How Proof-of-Reserves Audits Actually Verify What an Exchange Holds

Proof of reserves is a cryptographic and accounting process that lets a crypto exchange demonstrate it holds enough of a given asset to cover what customers have on deposit, without publishing anyone's individual account balance. Kraken's version of the process, as described on its own proof-of-reserves page, aggregates customer balances into a Merkle tree and has an independent accountant compare the resulting total against verified blockchain holdings; as of its June 30, 2026 snapshot, the exchange reported reserve ratios of 102.9 percent for bitcoin and 100.5 percent for ether, per Kraken.

The mechanism sounds like an audit, and exchanges often market it that way. It is narrower than that, and the gap between what proof of reserves shows and what a full financial audit would show became a live industry dispute in December 2022, when the accounting firm that had produced reports for several major exchanges stopped doing the work.

What does a proof-of-reserves check actually verify?

A proof-of-reserves review verifies that an exchange controls on-chain wallets holding at least as much of an asset as it owes customers in that asset, at one point in time. On Kraken's process, an independent accountant aggregates anonymized customer balances — spot holdings, staking allocations, margin positions, and futures collateral — into a Merkle tree, a data structure that compresses many individual balances into one cryptographic fingerprint called the Merkle root, according to Kraken.

The accountant separately collects digital signatures proving Kraken controls specific blockchain addresses, then checks that the assets in those addresses meet or exceed the total represented in the Merkle tree, Kraken says. Customers can confirm their own balance was included using a dashboard tool, a Merkle Leaf identifier checked through a third-party tool, or open-source verification scripts the exchange publishes in Python, Rust, Go, and Bash, per the same source. Kraken states it runs the review “at a regular cadence” rather than on a fixed public schedule.

The scope of assets reviewed is defined by the exchange, not by an outside standard-setter. Kraken's process covers a fixed list of cryptocurrencies — bitcoin, ether, solana, and ripple, plus the stablecoins USDC, USDT, and USDG — and the account types tied to those assets: spot balances, staking allocations, margin trading positions, and futures collateral, according to Kraken. Assets and account types outside that list are not part of the review, which means a customer holding a token not on the list has no proof-of-reserves coverage for that specific balance, even while the exchange's headline reserve ratios look strong.

Why did a major auditor stop doing this work?

In December 2022, Mazars Group — the accounting firm that had produced proof-of-reserves reports for Binance, Crypto.com, and KuCoin — suspended all such work for crypto clients, according to CNBC. The firm said it paused the activity “due to concerns regarding the way these reports are understood by the public,” and clarified that its reports were not audits or assurance opinions but “limited findings based on the agreed procedures performed on the subject matter at a historical point in time,” CNBC reported.

The timeline was fast: Mazars had published Binance's proof-of-reserves report on December 7, 2022, and Crypto.com published its own Mazars-produced report two days later; by the Friday after the announcement, the Binance report was no longer available on Mazars' site, per CNBC's reporting. The episode is a useful marker for how the industry itself distinguishes an attestation of this kind from a formal audit.

The Mazars pause did not end proof-of-reserves reporting industry-wide; it changed who does the work and how the results are framed. Exchanges that continued the practice, including Kraken, moved toward publishing methodology pages that describe the Merkle-tree process directly rather than relying solely on a named accounting firm's report, and toward repeating the exercise on a recurring basis rather than presenting a single historical snapshot as a settled fact, per Kraken's own description of its process. The underlying limitation the Mazars episode surfaced — that a proof-of-reserves check speaks only to the asset side of the ledger — did not change with the shift in who performs the review.

What does a proof-of-reserves report not verify?

A proof-of-reserves snapshot confirms assets on one side of the ledger; it does not verify an exchange's liabilities, the quality of assets that are not part of the review, or anything about solvency more broadly. TechCrunch, reporting in November 2022 as the FTX collapse was unfolding, described the core limitation: a Merkle-tree proof shows a custodian holds the coins it claims to hold, but it does not show what else sits on the balance sheet or how a firm's total obligations compare to its total assets.

Chainlink co-founder Sergey Nazarov, quoted in that reporting, argued that more complete real-time disclosure would have let outside observers see “what the balance sheet was in real time” rather than relying on a periodic snapshot. FTX's sister trading firm Alameda Research held a balance sheet heavily weighted toward FTX's own token, an asset-quality problem that a proof-of-reserves report covering customer coin balances would not have surfaced, per TechCrunch's account of the episode.

How should a reserve ratio above 100 percent be read?

A ratio above 100 percent, such as the 102.9 percent bitcoin figure and 100.5 percent ether figure Kraken reported for its June 30, 2026 snapshot, means the exchange's verified on-chain holdings in that asset exceeded what its Merkle tree showed customers were owed at that moment, according to Kraken. It is a point-in-time comparison of one asset category, produced and published by the exchange itself, and it does not by itself confirm the accuracy of the exchange's liabilities or its solvency across every asset it lists. A ratio below 100 percent would indicate the exchange's verified holdings fell short of what the Merkle tree said customers were owed at that snapshot; Kraken's June 30, 2026 figures for bitcoin and ether were both above that line, per the exchange's own reporting.

Market participants comparing reserve ratios across exchanges are also comparing methodologies that are not standardized. One exchange's snapshot may include staking and margin collateral, as Kraken's does, while another's may cover spot balances only; one may repeat the exercise on a public monthly cadence, while another may publish less frequently. None of that is disclosed in a single headline percentage, which is why the underlying methodology page — not just the ratio — is the primary source for any claim about what a given proof-of-reserves figure actually covers.

Exchanges that publish proof-of-reserves data are the attributed source of their own figures; the reports are not independent verification of solvency, and market participants who rely on them are relying on a single, self-reported snapshot backed by a third-party's procedural check on the asset side only.

How does proof of reserves differ from a full financial audit?

The two differ in what they cover and what assurance they offer, and the Mazars episode is the clearest evidence the industry itself draws that line. Mazars told clients its proof-of-reserves reports were never audits or assurance engagements, only agreed-upon procedures performed on one part of the balance sheet at one moment, according to CNBC. A full financial audit, by contrast, examines both assets and liabilities, tests internal controls, and results in an opinion on whether the financial statements as a whole are fairly presented.

That distinction is why TechCrunch's reporting on the FTX collapse treated proof of reserves as necessary but not sufficient: a firm can show it holds the coins in its reserve wallets while still carrying liabilities, or holding other assets of uncertain quality, that a coin-only snapshot was never designed to catch.

For a related altcoins perspective, read How Proof-of-Stake Rewards Work, and What the SEC's 2025 Guidance Changed.