC in its Bitcoin Trust are owned solely by the Trust.

“Each Grayscale digital asset product is structured as a separate legal entity – a statutory trust for each single asset product, and a limited liability company for each diversified digital asset product – sponsored or managed by Grayscale Investments, but ultimately owned by the product’s shareholders.

For example, this means that Grayscale Bitcoin Trust (OTCQX: GBTC) holds Bitcoin — and only Bitcoin — and each share is backed by a proportional amount of the trust’s holdings, approximately 0.00091502 BTC per share of GBTC, as of November 18, 2022. To be perfectly clear: these digital assets are owned by GBTC and GBTC alone.”

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