Bitcoin exchange Kraken has announced it has passed an audit that proves that more than 100% of Kraken’s Bitcoins are held in reserve. The whole process shows that Kraken owns the amount of Bitcoins required to cover an anonymized set of customer balances.
The audit was conducted by Stephan Thomas, CTO of Ripple Labs. Thomas made a post about him performing the audit voluntarily on March 11th and March 22nd at Kraken’s offices in San Francisco. “I’ve not received any payment for this audit – my personal goal with this is to help improve the stability of and confidence in the math-based currency industry overall.” Said Thomas in his post.
According to Thomas, the absolute priority of this project was to ensure all customers’ privacy. When performing an audit like this, it can prove difficult to work with sensitive data but it seems absolute privacy has been maintained.
“I am attesting to is 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.” Thomas mentioned.
As can be deducted from this quote, complete trust in a project like this requires the same trust in the conductor of the audit. Since this is the first time Kraken has been audited, Thomas wears a heavy burden. He is the only person to have ever done this and, if customers would find incomplete balances in their accounts, they will surely blame him for that. Until now, that hasn’t been the case, and the community has shown great trust in Thomas’ actions. Kraken showed that they are interested in having an audit like this on a regular basis but with a different auditor each time. If this is true, Thomas will be able to share the burden soon.
As for the audit itself, Kraken provided a JSON file with a list of their Bitcoin addresses and balances. Thomas verified this file against a copy of the blockchain. A more detailed explanation can be found in the Bitcointalk thread.
After conducting these calculations and tests, 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.”
It is to be expected that audits like this will be held regularly in the future at most exchanges. After the Mt. Gox crisis, there’s no reason whatsoever to ignore the necessity of a decent audit. People have grown wary of Bitcoin exchanges and the only way to get them back is to regain trust. This must be done by showing that exchanges are safe places to trade cryptocurrencies.
Kraken wasn’t the first exchange to see the power of a financial audit. Earlier this month, Bitstamp did that same and they came to a similar conclusion. Bitstamp held 100% of its validated Bitcoin balance and US dollar funds.
Exchanges will have to come up with new ways to show people that they are trustworthy. After all, people place their money in the hands of these websites. Bitcoins for which they often worked very hard to get them. What happened to Mt Gox must never happen again. Kraken has given a great example. Let’s hope the other exchanges will follow this one.