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Couldn't a bitcoin exchange publish a list of accounts that they use to hold coins for customers, and similarly, request that their bank confirm that the sum of

Couldn't a bitcoin exchange publish a list of accounts that they use to hold coins for customers, and similarly, request that their bank confirm that the sum of customer funds is greater than X? I mean, we might not see exactly the number of things we expect, but if it's holding over 95% of the value expected (through those mechanisms), and shows a successful trend of having increases when it claims and decreases when it claims, then it seems relatively trustworthy.

joe_the_user 13y ago
Well, Dollars are held in bank accounts that can be verified. Bitcoins are not held in bank accounts. They are long strings of numbers in essence and "storing" bitcoins involve putting these numbers on a hard disk that isn't connected to anything. I don't know enough about the bitcoin protocol to say this is possible but if an exchange could exhibit the public keys of their bitcoins without exposing the private keys, they could at least prove that either they or no one owns bitcoins of a given value.
- gizmo686 13y ago
  I can think of two ways to do this. The first way is a zero knowledge proof. This is a cryptography concept where you can prove that you know some secret (in this case the private key) without revealing the secret. I am unfammiliar with the specifics of Bitcoin, and suspect that the feasability of this method depends on the type of public/private keys they are using. The other approach is publish a list of your public keys along with predictions of future transactions. Assuming you actually control the public keys you claim to, you should be able to make those transactions successfully. Both of these approaches will run into some difficulty with a robbery or loss of keys kept in cold storage. Because your keys are (supposedly) in cold storage, it is not suspicious that you cannot prove control of them. However, if you were to suffer a harddrive failure (and not have backups), then you could simply claim that those keys were still in cold storage.
- krexit 13y ago
  This is achieved by making a transaction between two wallets you control - this is recorded on the blockchain. Karpeles / MTGox did this previously to prove that they had a certain amount of BTC. see https://bitcointalk.org/index.php?topic=21436.0 https://bitcointalk.org/index.php?topic=21436.0 for more details (search for 424242).
jamoes 13y ago
Many poker sites do this for their fiat reserves. They hold player funds in a separate bank account that is regularly audited by a trusted third party. For the exchanges crypto-currency reserves, a trusted third party isn't even necessarly. The exchange can use gmaxwell's "prove how (non)-fractional your Bitcoin reserves are” scheme [1], which allows them to cryptographically prove they are not fractional reserve. The Mt. Gox bankruptcy will have positive long-term repercussions on the bitcoin community, because it will pressure honest exchanges to do the above to prove they have the funds to cover their deposits. Coinbase has already done this for their bitcoin reserves [2], albeit through a trusted third party rather than the cryptographic way. [1] https://news.ycombinator.com/item?id=7277865 https://news.ycombinator.com/item?id=7277865 [2] http://antonopoulos.com/2014/02/25/coinbase-review/ http://antonopoulos.com/2014/02/25/coinbase-review/
- leoc 13y ago
  In the longer term (assuming Bitcoin survives so long) the question is whether exchanges will start to openly fractionally reserve their deposits. It might seem crazy today, but if and when the exchanges develop a strong reputation for financial soundness it may be very hard for them to resist the profits from a small, very safe under-reserving. Customers are likely to go along with this because 1) after all, the BTC exchanges have a strong reputation for safety and competence! and 2) some will likely share in the profits through interest on their deposits. Of course, these small, very safe overcommitments will likely turn out to be the first step on a slippery slope, but so it goes. (I am not an expert on anything.)

joe_the_user 13y ago

Well, Dollars are held in bank accounts that can be verified. Bitcoins are not held in bank accounts. They are long strings of numbers in essence and "storing" bitcoins involve putting these numbers on a hard disk that isn't connected to anything. I don't know enough about the bitcoin protocol to say this is possible but if an exchange could exhibit the public keys of their bitcoins without exposing the private keys, they could at least prove that either they or no one owns bitcoins of a given value.

gizmo686 13y ago
I can think of two ways to do this. The first way is a zero knowledge proof. This is a cryptography concept where you can prove that you know some secret (in this case the private key) without revealing the secret. I am unfammiliar with the specifics of Bitcoin, and suspect that the feasability of this method depends on the type of public/private keys they are using. The other approach is publish a list of your public keys along with predictions of future transactions. Assuming you actually control the public keys you claim to, you should be able to make those transactions successfully. Both of these approaches will run into some difficulty with a robbery or loss of keys kept in cold storage. Because your keys are (supposedly) in cold storage, it is not suspicious that you cannot prove control of them. However, if you were to suffer a harddrive failure (and not have backups), then you could simply claim that those keys were still in cold storage.
krexit 13y ago
This is achieved by making a transaction between two wallets you control - this is recorded on the blockchain. Karpeles / MTGox did this previously to prove that they had a certain amount of BTC. see https://bitcointalk.org/index.php?topic=21436.0 https://bitcointalk.org/index.php?topic=21436.0 for more details (search for 424242).

jamoes 13y ago

Many poker sites do this for their fiat reserves. They hold player funds in a separate bank account that is regularly audited by a trusted third party. For the exchanges crypto-currency reserves, a trusted third party isn't even necessarly. The exchange can use gmaxwell's "prove how (non)-fractional your Bitcoin reserves are” scheme [1], which allows them to cryptographically prove they are not fractional reserve. The Mt. Gox bankruptcy will have positive long-term repercussions on the bitcoin community, because it will pressure honest exchanges to do the above to prove they have the funds to cover their deposits. Coinbase has already done this for their bitcoin reserves [2], albeit through a trusted third party rather than the cryptographic way. [1] https://news.ycombinator.com/item?id=7277865 https://news.ycombinator.com/item?id=7277865 [2] http://antonopoulos.com/2014/02/25/coinbase-review/ http://antonopoulos.com/2014/02/25/coinbase-review/

leoc 13y ago
In the longer term (assuming Bitcoin survives so long) the question is whether exchanges will start to openly fractionally reserve their deposits. It might seem crazy today, but if and when the exchanges develop a strong reputation for financial soundness it may be very hard for them to resist the profits from a small, very safe under-reserving. Customers are likely to go along with this because 1) after all, the BTC exchanges have a strong reputation for safety and competence! and 2) some will likely share in the profits through interest on their deposits. Of course, these small, very safe overcommitments will likely turn out to be the first step on a slippery slope, but so it goes. (I am not an expert on anything.)