FTX Japan Launches Blockchain-based Proof of Solvency to Enhance Transparency and Security

In an effort to enhance transparency and bolster the trust of its customers, FTX Japan has unveiled a blockchain-based technology known as Proof of Solvency (PoS). This initiative was announced by Seth Melamed, the COO of FTX Japan, through a series of tweets on September 28, 2023. The newly introduced Proof of Solvency mechanism enables the company to prove, in an unalterable manner, that the reserves of the exchange surpass the assets held in custody for customers.

Proof of Solvency (PoS) is a method utilized to demonstrate a company's capability to meet its long-term financial obligations, merging traditional financial audit practices with blockchain transparency. Highlighted by ICONOMI's blockchain audit conducted by Deloitte on April 5, 2018, PoS comprises two core components: Proof of Liabilities and Proof of Reserves. Through the Merkle Tree approach, individual users can verify their account balances and overall liabilities without disclosing personal information, ensuring data integrity. Proof of Reserves entails disclosing total reserves encompassing digital and fiat assets, verified through blockchain addresses, bank, and exchange account information. Deloitte's audit, covering 80 digital assets, confirmed ICONOMI's $210.2M reserves surpassing its $133.6M liabilities, thus establishing its solvency. This PoS framework enhances transparency, security, and trust among stakeholders while maintaining user privacy.

The PoS is a significant stride towards addressing a central issue in the cryptocurrency market and, by extension, traditional financial markets. The technology aims to provide market participants, who have entrusted their assets to exchanges or financial institutions, with increased safety and information transparency. By doing so, it tackles the technical problem of information provision in a secured and transparent manner, which is a matter of concern for many in the industry.

FTX Japan has been ardently adhering to legal regulations by strictly managing the segregation of customer assets. However, with the introduction of PoS, the reliance on subjective verification or claims by the management has been replaced with cryptographic proofs such as Zero-Knowledge Proofs. These proofs and the corresponding results are reflected on the blockchain, thus allowing an objective verification of the asset management status by the customers of FTX Japan.

The PoS service is available to all customers of FTX Japan as well as the Liquid Japan platform. Customers can easily verify their balances with a mere three clicks via the Liquid GUI. Furthermore, details of the PoS are scheduled to be published weekly on the Ethereum blockchain, according to Melamed. This initiative is seen as a vital step towards resumption, and FTX Japan believes it to be a high-quality service for all participants in the cryptocurrency ecosystem.

The launch of the Proof of Solvency by FTX Japan underscores the growing importance of transparency and trust in the evolving digital asset marketplace. By leveraging blockchain technology, FTX Japan has established a robust mechanism to provide clear evidence of its financial solvency to its customers, thereby setting a positive precedent in the industry for security and transparency.