As chair of the Texas Innovation and Technology Caucus, state Rep. Giovanni Capriglione (R-Tarrant County) wants to prevent another FTX-like failure while allowing technology and technologists to be innovative without over regulation.
He has introduced House Bill 1666, which would require digital asset exchanges, such as Kraken, CashApp and Binance, to prove reserves exist when customers want to withdraw funds.
“I feel there is an opportunity in Texas to come up with some amount of minimal regulation that would provide people more assurance with an exchange,” Capriglione said at the 2023 D.C. Blockchain Summit last month.
FTX, once valued at $32 billion, filed for bankruptcy in November as the crypto exchange’s founder, Sam Bankman-Fried, resigned amid accusations of financial misdeeds and fraud. Reuters reported in November that at least $1 billion of FTX client funds disappeared.
If approved, HB 1666 would also ban digital asset exchanges from mixing funds of consumers with corporate assets.
"The challenge is trying to get people education on what the whole entire concept of everything from blockchain to cryptocurrency is and why it's necessary," Capriglione said. "As I've worked on the bill, we've been able to educate certain members as the votes come up."
The proposal was unanimously approved last month by the House Investment Financial Services Committee, which Capriglione chairs.
The next step for HB 1666 is a full House vote.
"My goal for this legislation and others like it is to start passing them in other states because that is the fastest way that we're going to get that trust back and help customers," Capriglione added.
Capriglione was part of a panel discussing "Proof of reserves: Don’t trust, verify" at the summit along with Brian Consolvo, KPMG technology risk management principal, and Binance Global public policy director Rana Kortam. The panel was moderated by Nic Carter, general partner at Castle Island Ventures.
“The goal for any proof of reserve system is primarily to demonstrate to users that their assets are safe, and held one-to-one,” Kortam told the Summit audience.
Binance recently added zero-knowledge proof called zk-SNARKs to its proof of reserve system with Merkle tree cryptography, which verifies and anonymizes customer holdings.
“We need to unpack the technology, explain what it does, and until people get to trust that, it is important to look at auditors,” Kortam said. "But one challenge that we grapple with is there are no specific global auditing standards for crypto.”
In response to the lack of standardization of proof of reserve auditing, digital asset exchanges have been abiding by their own rules to the consternation of audit professionals such as Consolvo.
“It's a slippery slope when you start letting these companies do it the way they see fit because it will create very inconsistent results from one company to the next,” Consolvo said. “My hope is that a group like the AICPA [American Institute of Certified Public Accountants] will volunteer to do this because I think they're one of the best standard centers in our space.”
"Risk management, good corporate hygiene and continuing to educate users on how products work and how they can ensure the safety of their assets is a journey that all exchanges should be on," Kortam added.