Proof of reserves: test the missing liability denominator
A proof that a customer balance appears in a reserve report is not proof that every customer liability was included. The first claim concerns membership in a disclosed population. The second concerns the completeness of that population. A reserve ratio can look strong when its liability denominator omits obligations.
The PCAOB investor advocate advisory explains limitations of proof of reserve reports and cautions against treating them as audits. This worksheet focuses on the denominator problem; it does not certify an exchange or infer undisclosed wrongdoing from missing public information.
Separate four verification questions
List asset control, asset availability, liability inclusion and liability completeness as different claims. A signed wallet message may support control at a particular time. It does not, by itself, establish that the assets are unencumbered or that all obligations have been listed. Match observation dates and reporting entities before calculating any ratio.
For a customer inclusion test, retain the reported balance, asset, snapshot identifier, leaf construction and verification result. A valid Merkle path supports inclusion relative to the supplied root under that construction. It does not independently enumerate accounts absent from the tree, verify off-platform borrowing, or establish the legal classification of every balance.
Ask what evidence reconciles the published customer population to the operator’s underlying books. Record products, entities, margin balances, borrowed assets and off-balance arrangements covered or excluded. Do not assume a report entitled “reserves” examines each of these items. The exact engagement and procedures determine what was actually checked.
Hypothetical omitted balances
Assume a fictional operator discloses assets of 110 units and a liability tree totaling 100 units. The published ratio is 110/100 = 110%. Customer A verifies that its own 5-unit positive balance appears correctly.
Now suppose an additional 20 units of customer claims were excluded from the hypothetical tree. A’s inclusion test still passes, while coverage against 120 units is only 91.7%. The example demonstrates a logical limitation of membership verification. It does not allege an omission by any real service.
| Test | What it supports | What remains open |
|---|---|---|
| A’s leaf verifies | A’s record matches the supplied tree | Other accounts omitted |
| Tree total is 100 | Sum under the chosen construction | Completeness of obligations |
| Wallet assets equal 110 | Observed covered assets | Encumbrances and other entities |
| Ratio equals 110% | Arithmetic for selected inputs | Whether the denominator is complete |
Also inspect negative balances. If positive customer claims total 120 and negative customer balances total minus 20, netting produces 100. Whether that offset is economically and legally available requires evidence about recoverability and the relevant obligations. A spreadsheet’s ability to subtract does not establish a right to net different customers.
Build a completeness request
Request a reconciliation from the starting customer ledger to the disclosed liability set: opening population, exclusions, valuation adjustments, offsets and final total. Preserve the report’s own treatment of account identifiers, duplicate accounts, products and asset conversions. Aggregating unlike assets at a price introduces valuation assumptions in addition to population assumptions.
State inaccessible evidence precisely. “No public reconciliation of all covered product liabilities was obtained” is a bounded finding. It is different from “the operator has no other liabilities” and from “liabilities were concealed.” A public researcher may be unable to resolve completeness, in which case the reserve conclusion must remain conditional.
Recheck after a reporting-entity change, product expansion, revised methodology or material new borrowing disclosure. A successful snapshot test cannot establish continuous solvency or future withdrawal access. Keep the final memo divided into verified membership, examined asset observations and unverified completeness conditions.
A matching asset and liability date is necessary but does not resolve valuation differences. Keep token quantities by asset before converting them into one currency, and disclose the rate used for each. A surplus in one asset cannot automatically satisfy a customer claim denominated in another asset without a verified conversion and availability assumption.
FAQ
If my balance verifies, are all customer balances covered?
No. Your inclusion does not establish the completeness of the overall population. That requires separate reconciliation evidence.
Is a reserve ratio above 100% enough to establish solvency?
Only for the selected measurements and assumptions. Full liabilities, asset availability, valuation, legal rights and dates can change the conclusion.