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Proof of Solvency at Liquid (by FTX Japan KK)

  • Updated

Scope of Proof of Solvency

All Users and accounts at FTX Japan KK whether the account is at FTX Japan or Liquid Japan are included in the Proof of Solvency.

Initially the following currencies are in scope for the Proof of Solvency:

BTC
ETH
JPY*

*USD is not currently in scope for the cryptographic proof, but are fully backed by JPY. This is because FTX Japan KK segregates the equivalent of User’s USD balances in JPY at the designated Trust account used for Asset Segregation. This is due to the limitation that as of August 2023, the service is not supported for foreign currencies, including the U.S. dollar. The amount of JPY segregated based on USD balances uses the daily MUFG TTM rate to calculate the amount of JPY that must be segregated in lieu of segregating USD.

Frequency of Proof of Solvency

Proof of Solvency snapshot will be taken on Tuesday morning JST. The exact time used for the snapshot will be visible in the web application. Proof of Solvency results will be published and visible on the Liquid GUI and on the blockchain Wednesday by EOD.

Why is Proof of Solvency important to FTX Japan KK and our Users?

Blockchain technology has immense potential to improve the way society invests, trades, saves, and transmit value. However, the operators of crypto currency exchanges have not always lived up to the promise of blockchain technology. A key problem has been lack of transparency where exchanges are not always doing what they claimed to be doing with customer funds.

Our company is introducing the Proof of Solvency feature as a core part of how we manage assets under our custody, which improves on how crypto exchanges were managed historically. The key steps we are taking:

  1. Periodically publishing cryptographic proofs that show the company reserves are greater than customer liabilities

  2. Leveraging blockchain technology and cryptographic methods such as digital signatures, Merkle Trees, Zero Knowledge Proofs and open source code to increase trust with our Users

  3. Provide user-friendly tools for each User to check that their balances are acknowledged by our exchange and included in the total reserves that are under custody.

We seek to go beyond the legal requirements in order to earn the trust of the Users of our exchange. Using Proof of Solvency and cryptographic proofs, there are several significant benefits to our Users & the cryptocurrency ecosystem as a whole:

  • Increased trust: Proof of Solvency can enhance trust between our Users and the exchange by providing increased transparency and instilling confidence that your funds are securely and responsibly held.

  • Cryptographic proofs can be verified by Users and third parties, and they are tamper-resistant.

  • Reduced risk: Proof of Solvency can lower the risk of insolvency by demonstrating that the exchange has sufficient assets to meet its liabilities to Users. This reduces the likelihood of unexpected losses or the inability to honor User withdrawals.

  • Improved compliance: Various regulators require crypto exchanges and financial institutions to maintain a certain level of solvency. Proof of Solvency can assist in demonstrating to regulators and third parties that they are compliant with these requirements.

Using innovative cryptographic methods and mathematical proofs can address many problems in crypto and allow for blockchain technology to fully realize its potential and benefit society. A cryptographic proof regarding Proof of Solvency is in our view far more valuable and informative to fall of our Users and stakeholders than traditional methods of paper or simple statements of “trust us.” Further, our belief is that a cryptographic proof can be extended beyond crypto currency exchanges to financial institutions in traditional asset classes.

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