Proof of reserves: what liabilities and audit scope reveal

Proof of reserves is useful only when the evidence matches the claim being made. Demonstrating that a business controls specified assets at a particular time does not, by itself, establish that it can meet every customer claim, that the assets are unencumbered, or that customers would receive them in an insolvency.

The practical task is to identify exactly what was checked. A reserve ratio becomes meaningful only after its numerator, denominator, legal entity and measurement date are understood.

Begin with the question the report actually answers

The PCAOB investor advocate's advisory distinguishes proof-of-reserve engagements from audits and highlights limits involving liabilities, asset holders' rights, borrowed assets and later events. This U.S. staff advisory does not define every engagement globally.

For review, record the provider, subject matter, criteria, procedures or assurance standard, and conclusion. Then describe the claim in one sentence, naming the company, balances and measurement time. A dashboard badge cannot supply missing scope information.

Separate existence, ownership and completeness

PCAOB AS 1105 distinguishes financial statement assertions including existence, completeness, valuation, and rights and obligations. These are different questions, even when they concern the same asset.

For a crypto balance, existence asks whether the asset is there. Rights asks whether the reporting entity has the relevant claim to it. Completeness asks whether the records contain everything they should contain. Valuation asks whether the reported amount follows the applicable measurement rules.

An analyst can use those distinctions without pretending to conduct an audit. Ask whether an address belongs to the contracting entity, whether the asset can be pledged elsewhere, and how customer records were reconciled. Evidence answering one question should not silently be reused as an answer to all four.

The legal relationship also deserves its own review. Our guide to custody, segregation and customer assets explains why the location of an asset and the rights attached to it need separate attention.

Understand what a Merkle proof adds

A Merkle tree organizes data into a cryptographic commitment. Kraken's proof-of-reserves explanation describes customer verification using a Merkle leaf and a path to the published root.

The useful outcome is specific: a customer can check that their reported balance was included in the committed dataset. That can help reveal a missing or incorrect entry for that customer.

An inclusion proof does not independently establish that no other account, borrowing or obligation was omitted from the dataset. This is a logical boundary: proving membership in a list is different from proving that the list is complete. Nor should the existence of an inclusion tool be treated as confirmation that every asset or product offered by the business falls within the report.

The practical follow-up is to compare the report's included products and balances with the account's actual holdings. Investigate the exclusions before interpreting the aggregate ratio.

Read the assurance language precisely

A financial statement audit addresses financial statements under an identified reporting framework. PCAOB AS 1000 describes reasonable assurance as a high level of assurance, rather than absolute assurance. An audit opinion therefore is not a promise that a business cannot fail or that every transaction was individually inspected.

An attestation may address a narrower assertion against specified criteria. The AICPA's 2025 stablecoin reporting criteria, for example, concern reporting on asset-backed, fiat-pegged tokens and the availability of backing assets. Read the criteria and period named in the particular report; do not assume every document bearing “reserves” uses that framework.

Circle's transparency page describes monthly third-party assurance comparing USDC reserve value with USDC in circulation. That illustrates a defined reserve assertion. Assessing such an assertion is a different task from evaluating the issuer's entire financial position.

For an agreed-upon procedures engagement, the PCAOB advisory explains that the output reports factual findings from the selected procedures rather than an opinion on overall financial stability. The identity of the accounting firm does not expand the written scope.

Use a report-reading worksheet

The following worksheet is an editorial method for organizing questions, not a substitute for the provider's work.

A hypothetical example shows why the denominator matters. Suppose a report compares 105 units of an asset with 100 units of included customer claims. Its arithmetic gives 105% coverage. If an additional 20 units of relevant claims were omitted, the same asset balance would cover 87.5% of the expanded total.

Those figures do not describe a real provider. They demonstrate that accurate arithmetic cannot repair an incomplete population. Equally, a reader should not assume omitted obligations exist merely because a report is narrow; the correct finding is that the document does not answer that question.

After completing the worksheet, write two short conclusions: what the evidence supports and what remains unresolved. This makes the review reproducible and keeps confidence proportional to the actual work performed.

Source review: 22 September 2026.