During the planning phase to re-launch exchange operations in Japan, our management team and Board of Directors made a strategic decision to invest in the development and adoption of Proof of Solvency as one of the first major enhancements for Liquid Japan. We have taken valuable lessons learned from the entire industry in 2022 and are reevaluating how to demonstrate the financial health and stability of financial institutions like FTX Japan K.K.

Proof of Solvency, based on cryptography and zk-Proofs, is deemed a crucial step in enhancing the security and transparency for participants trading in digital assets on a centralized exchange. By implementing Proof of Solvency, our goal is both to instill confidence in our users and set a new standard for financial institutions both crypto and traditional finance. 

There are two main ways for a crypto exchange or financial institution to prove solvency:

1. Traditional way

2. Cryptographic way

The Traditional Way

The traditional way involves inviting a third-party audit firm to thoroughly review the organization's numbers, accounts, and other sensitive information to generate a report stating the solvency status. However, this method has several implications: it tends to be slow, costly, and lacks privacy since a third party gains access to such data. Some recent companies in the crypto industry that have used the traditional way to audit reserves.  

The Cryptographic Way

The cryptographic way utilizes an innovative technology called Zero-Knowledge. With this method, an organization can create a cryptographic proof (zk-proof) that allows one party to prove the truth of its solvency statement to a third party without revealing any additional information.

As a licensed Financial Services business operator, FTX Japan K.K. will continue to publish audited versions of our annual financial statements on our web site. We will also maintain our daily practice of segregating users' assets, storing crypto assets in cold wallets, and holding fiat currencies in a trust account. Weekly asset segregation information is available on our website here: Asset Segregation

By introducing Proof of Solvency into our core operations, we are adding an additional layer of security and transparency based on advanced cryptography. Proof of Solvency empowers our users to verify their balances in a simple and efficient manner, without requiring detailed knowledge of asset segregation, while still preserving user privacy. Notably, aside from fiat balances stored in the SBI Clearing Trust account, the cryptographic method does not rely on having to trust a third party auditor.

Our sincere hope is that by daily publishing a Proof of Solvency using auditable cryptographic tools like zk-SNARK and zk-Proofs, we can help unlock the immense potential of cryptocurrencies and restore confidence in financial institutions and trading venues that deal with cryptocurrencies.