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. 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, 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, 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?