When customers deposit cryptocurrency with a centralised exchange, they usually cannot see exactly how the platform stores or manages those assets. The exchange’s internal account may show that the customer owns Bitcoin, Ether or another asset, but the customer must trust that the platform actually holds sufficient funds to honour withdrawals.
Proof of Reserves was developed to provide greater transparency around this issue.
But what is Proof of Reserves, how does it work and what does it genuinely prove?
Proof of Reserves can help an exchange demonstrate that it controls identifiable cryptoassets intended to support customer balances. It may combine public blockchain records, wallet-ownership verification and cryptographic tools that allow customers to confirm their balances were included in a reserve calculation.
This article focuses on the mechanics of PoR. For the wider framework covering reserve reports, attestations, liability completeness and transparency governance, see Proof of Reserves, Attestations and Exchange Transparency Controls.
What Is Proof of Reserves?
Proof of Reserves, commonly shortened to PoR, is a method through which a cryptocurrency exchange or custodian demonstrates that it controls assets intended to back customer balances.
A typical Proof of Reserves process compares:
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The cryptoassets held or controlled by the exchange
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The customer balances included in the reserve calculation
Suppose an exchange’s customers collectively hold 20,000 units of a particular cryptoasset in their accounts. To demonstrate full backing for that asset, the exchange would need to show that it controls at least 20,000 units within the scope of the verification.
The result may be presented as a reserve ratio:
Reserve ratio = Verified assets ÷ Included customer liabilities
A ratio of 100% means the verified assets equal the customer liabilities included in the calculation. A ratio above 100% indicates that the reported assets exceed those included liabilities.
The word “included” is important. A Proof of Reserves report is only as reliable as its scope, data and verification procedures.
It may not automatically prove that:
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Every customer balance was included
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The exchange has no other debts
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The assets are available for immediate withdrawal
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The assets were not borrowed temporarily
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Customer funds are properly segregated
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The exchange can remain financially stable
Proof of Reserves provides evidence about specified assets and liabilities. It does not necessarily provide a complete view of the exchange’s financial position.
Why Do Crypto Exchanges Publish Proof of Reserves Reports?
Crypto exchanges publish Proof of Reserves reports primarily to demonstrate that customer assets are backed and to increase confidence in their custody arrangements.
Customers using a centralised exchange do not control the private keys associated with the exchange’s wallets. They depend on the platform to safeguard their assets, maintain accurate internal records and process withdrawals when requested.
A Proof of Reserves report can reduce part of this information gap.
It may help an exchange:
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Demonstrate that reported assets exist
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Show that it controls particular blockchain wallets
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Allow customers to verify inclusion of their balances
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Identify differences between customer records and reserves
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Strengthen internal reconciliation processes
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Support discussions with auditors and regulators
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Improve transparency following periods of market stress
Publishing reserve information can also distinguish an exchange from platforms that provide little evidence about how customer assets are held.
Nevertheless, customers should not treat the existence of a PoR page as an automatic guarantee of safety. The quality of reports differs considerably because Proof of Reserves engagements are not performed under one universally applied standard. The Public Company Accounting Oversight Board has warned that these reports are inherently limited and may not establish that sufficient assets exist to meet all customer liabilities.
How Does Reserve Verification Work?
The exact methodology varies among exchanges, but reserve verification commonly involves five main stages.
1. Creating a Customer Liability Snapshot
The exchange produces a record of the customer balances covered by the exercise at a specified date and time.
These balances represent liabilities because the exchange owes the assets to its customers.
The dataset may include balances from spot accounts, funding wallets or other eligible products. The report should clearly identify which accounts, assets and legal entities are included or excluded.
2. Organising Balances in a Merkle Tree
Customer balances may be converted into cryptographic records and organised within a Merkle tree.
This allows the exchange to create one cryptographic summary of a large customer-balance dataset while giving individual customers a way to confirm that their balances were included.
3. Identifying Reserve Wallets
The exchange identifies blockchain wallets containing the assets included in the reserve calculation.
Because public blockchains allow anyone to view wallet balances and transactions, customers or external reviewers may be able to verify that the reported assets existed at the relevant time.
4. Proving Wallet Control
Publishing a wallet address alone does not necessarily prove that the exchange controls it.
Control may be demonstrated through a cryptographic message signed with the wallet’s private key, a test transaction, custodian confirmation or examination by an independent assurance provider.
5. Comparing Assets With Customer Liabilities
The verified wallet balances are compared with the customer liabilities included in the Merkle tree or other liability dataset.
The exchange can then publish a reserve ratio and provide customers with tools for checking their inclusion.
A more reliable process includes both sides of the calculation. Publishing wallet assets without reliable customer-liability information does not reveal whether those assets are sufficient.
Understanding Merkle Trees in Simple Terms
A Merkle tree is a cryptographic data structure used to summarise and verify a large collection of information.
NIST describes a Merkle tree as a structure in which internal nodes contain hashes representing the information contained in the leaf nodes below them.
A simple way to understand it is to imagine a large set of sealed envelopes.
Each envelope contains one customer’s account information. Instead of opening every envelope publicly, the exchange creates a unique digital fingerprint, known as a hash, for each record.
The fingerprints are paired together and hashed again. That process continues through several levels until one final fingerprint remains. This final value is called the Merkle root.
The exchange can provide a customer with a Merkle proof showing that the customer’s balance contributed to the final root. The customer does not need to see anyone else’s balance.
Merkle trees are useful because they provide:
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Efficient verification of large datasets
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Protection of individual account information
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Evidence that an included record has not been changed
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A way for customers to confirm their inclusion
For example, Kraken explains that customers can check their Merkle Leaf ID and validate its path to the Merkle root used in its reserve-verification process.
However, a valid Merkle proof establishes only that a particular balance was included in the published dataset. It does not independently prove that every customer liability was included.
How Proof of Reserves Demonstrates Customer Asset Backing
A meaningful Proof of Reserves calculation connects customer liabilities with verifiable assets.
Customer asset backing generally requires evidence that:
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Customer balances were recorded accurately.
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Relevant customer liabilities were included.
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The exchange controls the reported assets.
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The assets equal or exceed included customer liabilities.
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The same assets were not improperly counted more than once.
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The assets were available for the purpose claimed.
Consider an exchange reporting the following position:
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Included customer Bitcoin liabilities: 50,000 BTC
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Verified Bitcoin held in reserve wallets: 51,000 BTC
The reported reserve ratio would be:
51,000 ÷ 50,000 = 102%
This would show that the verified Bitcoin exceeded the included customer Bitcoin balances at the reporting time.
It would not necessarily show whether the exchange had borrowed part of the Bitcoin, pledged it as collateral or faced unrelated debts elsewhere in its business.
Compliance teams should therefore look beyond the headline ratio and examine the methodology, exclusions and availability of the assets.
Public Wallet Disclosure
Public wallet disclosure is one of the most visible elements of Proof of Reserves.
An exchange may publish addresses for cold-storage wallets, operational wallets or assets held through identifiable custody arrangements. Anyone can then use a blockchain explorer to examine the balances and transaction history associated with those addresses.
Public disclosure offers several advantages:
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Blockchain balances can be independently checked.
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Unexpected asset movements may be detected.
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Reserve updates can be compared over time.
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Customers do not have to rely entirely on an exchange’s internal statement.
However, seeing funds in a public wallet does not answer every relevant question.
A wallet balance does not automatically establish:
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Who legally owns the assets
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Whether the exchange has exclusive control
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Whether the assets are pledged or restricted
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Whether the funds were borrowed
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Whether the wallet contains customer or corporate assets
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Whether all liabilities have been disclosed
Exchanges may also avoid publishing every operational address because detailed wallet information can introduce privacy, security and transaction-tracing concerns.
Public wallet information is useful, but it becomes stronger when combined with custody governance, segregation and continuous monitoring. Those controls are covered in Exchange Transparency Controls: Best Practices for Crypto Compliance Teams.
Benefits of Proof of Reserves
Proof of Reserves can provide several valuable benefits when implemented properly.
Greater Customer Transparency
Customers receive more evidence about the assets supporting their exchange balances instead of relying solely on company statements.
Personal Balance Verification
A Merkle-based system may allow each customer to confirm that their balance was included in the liability calculation.
Stronger Reconciliations
Preparing a PoR report requires an exchange to compare internal customer records with on-chain and custodian balances. This may reveal accounting or operational differences.
Public Accountability
Publishing wallet information and reserve calculations makes it more difficult for an exchange to make unsupported claims about customer asset backing.
Earlier Identification of Shortfalls
Frequent reserve monitoring can help management identify deficiencies before they develop into a severe withdrawal or customer-protection problem.
Support for Compliance Oversight
Compliance, risk and internal-audit teams can use reserve information to assess custody controls, asset segregation, reconciliations and management reporting.
Limitations and Common Misconceptions
Proof of Reserves is useful, but several misconceptions can cause customers to place too much confidence in it.
Misconception 1: Proof of Reserves Is a Financial Audit
A PoR exercise may review selected cryptoassets and customer liabilities at one point in time. A financial audit examines a much broader financial picture, including assets, debts, income, expenses, disclosures and other obligations.
The PCAOB has made clear that Proof of Reserves reports are not financial statement audits and may be based on different procedures selected by management or the service provider.
Misconception 2: A 100% Ratio Proves Solvency
An exchange may have assets equal to selected customer balances while still facing major corporate debts, legal claims, operating losses or liquidity pressure.
Solvency requires consideration of the entire financial position—not only selected reserve assets.
Misconception 3: Merkle Trees Prove All Liabilities Were Included
Merkle trees allow customers to verify inclusion. They do not independently establish that the exchange included every customer, account or liability.
Misconception 4: Public Wallets Prove Assets Are Available
Assets may be locked, lent, pledged, staked or subject to claims. Their presence in a wallet does not necessarily mean they can immediately fund customer withdrawals.
Misconception 5: One Snapshot Provides Continuous Protection
An exchange could show sufficient reserves on the reporting date but experience a shortfall later. Periodic snapshots should be supported by regular reconciliations and continuous risk monitoring.
Examples of Exchanges Using Proof of Reserves
As of July 2026, several major crypto exchanges maintain public Proof of Reserves programmes. Their approaches, covered assets, verification procedures and reporting frequency are not identical.
Binance
Binance maintains a public Proof of Reserves page covering assets held in custody for users. Its system allows customers to check whether their account balances were included in the reserve dataset. Binance has also described using Merkle trees and zero-knowledge proofs to support customer verification without publicly disclosing individual account data.
Kraken
Kraken publishes periodic Proof of Reserves results and provides customers with tools for confirming their inclusion in the relevant Merkle tree. Its latest publicly identified report in the search results was attested as of December 31, 2025 and published in February 2026.
OKX
OKX also operates a public Proof of Reserves programme and provides reserve information intended to demonstrate backing for customer and corporate digital assets covered by its methodology. Its official page notes that some balances may be held with third-party custodians, which illustrates why users should examine the scope and custody disclosures attached to each report.
These examples show how exchanges can apply cryptographic verification and public asset reporting in different ways. Their inclusion here does not represent an assessment or guarantee of the financial safety of any platform.
Customers and compliance teams should review each report independently rather than comparing headline reserve ratios alone.
What Should Customers Look for in a Proof of Reserves Report?
A useful PoR report should explain:
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The date and time of the verification
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The exchanges and legal entities covered
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The assets included
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The types of customer accounts included
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How liabilities were calculated
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How wallet control was verified
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Whether third-party custodians were involved
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Whether customers can verify their balances
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Whether assets are restricted or encumbered
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Who performed any independent procedures
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Which assurance or professional standard was used
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The limitations of the report
Customers should be cautious when a platform publishes only wallet addresses or a reserve percentage without explaining the corresponding liabilities.
Conclusion
Proof of Reserves is a transparency mechanism that helps crypto exchanges demonstrate that they control assets intended to support customer balances.
To build a practical working understanding of reserve reporting, attestations and transparency governance, explore Proof of Reserves, Attestations and Exchange Transparency Controls. The course is designed for compliance teams that need to evaluate PoR reports, liability coverage, wallet-control evidence, segregation, custody governance and disclosure risks.
