Crypto exchanges must prove they hold customer funds—or face escalating fines
S. 1405 — PROOF Act · Filed by Thom Tillis (R-NC) · 1 cosponsor · Introduced Apr 10, 2025 · Referred to committee
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What it does
This bill requires digital asset exchanges and custodians to prove they actually hold the customer assets they claim to hold, through monthly independent audits and cryptographic verification. Exchanges must segregate customer funds from their own money, cannot use customer assets to cover their own trades, and face escalating civil penalties (25 cents to 90 cents per user, or 2.5% to 9% of assets under management) if they fail to produce proof of reserves. The bill aims to prevent exchanges from losing or misusing customer crypto holdings, a problem that emerged after major exchange collapses like FTX.
Why we flagged it
The bill's operative mechanism is a mandatory proof-of-reserves regime with segregation rules and escalating penalties. It is fundamentally a consumer safeguard against exchange insolvency and asset misappropriation, not a tax, subsidy, or deregulation.
What the text implies
- The bill's effectiveness depends entirely on the accounting standard that PCAOB and AICPA jointly approve within 18 months (extendable by 180-day periods). If that standard is weak or allows loopholes, the proof-of-reserves requirement becomes performative. The bill does not specify what 'proof' must include, delegating that power to industry-influenced advisory committees.
- Margin accounts are explicitly carved out from 'covered assets,' meaning customer funds in margin accounts receive no segregation protection. This is a significant gap: customers borrowing on margin have no statutory guarantee their collateral is held separately, only that the exchange follows 'baseline accounting standards.'
The full analysis lists 5 implications of this text.
Who stands to gain
independent auditing firms and accounting firms (new recurring revenue from monthly attestations); digital custodians (potential increase in business as exchanges seek qualified third-party custody s; compliance software vendors (tools to track and verify reserves)