When investors lost billions in the wake of the FTX fraud, there was outrage. When Silicon Valley Bank suddenly collapsed, there was immediate fear of systemic contagion. These events exposed critical gaps in market oversight and transparency—gaps that policymakers are now in a position to close. By embracing proof of reserves, policymakers can help build a more transparent and resilient financial system that better protects investors and strengthens the integrity of markets.

Why Does the Financial Industry Need Proof of Reserves?

Issuers of funds and other financial assets are required to demonstrate that they hold sufficient reserves through independent audits. However, financial audits typically only occur monthly or quarterly, creating a gap where discrepancies or outright fraud can go undetected immediately after audits are completed. This lack of transparency around reserves has resulted in billions of dollars of losses for consumers during events such as the FTX fraud.  

What’s needed is a way for customers, counterparties, and regulators to verify that a financial instrument is fully collateralized in near real-time, eliminating the gap that leaves individuals and institutions vulnerable to fraud. This would ensure they can confidently transact without fear of insolvency, fraud, or hidden reserve shortfalls like those often revealed during market crises.

What is Proof of Reserves?

Proof of reserves provides real-time transparency into the value of the reserves backing any financial asset.

Proof of Reserve feeds provide the status of reserves for stablecoins, wrapped assets, and real-world assets. Customers, counterparties, and regulators can verify an asset’s backing every second of every day. This bridges the gap between traditional audits, protecting holders from fraud, and increasing market transparency.

Key benefits of proof of reserves include: 

1. Investor Protection—Proof of reserves ensures digital assets are fully backed and verifiable, reducing exposure to fraud, insolvency, and financial mismanagement.
2. Market Integrity—By enforcing code-based issuance constraints, proof of reserves promotes transparent, rules-based behavior aligned with regulatory goals.
3. Global Competitiveness—Jurisdictions that adopt proof of reserves signal a commitment to digital asset integrity, strengthening their global financial standing and attracting greater foreign investment.
4. Regulatory Confidence—Real-time reserve visibility reduces reliance on delayed audits and strengthens regulatory oversight through continuous transparency.
5. Crisis Prevention and Contagion Mitigation—Continuous reserve monitoring improves early detection of undercollateralized entities, supporting faster regulatory responses that help limit contagion.
6. Operational Efficiency for Supervision—Automated reserve verification streamlines compliance monitoring and allows regulators to reallocate resources toward higher-risk areas.
7. Strengthened Confidence in Regulated Digital Assets—Enables broader adoption of compliant digital assets by traditional financial institutions.

Setting a Standard for Proof of Reserves in the Blockchain Economy 

Proof of reserves is critical infrastructure for the emerging blockchain economy, where real-world assets such as dollars, Treasuries, and equities are increasingly tokenized. These tokens represent ownership of the underlying assets and are actively traded across Ethereum, Solana, and other blockchain networks. They require proof of reserves so holders can independently verify they’re fully backed by offchain assets such as dollars in regulated bank accounts, Treasuries held by qualified custodians, and equities in brokerage accounts.

Stablecoins, which are predominantly tokenized U.S. dollars, already represent over $240 billion worth of value. According to a recent industry report by Citi, stablecoins could be the largest holders of U.S. Treasuries by 2030 and are approaching transaction volumes similar to Mastercard and Visa. Other tokenized real-world assets, from equities to real estate, are expected to follow a similar growth trajectory. There’s a pressing need to set a proof of reserves standard for stablecoins and other tokenized assets as they become increasingly significant in global markets, along with proof of reserves for centralized exchanges and custodians responsible for holding crypto and other onchain assets.

Recognizing the need for proof of reserves, policymakers in the U.S. introduced the PROOF Act to offer a regulatory framework for reserve verification and systemic risk monitoring. 

Proof of reserves can be used to enforce hard-coded rules on tokenized assets, ensuring new tokens cannot be issued without adequate backing. For instance, a protocol might prevent the minting of additional USD-backed stablecoins unless a corresponding amount of U.S. dollars or Treasury securities is verifiably held in reserve. This enables real-time transparency for investors and gives regulators a clear view into ongoing compliance with reserve requirements.

Real-World Example: One of the Largest Financial Conglomerates in Latin America Uses Chainlink Proof of Reserve

Wenia—the digital asset company from the Bancolombia Group, one of the largest financial conglomerates in Latin America—is using Chainlink Proof of Reserve to bring end-to-end transparency to the Colombian Peso reserves backing its COPW stablecoin. Proof of Reserve’s Secure Mint feature is integrated directly into the stablecoin’s minting function, helping to protect users against the risk of infinite mint attacks where additional COPW is issued without sufficient available reserves.

Conclusion

Proof of reserves provides policymakers with an opportunity to increase the transparency of financial markets, make their jurisdiction more globally competitive, and, most importantly, protect their constituents from fraud or poor financial management. With the rapid growth of the blockchain economy, which is set to power the next generation of financial markets, establishing proof of reserves standards to align the interests of individuals, institutions, and regulators is an important next step for policymakers. Doing so will ensure that the financial markets of tomorrow are more resilient, reliable, and secure.