This report reviews recent market dysfunction, broadly assesses relevant industry policies and practices, and examines potential benefits of expanded Proof of Reserves assurances.Recent events in the digital assets market have cast issues of counterparty risk into sharp relief. High profile failures and acute stresses experienced by major custodians, algorithmic stablecoins, and other institutional intermediaries have revealed a number of structural issues in the market. These events have drawn the scrutiny of regulators and policymakers concerned about consumer protection, financial stability spill-overs, and malicious behavior. On November 8, Rep. Patrick McHenry, the Republican leader of the House Financial Service Committee, released a statement on the events involving trading platforms FTX and Binance: “The recent events show the necessity of Congressional action. It’s imperative that Congress establish a framework that ensures Americans have adequate protections while also allowing innovation to thrive here in the U.S.” More stringent regulation may be on the horizon. More importantly, FTX’s liquidity crisis underscores the industry’s existential need to mature on its own. Now is the time for market participants to identify private, voluntary solutions to improve transparency and instantiate related best practices.
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