Kraken Bitcoin Exchange Passes 'Proof of Reserves' Cryptographic Audit

Bitcoin exchange Kraken has passed a cryptographically verifiable proof of reserves audit with flying colours.

The audit, which was carried out by Stefan Thomas on 11th and 22nd of March, proved that more than 100% of Kraken's bitcoins are held in reserve.

The process was designed to allow the auditor to verify that the total amount of bitcoins held by Kraken matches the amount required to cover an anonymized set of customer balances.

Covering all balances

Thomas said the audit was very strict, but at the same time it maintained "absolute privacy" for customers. He also added that Kraken have expressed interest in conducting regular audits in the future, with different auditors each time. Thomas said:

"I am attesting to [...] the root hash of a merkle tree containing all balances that were considered in the audit. If you are a customer of Kraken, you'll be able to verify using open-source tools that your balance at the time of the audit is part of this root hash. If it is and if you believe that I am trustworthy, then you can be confident that your balance was covered by 100% reserves at the time of the audit."

Using the ‘Merkle Tree’ technique originally proposed by bitcoin developer Greg Maxwell, the auditor went on to explain the gritty technical details. He was provided with a JSON file from Kraken, which contained the list of the exchange's addresses and balances. The file was then compared against a copy of the block chain.

The results were in order, Thomas concluded: "The actual holdings were very slightly (< 0.5%) above the required holdings, meaning Kraken had greater than 100% reserves at the audit block height."

A competitive edge

Following the Mt. Gox crisis, many exchanges are keen to distance themselves from the troubled exchange and other bitcoin outfits with a chequered track record. Security and transparency have become selling points, hence exchanges appear to be doing their best to reassure investors on a regular basis.

Earlier this month UK-registered bitcoin exchange Bitstamp released the results of its own financial audit, which found that it held 100% of its validated BTC balance and USD funds. No issues were raised by the auditors.

Bitstamp CEO Nejc Kodrič told CoinDesk that his company plans to perform regular audits, with quarterly results posted on the Bitstamp website.

As investors demand more security and transparency, exchanges have to oblige or suffer the consequences and lose their competitive edge. Low fees are just one way of remaining competitive, but transparency and sound reporting practices might prove more important in the long run.