TBW #36: The illusion of Proof-of-Reserve

TBW #36: The illusion of Proof-of-Reserve

Read all about The Big Whale's 36th Premium newsletter.

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🖊️ Editorial from the editors

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⚡ ️ What if everything went well?

🤖 The Big Focus


False good idea 🙄

How do we restore trust?

This is the question obsessing the platforms and after two weeks of panic, it seems they have FINALLY found the solution to reassure everyone: the "Proof-of-Reserve" 💡.

The idea behind this proof is to allow each customer to consult the assets held by a platform at a given moment. "This system will allow everyone to check that Binance is actually holding the cryptos," explained its boss "CZ".

Except that, interesting as it is, this system is (very) far from solving all the problems raised by the FTX scandal.

Consulting a platform's reserve only gives a partial idea of its financial situation. What about its debts? And how can we be sure that the platform won't transfer the cryptos right after the transaction? 🤔

If they really want to restore trust, exchanges are going to have to do a lot more and perhaps start by really separating their custody activities from their trading activities...



👉 Dogami signs new fundraising round

The FTX crash isn't stopping the crypto planet from spinning. Some projects are continuing to develop (more on that below) AND to raise funds. Such is the case with Dogami. After several months of negotiations and a near-agreement with White Star Capital - we told you about it this summer, the Paris-based start-up has finally signed up XAnge fund and other investors such as Bpifrance. The total amount raised is said to be in the region of €7 million. Dogami is an NFT game that involves adopting and breeding virtual dogs (there are over 300 breeds 🐶 ) with the aim of earning money via the "Doga" crypto and playing other games in the Dogami galaxy. With this new money, the Paris-based start-up, which has already raised just over €5 million in early 2022, would like to speed up recruitment and the creation of new games.


What if the ecosystem had never been better?

Unless you live on another planet, no one could escape FTX's collapse. It's been all over the front pages of the papers, played over and over again on TV and radio, an avalanche of news that gives the impression that the whole ecosystem is in ruins. But what is the reality? We conducted a survey  🔎.

Test it out around you: ask "how are cryptos" to a friend, colleague, relative, whoever you like. Their answer will be almost the same.

Inquisitive tone: "It's carnage there, isn't it?"

Concerned tone: "Oh yes, it's very very very very hot"

Peremptory tone: "Cryptos are finished"

For the past three weeks, the media have been talking ONLY about the fall of FTX and its consequences. The Big Whale team has never been so much in demand to comment on an affair which, with so many TV and radio stories, gives the impression that the whole ecosystem has collapsed... 🤯

But is this really the case?

While the markets are not at their best - bitcoin is trading below $17,000 - the industry is actually holding up rather well. "Let's not fool ourselves. It's only part of the ecosystem that's been affected," sums up Alexandre Stachtchenko, head of blockchain & cryptos at KPMG France.

This "part" of the ecosystem is the financial intermediaries that make it possible to buy and sell crypto-assets. With the meteoric rise in prices since 2020, platforms like FTX have seen their business explode to the point of taking on an outsized role 🚀

The world leader, Binance, passed the 100 million customer mark in 2021, a figure that would make any bank green with envy. By way of comparison, Europe's largest bank, HSBC 🇬🇧, has "only" 40 million customers.

But the sudden downturn in share prices at the start of 2022 undermined this fine mechanism, and the dominoes began to fall. First in the spring with Terra (Luna), then with Celsius, until the fall of... FTX.

As Binance boss "CZ" reminded us, several crypto lending platforms and companies are still going to "disappear". American BlockFi, for example, has just bitten the dust. It announced this week that it was filing for Chapter 11 bankruptcy protection in the United States. All eyes are also on Genesis - a subsidiary of US giant Grayscale - which could tip over the edge and further exacerbate the crisis....

Meanwhile, all is "rather" well in the rest of the sector 😅  

👉 The boom in self-custody

First of all, there are the direct "beneficiaries" of the weakening of the exchanges, even if they obviously reject this label. This is notably the case with France's Ledger. "We have never sold so many Nano", confirms its CEO, Pascal Gauthier.

Since the collapse of FTX, the world leader in digital asset preservation has been selling tens of thousands of products a day - compared with a few hundred or a few thousand at best in normal times.

In November, the $1.5 billion company surpassed the 5.5 million hardware wallets sold since it was founded.

The other digital asset preservation specialists are also in fine form. Fireblocks, which offers MPC (multiparty computing), i.e. a solution for keeping crypto assets without hardware, has seen its business volume grow.

"The business is very resilient. We have a lot of new customers who have understood the importance of self-custody," confirms a spokesperson for the US company.

👉 DeFi in good shape

Same tone of voice on the decentralised finance side, where the virtues of a more transparent and auditable system are emphasised. "DeFi won't solve all the problems, but what has happened over the last few months is clearly an accelerator," insists Julien Bouteloup, founder of StakeDAO and a member of the DeFi Curve protocol development team.

In mid-November, the level of funds deposited on the DeFI Morpho protocol 🇫🇷 exceeded $250 million, more than on Solana, which is impacted by the fall of FTX (find our survey).

A view shared by other DeFi players. "Nothing like what happened with FTX is possible with Aave or Coumpound," stresses Laszlo Szabo, co-founder and CEO of Kiln, a company specialising in staking.

As a sign of the trend, Kiln has just raised €17 million in a Series A round from several heavyweight players such as Kraken Ventures. "The value of the assets we manage has fallen with the Bear Market, but we have never had so much demand", adds Laszlo Szabo. The Paris-based start-up now manages just over $600 million in cryptos. A record.

👉 A period of maturity

Kiln is not the only company to have raised funds. As noted above, Dogami also raised just under €10 million.

According to the latest figures from Crypto Valley Venture Capital (CVVC), the European ecosystem raised a total of $1 billion in Q3, as much as in Q1 2022 and slightly less than in Q2 ($1.4 billion) 💶.

In fact, crypto funds have never had so much money. They're just still a little more selective. "We need to let things settle down and return to more realistic valuations," explains Luc Jodet, head of the Web3 & Crypto fund at XAnge.

This type of period is indeed conducive to a sort of clean-up of the sector. "We've seen everything and anything go by for two years, and the crisis will allow us to clean house," confirms a crypto business angel for his part. "The Bear Market will do its work and the clowns will leave", emphasises another.

The NFTs sector is one of the most significant from this point of view.

The market literally exploded in 2021 with new collections being launched every week. While some, like Bored Ape (find our survey), have managed to make a good name for themselves, others have almost disappeared from circulation.

"The sector is maturing. There's a kind of frenzy, but the recent downturn has done nothing to dampen the momentum. There are still just as many projects and more and more serious players," explains Lucie-Eléonore Riveron, director of the NFT Factory in Paris.

The sign of a healthy sector 🔋.


Matthias Baccino (Trade Republic): "Traditional investors' interest in cryptos continues to grow"


The head of France for the German investment app (2 million users) talks about the launch of its crypto offering.

The Big Whale: The crypto market has been pitching a lot in recent weeks. Was it the best time to get involved?

Matthias Baccino: The current context is very interesting. The FTX crash has put the spotlight on security issues in cryptos, and we can see that there are different types of players. What happened with FTX could never have happened with Trade Republic.

We do custody, but to completely different standards. Our accounts are audited by the German financial watchdog (BaFin) and the German central bank (Bundesbank). This is a fairly credible proof of reserve (laughter).

Who is your offer aimed at?

Anybody, but especially those who want to invest in digital assets without exposing themselves to the risks of the Web3 universe. Traditional investors' interest in cryptos is growing all the time, but some are afraid to hold their cryptos themselves, hence our solution.

What were you waiting for to get started?

We were waiting for our digital asset custody service (Trade Republic Custody) to be registered with the Austrian authorities. This is now the case, and we can offer our customers the opportunity to invest in 50 different crypto-currencies.

This service was already available in Germany, Spain and Italy, and as of this week it is available in nine other European countries: France, Belgium, Austria, Ireland, Lithuania, Latvia, Portugal, Slovakia and Slovenia. Others are to follow.

What lessons have you learned from your initial tests in Germany, Spain and Italy?

We launched in partnership with Bitgo for digital asset preservation, but ultimately preferred to develop our own solution for optimum security.

Why did you choose Austria to register your custody structure?

Waiting for MiCA (the future European regulation that will come into force in 2024, editor's note), the Austrian regulation is the most interesting for developing in Europe. It's both stable and fairly detailed, so it's reassuring. The short registration times have also worked in Austria's favour.

Are the cryptos that customers buy "real" cryptos? Many traditional players offer synthetic products...

Yes, they are not synthetic products. We buy and sell 'real' cryptos to our customers.

Why don't you offer crypto deposit/withdrawal via external wallets?

This is a very big challenge in terms of combating money laundering and the financing of terrorism. Such a system requires major IT developments as well as a harmonised European market. This is also the aim of MiCA.

We will be working on this solution next year so that it is available as soon as possible. We want to enable these transfers while maintaining our level of requirements as a regulated financial entity.

On which institutional exchange platform do you buy your cryptos?

We work with Bankhaus Scheich Wertpapierspezialist AG, which is the biggest German player. As with equities and ETFs (Trade Republic works HSBC, ed. note), we have chosen those we consider to be the best.

How do you intend to distinguish yourself from Bitpanda and Revolut, which also offer crypto investment alongside other more traditional investments (equities, precious metals, etc.)?

Bitpanda is not really a competitor insofar as they don't sell real equities. And as far as Revolut is concerned, we like to highlight the fact that we are regulated in Germany (the British bank is registered in Lithuania for its European customers, editor's note).

How do you ensure the security of cryptos?

We chose Fireblocks' software solution, which is a benchmark in the ecosystem (we'll tell you more about it very soon in The Big Whale 👀 ). This is very reassuring for customers, as neither Fireblocks nor Trade Republic are able to touch your cryptos.

FTX used to say the same thing... How do you prove this to users?

As soon as we have sufficient reserves on Trade Republic Custody, we will publish audits of our accounts. Our advantage is that we belong to centralised finance and we also work with trusted third parties: the German Central Bank and our auditors, who guarantee our funds.

You can't get more secure than a European bank. That's the whole point of a hybrid model like ours, which we believe brings together the best of both worlds.

What do you think of the concept of "proof of reserve", proposed in particular by Binance?

I am convinced by the power offered by the transparency of blockchain technologies. Nevertheless, I am a banker and I think we need systemic trust, hence the interest of the future European MiCA regulation. Regulators and their supervisory powers can also be part of the solution.

This edition was prepared with ❤️ by Raphaël Bloch and Grégory Raymond. The Big Whale is a free and independent media. By supporting us, you are contributing to its development.

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