Crypto Exchanges' Proof of Reserves: A Necessary Signal, Not a Guarantee

Crypto exchanges and custodians have started publishing 'Proof of Reserves' (PoR), a way to show they actually hold the crypto they owe users. These disclosures provide a snapshot of on-chain assets at a specific time, often mapped to user balances via a Merkle tree. The goal is to give users confidence that their funds are secure.

However, PoR has its limitations. It's primarily focused on on-chain assets and doesn't account for off-chain liabilities, such as fiat balances or loans. This means that exchanges can appear solvent in terms of crypto reserves but still be at risk of insolvency due to hidden debts.

The Block's July 2026 primer noted that PoR is usually a point-in-time snapshot, which can be gamed by moving funds just before the check. It also doesn't capture fiat or other off-chain liabilities and can't fully prove exclusive key control. As such, it's essential to treat PoR as a necessary signal but not a full solvency audit.

Phemex reported an average reserve ratio of 127.77% across BTC, ETH, USDT, and SOL in July 2026, while MEXC showed a BTC reserve ratio rising to 281%. However, ratios over 100% can be comforting but are not all the same story. It's crucial to ask how liabilities were computed and whether non-crypto exposures exist off to the side.

The key takeaway is that PoR should be used in conjunction with other checks and risk limits, rather than as a standalone guarantee of solvency.