At CheckSig, we believe in a provably-honest transparent custody. At least monthly, we provide a public blockchain proof that all assets in custody are safely under control. This might seem so obvious to be redundant: as a matter of fact, no other custodian proves its reserves; woefully, they might be concealing losses to be discovered later on!
The proof-of-reserves is provided as a blockchain transaction that
This consolidated amount represents the assets under custody at the transaction date.
At the beginning, the control of the consolidated amount was proved by the act of spending it at the next transaction date. To make the proof-of-reserve self-contained, since July 2021 each transaction spends from and to the consolidation address at the same time. As a result, this spend-to-self transaction immediately proves the control of the consolidated amount at the transaction date.
While address reuse is bad for privacy, it is fine in our case because the proof-of-reserves must be public. Moreover, residual security concerns (e.g., nonce exfiltration) are solved by our custody protocol. In fact, we rely on a multi-level multi-signature scheme using hardware wallets (Hardware Security Modules) from different vendors. To learn more about our security, read about CheckSig custody protocol.
Anyway, proving our reserves does not prove them to be enough to cover the obligations we have towards our clients. To achieve a proof-of-solvency, the proof-of-reserves should be combined with a proof-of-liabilities. Unfortunately, a reliable cryptographic proof-of-liabilities is impractical. All known privacy preserving approaches do not provide easy independent verification for non-technical clients (see here).
Therefore, we believe that proof-of-liabilities is better delegated to external auditors. Indeed, our (internal controls and) external auditors independently verify that the proved reserves exceed our liabilities. This verification is part of the SOC attestations we obtain by Deloitte.
Furthermore, the on-chain proof-of-reserves could be manipulated. As example, bitcoins could be borrowed from a third party to cover losses. Only an off-chain external auditor can detect this kind of shenanigans.
Finally, check out below our proof-of-reserves transactions and explore them on-chain. The current consolidation address is bc1qqst9un5sz8576fy2nnqkpm4rpfh0weveqwtt8zxgjp02g2mx5q7s2vresu.