CoinSwitch’s overall holdings of Indian Rupees on our books and crypto assets held in custody are greater than customer holdings, an independent review of the company’s books and custody services has confirmed. The summary of our Proof of Reserves report is available here.
At CoinSwitch, we have always prioritized trust, transparency and safety, and going the extra mile to do right by our users. The extensive and independent review of the company’s bank accounts, payment gateways, crypto custody services as well as counterparty relations with crypto exchanges was thus carried out so that our users have full visibility into their funds and investments reserves on CoinSwitch.
The review, or the agreed-upon procedures (AUP), was carried out by INMACS, a 38-year-old public limited company registered in India, that specializes in assurance, taxation, regulatory advisory, and risk management, among other services. The firm was founded by Mr. Vinod Jain, an experienced Chartered Accountant with 42 years of rich industry experience, who has also been a Member of the High Powered Committee, appointed by the Finance Ministry to simplify Income Tax Law. He was also appointed by the Union Finance Minister as an Advisor to the GST Council for reviewing GST Law.
The recent collapse of the global crypto exchange FTX has been a rude awakening for the global industry, and regaining the trust of the users and outside observers should be of the highest priority for every stakeholder in the industry. The growing call for exchanges and intermediaries to show proof of reserve is thus welcome.
At CoinSwitch, we believe, a representation of the crypto and fiat holdings without an independent review, however, falls short of the high standards the industry should benchmark itself against—for, in the absence of regulations that mandate such reviews, the onus is on exchanges and intermediaries to be proactive and transparent. This report is just the beginning of many such steps to come.
And few come with the credibility and experience of INMACS and Vinod Jain, who has inspected the financials of medium and large-scale corporations across regulated sectors. INMACS, who was engaged by us in July 2022, conducted the Agreed-Upon Procedures (AUP) in November 2022 under the Indian Standards on Related Services (SRS 4400) issued by the Institute of Chartered Accountants of India. The inspection adhered to the International Standard (ISRS) 4400, an international standard and guidance to perform agreed-upon procedures regarding financial information.
A summary of our Proof of Reserves review
The details of the process followed and findings certified by INMACS are as follows:
- INMACS was provided with a detailed listing of crypto custody services, counter-party sources including crypto exchanges and wallet addresses from CoinSwitch, using a snapshot of web-logins on the web-portal of these sources provided by CoinSwitch.
- INMACS obtained individual Indian fiat currency (INR) balances with banks, payment gateways, and crypto exchanges, using snapshot of web-logins on the web-portal of these sources or banks, and payment gateways, and crypto exchanges statements of account provided by CoinSwitch.
- INMACS also obtained a detailed listing of customer holdings with CoinSwitch in Virtual Digital Assets (VDA) directly from CoinSwitch’s database.
- It then compared the total CoinSwitch’s crypto and INR holdings with customers’ crypto and INR holdings with CoinSwitch to understand whether total CoinSwitch holdings were greater or equal to or less than customer holdings.
- The review found CoinSwitch’s INR and crypto holdings were greater than the investments of CoinSwitch’s users.
Why we chose this path
First, let me take a step back and provide you with the lay of the land:
What is Proof of reserves (PoR)? In simple terms, it is a means to prove that a financial entity has the holdings it says it has. In the case of a crypto exchange or intermediary, a PoR provides a real-time view of its holdings on wallet addresses.
A view into the hot and cold wallets used by a crypto exchange can certainly provide users with a better understanding of the intermediary, yet it does not provide a comprehensive view of the company’s business and financial exposure.
The wallet address may show X assets, but there is no visibility. For instance, an on-chain review of just the wallets will not reflect the loans the intermediary may have taken. And if the company is unable to repay this, it can go insolvent. Thus, in many ways, a PoR can provide a false sense of security to the users.
A few crypto intermediaries have chosen to publish a liability-to-reserve ratio. In our view, independently reviewed and confirmed report offers greater transparency than self-attested data.
How about a PoR that is audited periodically? Here, the timing becomes important. If the crypto intermediary has borrowed or temporarily moved assets from a large holder (a whale) to its wallet before the PoR snapshot, the results would give a false impression of assets in its holdings.
Due to these shortcomings, CoinSwitch opted for an extensive and independent review of the wallets, banks, payment gateways, and counterparties through the snapshots we provided. While this Proof of Reserve is not a “Merkle Tree” approach, it has been independently reviewed and confirmed.
We believe this is the ideal way forward. Making public the wallet address without any insight into the company’s on-chain and off-chain liabilities does not do justice to the objective of trust and transparency, instead, could even expose the same wallet addresses to bad actors.
As always, as a custodian of the trust of 18 million users and as India’s leading crypto investing app, we believe the onus is on us to build a credible, responsible and trustworthy crypto ecosystem in India. This independent report is one such step toward the cause.
— Ashish Singhal,
CEO and Co-Founder, CoinSwitch
This document / report is solely for information purposes, and is not intended to provide any legal, tax, accounting, or investment advice or recommendations. Users are strongly advised to do their own research (DYOR) before buying, selling, or storing any Crypto or INR on any Crypto platform. Crypto assets and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Your usage of the CoinSwitch platform shall remain subject to various terms and policies as available on www.coinswitch.co.