S. 1405: Proving Reserves Of Others’ Funds Act

This bill, titled the Proving Reserves of Others’ Funds Act or the PROOF Act, aims to implement new standards and requirements for digital exchanges in how they manage customer assets, specifically digital assets and commodities. Below is a breakdown of its main components:

Definitions

• Covered Assets: This term refers to the money, assets, or property belonging to a customer of a digital exchange, excluding proprietary funds of the exchange and certain assets in margin accounts.
• Digital Assets: These are defined as any digital representation of value recorded on a secured digital ledger.
• Digital Custodian: An entity that holds and safeguards digital assets on behalf of customers but is not involved in the clearing or settling of those assets.
• Digital Exchange: A trading platform that lists at least one digital commodity or asset.

Requirements for Digital Exchanges

Customer Asset Protection

Digital exchanges are required to:

• Establish baseline accounting standards and procedures to protect customer assets.
• Hold customer assets in a way that minimizes risks of loss and delays in accessibility.
• Treat all customer assets as belonging exclusively to the customer, prohibiting commingling with non-customer assets.

Segregation of Funds

Exchanges can co-mingle customer assets in certain situations (e.g., with a bank) for convenience, but under strict regulations. Customers' explicit consent is needed for any substitution of their covered assets.

Attestation Requirements

Digital exchanges and custodians must obtain monthly attestations from independent auditing firms to verify that they have sufficient reserves to cover customer assets. This attestation will require:

• Proof of possession or control of digital assets.
• Verification of the entity's financial obligations.

Reporting and Public Availability

Auditing firms must submit reports concerning their attestation to the Under Secretary of the Treasury. These reports will then be made public, detailing the name of the entity being reviewed and the auditing firm involved.

Enforcement and Penalties

If a digital exchange fails to comply with the act, the Under Secretary may impose civil penalties based on the nature and frequency of the violations. Penalties will depend on the number of infractions observed within a specified timeframe, with caps established for customer charges and total assets under management.

Effectiveness of the Act

The enforcement of this act and its provisions will become effective once the Public Company Accounting Oversight Board and the American Institute of Certified Public Accountants approve the required standards for the attestations outlined in the bill.

Relevant Companies

• COIN - Coinbase Global, Inc.: As a digital exchange, Coinbase would need to establish rigorous accounting standards and protocols to comply with the new legislation regarding customer assets.
• BTCC - Bitstamp: Similar to Coinbase, Bitstamp would be impacted by the requirements to hold and report on customer assets and maintain proof of those assets.
• GREE - Greenidge Generation Holdings Inc.: Involved in digital asset operations, it would need to comply with the increased regulatory scrutiny contemplated by the bill.