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Highlights
- PROOF Act mandates monthly third-party audits to verify crypto firms’ reserves, boosting investor protection.
- New bill bans co-mingling of customer funds by crypto custodians to avoid another FTX-style collapse.
- SSEC under Paul Atkins releases stricter disclosure rules for digital asset issuers after Senate approval.
As crypto regulation gains ground in the US under pro-crypto President Donald Trump, US Senators are taking further steps to strengthen oversight of digital asset firms. Senators Thom Tillis and John Hickenlooper reintroduced the Proving Reserves of Other Funds (PROOF) Act, which aims to create new standards for transparency and fund management in the cryptocurrency sector.
US Senators Reintroduce PROOF Act Bill
According to Eleanor Terrett, US Senators Tillis and Hickenlooper have renewed their push for the PROOF Act, which was first introduced in 2023. The bill responds to concerns raised by the collapse of FTX, where customer funds were reportedly mixed with the company’s own capital and redirected to affiliated firms.
The PROOF Act would prohibit the co-mingling of customer assets by digital asset custodians and exchanges. It sets requirements for monthly third-party reserve checks, which would ensure that firms hold enough reserves to back customer holdings.
Independent auditing firms would perform these checks, sending the results to the U.S. Department of the Treasury.
Mandatory Proof of Reserves Checks
Under the US Senator’s proposed law, all firms offering digital asset custody or exchange services must undergo monthly Proof of Reserves (PoR) inspections. These checks would verify that firms hold the assets they claim to possess on behalf of their clients.
PoR uses cryptographic tools like Merkle trees and zero-knowledge proofs to verify balances without revealing user data. To ensure transparency, the inspection reports would be made public through the Treasury Department. If a company fails to comply, it will face civil fines that increase with repeated violations.
Although some firms have previously voluntarily shared proof of reserves information, these practices have been inconsistent and often lacked third-party verification. The PROOF Act would create a standardized process across the industry.
Preventing Fund Mismanagement in the Crypto Industry Through The PROOF Act
The US Senators’ renewed effort to pass the PROOF Act follows the financial failure of several crypto companies, most notably FTX. Reports showed that FTX moved customer deposits to its sister firm, Alameda Research, without proper disclosure or reserves, contributing to a major loss of trust in the sector.
Lawmakers aim to reduce the risk of mismanaged or missing funds by introducing strict reserve reporting requirements. The bill, as a result, intends to give customers more confidence that their digital assets are safe and properly accounted for by crypto firms.
The legislation also encourages more responsible behaviour from digital asset institutions by requiring them to follow clearly defined standards. These standards subsequently support regulatory oversight and prevent future financial harm to customers.
SEC Leadership and Regulatory Developments
The reintroduction of the PROOF Act follows Paul Atkins’s appointment as the new Chair of the Securities and Exchange Commission (SEC) in the United States. The Senate endorsed Atkins with a 52 to 44 majority in acknowledging his position on precise crypto regulations.
As a result, the Division of Corporation Finance of the SEC published guidance for crypto issuers as a follow-up to Atkins’ confirmation. The guidance also involves disclosure concerning business models and financial statements and risks associated with digital assets that fall under the definition of securities.
Subsequently, Senator Cynthia Lummis, a pro-Bitcoin legislator, has corroborated the development while acknowledging optimism about the future under Atkins. She stated that from her conversation with Atkins, she became confident in his handling of digital asset regulation.
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