South Africa, October 2021 — This month, two reputable South African virtual asset service providers in South Africa made history by issuing first-of-its-kind proof of reserve reports, a move that will assist to combat fraud, protect crypto holders and industry stakeholders, and help cultivate credibility for the local cryptocurrency market.
In October, Revix became the first South African cryptocurrency investment platform to have an independent party verify that it securely holds the underlying cryptocurrencies of its products. South Africa’s largest cryptocurrency exchange, Luno, also underwent the rigorous process of independently verifying the existence of customer funds by means of a proof of reserves report. Further to this, Luno became the first local crypto exchange to issue this type of report, setting a strong precedent for the crypto industry both locally and internationally.
Defining proof of reserves in the crypto industry
This is according to Wiehann Olivier, Digital Asset Lead and Partner at Mazars South Africa, who explains that the proof of reserves report is a type of assurance engagement, called an ‘agreed-up procedure’ (AUP) engagement. “The AUP engagement lists the procedures that need to be performed by an independent auditor, and outlines how the auditor will consequently report on the factual outcome of each procedure.
“With a proof of reserves report, Mazars in South Africa modified these types of engagements to perform specific procedures over crypto exchanges and investment platforms, such as Luno and Revix, to provide current and prospective customers with reassurance that their digital assets actually exist and that the funds are either situated on-chain or within a custody solution,” Olivier explains.
As the independent auditor, Mazars also ensures that the customers’ investments are collateralised; meaning that what they see on their online crypto dashboard is backed by cryptocurrencies that exists within a custody solution or an on-chain address.
The unmistakable value of proof of reserves
He explains that the immediate benefits of introducing proof of reserves reports to the cryptocurrency industry includes the prevention of fraud, the protection of stakeholders, and the cultivation of credibility.
“In recent years, fraudulent incidents around cryptocurrency scams have increased in number, and many innocent people have become victims of cryptocurrency crimes, simply because there weren’t actual cryptocurrencies backing the digital assets that people thought they held.
Sean Sanders, Founder and CEO of Revix, says that this is one of the biggest challenges that the industry faces. “Thankfully, addressing this through a proof of reserves report provides some sort of assurance to the public.”
Marius Reitz, General Manager of Luno adds; “As an industry we need to take a stronger stand against cryptocurrency crime, and proof of reserves helps to protect all stakeholders against fraud. Due to this report, Luno’s nine million customers in more than 40 countries can rest assured that their wallets do in fact contain the cryptocurrency stated. We have always said that Luno is a safe platform to secure and store cryptocurrency and this is external validation that this is in fact the case.”
Olivier says that proof of reserves reports play a valuable role in creating a safer investment environment for all cryptocurrency customers and consequently bolsters the credibility of the industry. “Revix and Luno’s decision to verify their reserves and be transparent about their assets instantly brings a level of trust to an industry perceived to be opaque and complex. Hopefully this trend of social responsibility towards investors and customers will be followed by other South African digital asset service providers, and in turn boost the credibility of the industry.”
Future hopes for the regulation of the cryptocurrency market
Earlier this year, the Intergovernmental Fintech Working Group (IFWG) published a position paper which confirms that cryptocurrency assets will be brought into the South African regulatory purview in a phased and structured manner. “The IFWG also highlighted the importance of regulating the cryptocurrency industry so as not to stifle innovation. This is very reassuring for both industry players and stakeholders but in the interim, much progress can still be made to ensure the crypto industry is safer,” Olivier explains.
He believes that the Financial Sector Conduct Authority (FSCA) should make regular proof of reserve reports mandatory. “There’s a need for these types of reports in both a regulated and unregulated industry to confirm that these virtual asset service providers are acting above reproach.”
He adds that when the industry is further monitored through statutory audits, an element of public accountability will take root to ensure only credible virtual asset providers are operating in the market. In South Africa, Mazars is currently the only audit firm issuing proof of reserve reports for digital assets. Based on its expertise and experience in the crypto industry, Olivier says he hopes that these reports can reassure the general public of the legitimacy of pro-regulation companies like Revix and Luno.
“At Mazars, we’ve invested a lot of time and effort into understanding digital assets, cryptocurrencies, and the blockchain technology behind it,” Olivier reiterates. “We’ve also invested time and effort into understanding the risks associated with cryptocurrencies to service our clients in this sector, and - more importantly – its stakeholders. Whether we’re doing a statutory audit or proof of reserves report, we’re providing stakeholders with the required assurance.”
Mazars’ industry leading expertise in the crypto sector was further showcased during the second half of October with Ovex’s media statement boasting about being the first South African crypto OTC exchange to be successfully audited by Mazars.