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**MARCH 13, 2023**
Kuttner on TAP
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**** The Crypto Shell Game
What if the assets backing cryptocurrencies are as volatile as crypto
itself?
When cryptocurrency promoters tried to persuade gullible investors that
their money was safe, one challenge was to demonstrate that the real
assets that supposedly backed up crypto creations actually existed.
Since this was uncharted territory, they had to get inventive.
Thus was born a whole new self-regulation concept called "proof of
reserves," or PoR. Allegedly, a PoR certification, which has no basis in
securities law or any other kind of law, is an independent audit that
confirms that the money is supposedly where the crypto promoter says it
is.
But given the chronically dubious claims about crypto and the serial
lies told by Sam Bankman-Fried and others, there was good reason to be
skeptical. Now, it turns out that these supposedly independent audits
are no more trustworthy than crypto itself.
The Public Company Accounting Oversight Board (PCAOB) has issued a
public warning that proof of reserves audits are entirely unregulated
and not reliable
<[link removed]>.
The warning says:
The [PCAOB] Office of the Investor Advocate is issuing this Investor
Advisory because of concerns that investors and others may place undue
reliance on PoR Reports, which are not within the PCAOB's oversight
authority. Importantly, investors should note that PoR engagements are
not audits and, consequently, the related reports do
**not** provide
**any meaningful assurance** to investors or the public.
This raises the larger problem of self-regulation, which is by
definition replete with conflicts of interest. The reason we have public
regulation, by regulators such as the SEC, is because promoters and
their hirelings can't be trusted to be honest.
Before the PCAOB was created by the Sarbanes-Oxley Act of 2002
<[link removed]>, the
accounting profession was trusted to certify the accuracy of company
books. The supervision of the accountants, in turn, had been delegated
to their own trade association, the American Institute of Certified
Public Accountants, a classic case of the fox guarding the chicken coop.
In the 2001 Enron scandal (echoed by others such as WorldCom and Tyco
International), supposedly independent accountants had colluded with
management to cook the company books. When Enron collapsed in a sea of
corruption, the scandal also took down its accountants, the venerable
firm of Arthur Andersen, which was later convicted of obstructing
justice. In the aftermath of Enron, the Sarbanes-Oxley Act tightened
accounting standards and created the PCAOB as an arms-length supervisor
of the accounting profession.
Meanwhile, the rolling crypto collapse continues to reverberate. At
first, it seemed that crypto was not directly implicated in last
Friday's implosion of Silicon Valley Bank (SVB). But then it came out
that Circle, a crypto company that issues stablecoins, had $3.3 billion
of its reserves on deposit at Silicon Valley Bank. The market value of
its stablecoin, called USDC, supposedly pegged to the U.S. dollar,
quickly fell far below par.
The supposedly independent certification by the Grant Thornton Group of
the soundness of Circle's assets, in a PoR report issued in January
<[link removed]>,
was suddenly worthless. And the volatility of other crypto startups in
the Valley fueled the bank run that crashed SVP.
How many times do we have to learn that the soundness of the financial
sector is only as reliable as its independent regulators?
~ ROBERT KUTTNER
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