• Written by: Prasanna
• Sun, 13 Nov 2022
•   Germany

Gate.io and Crypto.com, seem to be falsifying their proof of reserves.

The Next black Swan Event?: Gate.io and Crypto.com Seem to be Fabricating Proof of Reserves

Following the demise of FTX, the crypto community is particularly worried that some crypto exchanges, such as Gate.io and Crypto.com, seem to be falsifying their proof of reserves.

The failure of Samuel Bankman-FTX Fried’s exchange pointed out the importance of proof-of-reserves for centralized exchanges. Cold storage information provided a dubious transmission of 320,000 Ether to Gate.io when verifying the flow of cash on Crypto.com.

What are Proof-of-reserves (PoR)?

Proof-of-reserves (PoR) audits are third-party independent audits intended to provide accountability and proof that a holder possesses the holdings it asserts to have on behalf of its customers. Auditors then gather account balances into a Merkle tree, which contains all client account balances.

Crypto.com sent millions of dollars to the wrong users twice in 18 months

For the second time, Crypto.com, a well-known cryptocurrency exchange, has ‘unknowingly’ transmitted millions of dollars to the wrong address.

Because of the prevailing situation of proof-of-reserve by exchanges, Kris Marszalek, the CEO of Crypto.com, posted publicly the list of addresses for the firm’s cold storage. When cryptocurrency geeks inspected, they found that the company had already sent 320k units of Ethereum tokens to another exchange, Gate.io.

In response to the allegation, CEO Marszalek noted that the funds were meant to be transferred to some other cold central warehouse, but instead were “sent to a whitelisted external exchange address.” Particularly, the inaccurately transferred fund depicted a substantial chunk of Crypro.com’s total equity in cold storage. The funds were brought back to the wrong destination several days later.

Gate.io completes proof-of-reserves after having received a transfer of 320000 ETH

The FTX demise has raised concerns among buyers and sellers about the security of user investments in cold storage at exchanges. To avoid the troubles that encircled the FTX exchange just before its breakdown, exchanges began publishing proof-of-reserves.

On October 28, 2022, Gate.io accomplished its proof-of-reserves inspection, just weeks after getting $404 million in Ethereum from Crypto.com. When Crypto.com probed transfers, on-chain analysts found a dubious 320,000 Ether transmission to Gate.io. This transmission was unintended, according to Kris Marszalek, CEO of Crypto.com. Crypto.com aimed to transfer consumer funds to a unique cold storage address, but a mistake ended up causing the investments to be transmitted to Gate.io.

According to Etherscan data, Crypto.com sent out the funds to Gate.io on October 21, and Gate.io handed back 285k ETH within a week. He mentioned that the sender and receiving addresses were both affiliated with Crypto.com.

The Cryptocurrency Community Chases down Crypto.com’s Clarification

Meanwhile, many in the cryptocurrency community are extremely skeptical of Crypto.com CEO’s clarification and find it hard to believe that the transfers are linked to the exchange trying to lie about its reserve.

Adam Cochran pointed out that there were some discrepancies in Crypto.com’s proof of assets that the CEO must fill in. Cochran went on to explain that “the answer of “wait for our audit” is grossly inadequate. If the assets occur, it should be fairly quick to figure to even 80% of these assets to guarantee users meanwhile. Obviously, people are worried and have doubts about this ecosystem!”

Ben Armstrong (BitBoy), a popular Bitcoin influencer, proclaimed that he was pulling back all of his assets from Crypto.com and warned others to do the same. He alleged that the latest sequence of events has educated him on the importance of self-custody.

Binance CEO Changpeng Zhao concurred in, and said that an exchange that shifts massive volumes of cryptocurrency pre or post-its proof-of-reserve is an “evident sign of a problem.”

Meanwhile, the CEO of Crypto.com has bashed the exchange speculations, claiming that people should rather concentrate on businesses with affiliations to FTX.

Huobi is also under Radar

According to Wu Blockchain, 10,000 ETH has transferred from Huobi 34 wallet to Binance and OKX addresses after Huobi published asset reserve screenshots. The Huobi 34, which had over 14k ETH when the screenshot was taken, now contains only 4,004 ETH.

However, Paradigm researcher Sam made clear that the money in the Huobi 34 wallet did come from some other Huobi address, both of which were shown in the screenshot. As a result, it was highly improbable that the funds were being used to pump up the PoR.