With all eyes on crypto exchanges, rebuilding trust — through increased transparency, safety and effective policies — has become the top agenda for entrepreneurs worldwide.
Investor sentiment has always been a critical driver in the crypto space. Both positive and negative sentiment influence ongoing trends — be they price movements, product launches or regulations. In 2022, sentiment worldwide suffered as major crypto firms and ecosystems collapsed, further straining investors amid an unforgiving bear market.
While many showed resilience as Terraform Labs, Celsius and Voyager, among others, closed down, Sam Bankman-Fried’s alleged misappropriation of FTX customers’ funds drove even the most die-hard crypto investors to question the integrity of those running the show.
A series of scams, crashes, bankruptcy filings and court cases have forced investors to rethink how they store crypto and seek accountability from crypto exchanges. Proof of reserves (PoR) became the de facto standard adopted widely among crypto exchanges to publicly showcase and reassure investors that funds exist.
Sumit Gupta, co-founder and CEO of CoinDCX — a Mumbai-based crypto exchange — has opted for the same approach of being transparent with investors. Speaking to Cointelegraph, Gupta discussed the thought process behind proof-of-reserves standards, healing investor sentiment, a new era of trust-building and more.
Cointelegraph: While many exchanges have opted to reveal their proof of reserves, the outflow of assets from exchanges remains a growing trend. Do you think this new standard will help regain investors’ trust?
Sumit Gupta: The collapse of FTX, which is actually a case of malpractice and manipulation of the market, has shaken the industry. Unfortunately, the fiasco has been linked to the integrity of the crypto market, questioning the safety and security of crypto assets.
It is imperative for users to worry about their funds being secured on exchanges, and it is the duty of the crypto industry to give users confidence about the safety of their funds in a transparent manner. PoR is one of many steps to assure users that their funds are safe. Therefore, CoinDCX, in the pursuit of complete transparency, published a full proof of reserves with an audited report furnishing both sides of its reserve balance — i.e., assets and liabilities.
Building trust in any ecosystem is an ongoing process that requires continuous attention and effort. While PoR is one step in this direction, the other steps to regain users’ trust include ring-fencing digital trading assets, such as websites, apps and trading platforms. Couple this with a robust security framework to prevent hacks, creating top-class standards, benchmarks and preventive policies that ensure the safety of users’ funds at the utmost level. Regular checks and balances in the form of standard operating procedures and audits lend more credibility and trust. The other major step to regain the confidence of users is to regulate the market, as this will result in the exit of bad players, and only serious, trustworthy exchanges will survive.
CT: Why have some exchanges opted for the PoR route while others are still contemplating the move? How does this choice impact the credibility of the organization?
SG: Publishing reserves is going to become table stakes, and very soon, users will demand or shift to those exchanges that are more transparent and publish their reserves. It is a user’s right to demand proofs of reserves, which gives them confidence about their funds being safe on an exchange.
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At CoinDCX, we believe in complete transparency and understand the importance of maximizing communication when the industry is going through a trust deficit phase. Nonetheless, sharing proof of reserves is one of the steps; but to build credibility among investors, the industry must continue to maintain the highest standard of transparency, develop robust business practices and stay self-compliant. Transparency and consumer protection must take precedence over everything.
CT: What factors have investors historically considered when trusting crypto exchanges for storing assets?
SG: Over the past few years, exchanges in India did see a new generation of investors onboarding who were not exposed to traditional asset markets but were keen to explore opportunities in virtual digital assets. Therefore educating this new investor class became critical. While post-FTX debacle, there are more conversations around transparency, compliance and security. These have formed the core of our investors’ education strategy for the past three years.
Secondly, we never expose user funds to price and credit risk. We never lend or take any actions with users’ assets without prior consent. All customer assets are held 1:1, allowing customers to access their funds at any time. We do not have a native token, as this exposes users to asset concentration and liquidity risks. At CoinDCX, we have taken a conscious decision not to have a native token. This helps safeguard our users from the above risks that are associated with launching a native token.
Keeping in mind these factors, we built some innovative products in crypto investing and trading, namely Buy, Sell, CIP, Earn, Earn, Staking, etc. We also introduced the 7M Model, which conducts a rigorous check on any new token before listing it on the platform.
CT: Have you personally noticed any positive change among Indian investors after CoinDCX released its PoR?
SG: CoinDCX has always taken extra steps to build a strong connection with its investors, and typically in times of crisis — whether it was the Terra-Luna crash or FTX — we were quick to address any concerns our users have. At the company level, we have been very cautious and compliant and, thus, were able to avoid any exposure to negative incidents in the crypto space in 2022.
Nonetheless, initiatives like proof-of-reserve and audit reports have surely helped strengthen our investors’ trust, and the community’s response has been extremely positive. We have seen a “dip-buying” sentiment during the phase but cannot attribute it to FTX alone — it is a combination of various market conditions.
CT: Is there any other way, in addition to PoR, that crypto exchanges can opt to prove their credibility to investors?
SG: PoR is just one tool, but what if the exchange has a history of security breaches or other issues that have resulted in the loss of customer funds? In such cases, investors may be more hesitant to trust the exchange, regardless of the provided PoR information.
Exchanges must continuously work toward improvement and progress through implementing policies, security standards and protective measures against hacking, as well as establishing investment protection funds and implementing standard operating procedures and audits.
CT: A few members of the United States Congress have drawn a direct comparison between FTX and the crypto ecosystem. Do you think the crypto ecosystem is answerable to Sam Bankman-Fried’s actions? What suggestions do you have for regulators across the globe in this regard?
SG: Crypto exchanges are an integral part of the virtual digital asset ecosystem, and it is crucial that they conduct themselves in a manner that is both transparent and compliant in order to foster trust and confidence in the industry.
Given the cross-border nature of crypto, international cooperation is essential. The Indian crypto industry is hopeful about the forthcoming G20 summit, as India assumes the presidency, and the possibility of establishing regulatory frameworks for crypto and other digital assets could bring greater clarity and stability to the industry. The implementation of clear, consistent regulations may serve to bolster confidence in the crypto market.
CT: Does the FTX fiasco change how you operate CoinDCX? Do you think Indian regulators will weigh FTX’s collapse as a factor when penning new laws or issuing operating licenses in the future?
SG: The FTX fiasco is a lesson for the entire business and finance world, as it was a case of unscrupulous activity, which can happen in any industry that is already covered under existing rules and regulations. Nonetheless, the event has burdened the crypto industry with reputation damage, and therefore, the need to take extra steps and share the maximum information available with users has become critical.
The safety of users’ funds is of utmost importance, and serious players in the industry are happy to work with regulators on a framework that extends maximum protection to users and builds a progressive framework for the VDA industry in India.
CT: Paxful CEO Ray Youssef recently advised his own users to store their Bitcoin away from exchanges. Will calls for self-custody have any positive or negative impact on the exchange’s day-to-day operations?
SG: It is unlikely that an event of this scale will not affect investors’ behavior. Investors will be more cautious about using a particular exchange. Nonetheless, I believe the negative sentiments will be short-term for those exchanges that have prioritized and practiced transparency and proper risk management. On the other hand, such crises will only help segregate compliant exchanges from others.
It will also depend on how exchanges continue building trust and the steps they take to address such concerns in the long term. In the future, people will trust exchanges that are transparent and publish their reserves. Only exchanges that adhere to these trust-building measures will ultimately be able to sustain.
CT: What is your advice to Indian investors? What is your message when it comes to the safekeeping of assets?
SG: Investors must take into account specific criteria before choosing a crypto exchange. The most important element they must consider is transparency; therefore, evaluating the PoR and audit information of the exchange is essential to know a company’s financial health. Equally important is how much attention the exchange pays to Know Your Customer verification.
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Exchanges that go above and beyond the minimum standard and run safe and wholly compliant exchanges must be preferred.
Also, it is advisable for users to choose an exchange that operates in their country and has an obligation to comply with the rules and regulations of the land. For instance, Indian users using crypto exchanges based in India are less vulnerable in case of any wrongdoing or financial mismanagement when compared with offshore exchanges that do not adhere to Indian standards and KYC, regulations, taxations and several declarations to the Union Ministry of Corporate Affairs. An exchange’s jurisdiction has become critical, especially since the FTX fiasco.