Top Questions around the FTX Collapse & Proof of Reserves addressed by Sumit Gupta, CEO CoinDCX

The crypto bear market has been raging on ever since beginning of the year and the staggering collapses like the Terra LUNA crash and the more recent, FTX collapse – haven’t helped either. All these incidents have significantly damaged the sentiments of the crypto participants, notwithstanding the fact that most of their portfolios are deep in the red. This recent collapse of the FTX crypto exchange, which was once the third largest crypto exchange and valued at about $32 billion at one point – has raised a lot of questions around centralized crypto exchanges. To answer all those questions, and more – we had Sumit Gupta, CEO and co-founder of CoinDCX, with Kashif Raza of Bitinning discuss everything from exchange revenues to issuing exchange tokens and much more. Read on to know more!

1. Does CoinDCX have any exposure in FTX?

CoinDCX has absolutely zero exposure in the FTX, neither any liquidity aggregation model nor any kind of API integration. In fact, CoinDCX has zero exposure to FTT, FTX’s native crypto token and any of the other affiliated cryptos like Solana (SOL) and the likes. Along with that, CoinDCX has been completely unaffected by all the crashes that have happened previously too ranging all the way from the Terra LUNA crash to the dissolution of 3 Arrows Capital crash. CoinDCX does not take any kind of counterparty risk when it comes to using company funds and the funds deposited by users on the CoinDCX exchange.

Read: FTX Collapse Explained

2. Does CoinDCX indulge in converting user tokens to further make additional income from those tokens?

No, that is where exposure and risk to customer funds comes in! CoinDCX in no way is involved in taking on additional exposure and risk using customer funds. We follow this so much so that even the fees that we earn from the trading in the form of some or the other crypto, say BTC, ETH or any other – we convert that into a stable form so that we as a business don’t have a balance sheet that fluctuates too much, too often. Meddling with user funds is the worst thing one can do and we at CoinDCX take the extra step to convert even the fees that we earn into stablecoins like USDT so that we as a company don’t event ake on that risk and fluctuation. We are ensuring that our balance sheet remains unaffected by the market movements. Along with that, all of customer funds in the form of crypto are stored in cold storage only for extra security.

3. How secure is a cold storage? What are the security standards follow?

So firstly, we employ the method of cold storage of cryptos. These are wallets that are completely disconnected from any internet connection and hence cannot be compromised by any hacker. There are various custody solution providers who can provide this kind of infrastructure. To further add to that, it is secured via a distributed access, with no single point of failure either. As was the case in FTX where the cold wallets containing user funds on the FTX crypto exchange was in the sole control of the founder, Sam Bankman-Fried.

4. Are funds on CoinDCX secured by any kind of insurance?

Yes! Funds on CoinDCX are insured by BitGo, as of now we have a $100 million insurance plan and we are planning to top it up even further.

5. How is CoinDCX running an exchange when revenues from trading activities have fallen 80-90%?

Firstly, CoinDCX does not touch any customer funds, and it shouldn’t be done either. It is extremely wrong to do so and we’ve seen what happens to those who do it. Now it is also true that after the implementation of the 30% tax and the 1% TDS on crypto transactions, Indian crypto exchanges have seen a drop of nearly 80-90% of all volumes. And understandably, as a business that runs on commissions earned from trading volumes, that business is seeing a similar drop in revenues too. Now with that in mind, the community must understand that building and running an exchange isn’t a easy job. An exchange isn’t simply a software that matches orders and executes a trade. There are several other things that goes on behind the scenes.

As mentioned earlier on multiple channels, funds that CoinDCX as a company has raised is enough to sustain the company for the next 4.5-5 years, even conservatively speaking even if the company gets no revenue whatsoever. CoinDCX is very well capitalized and will never have the need to even look at customer funds.

Additional read: Our Approach Towards Consumer Protection and Risk Management

6. Has CoinDCX ever considered launching its own token?

CoinDCX is not interested to raise money from the public by issuing a coin just yet. This is because we believe that if somebody does that, then the attention of the company or the exchange itself moves from building actually useful products to all the time thinking about what can be done to push the price of the exchange crypto up because that is what a large cross-section of the users would be pushing for.

7. Why isn’t CoinDCX allowing crypto withdrawals?

The first thing is that self-custody is the topmost thing. Users need to have self-custody of their own funds. With the launch of Okto, users will be completely free to do transfers of crypto funds to any and all. But the problem is that India is a country that has extremely high capital controls. This is because of the Liberalised Remittance Scheme (LRS) of India that allows only $250,000 to be sent outside. It is a very serious control that is exercised in India, which doesn’t exist in India – a very India specific issue.

So in the process of transferring crypto, nobody on the outside can say where the crypto has actually been transferred. CoinDCX initially had the technology to facilitate crypto transfers and withdrawals but we have had to close it to abide by restrictions. This is because there is no way to know who the other person on the receiving end of the transfer is, and what the crypto will be used for. There’s no way to even know if the funds are being sent to Binance or Metamask or maybe to some person on the other side of the world and the crypto could potentially be used for nefarious activities. As a platform, CoinDCX can fall into a lot of trouble in this regard.

8. What is Proof of Reserve that everyone is talking about? Why is it not the only solution?

Proof of Reserve is simply an audited document that shows the reserves of a centralized crypto exchange. However, simply declaring reserves doesn’t show the whole picture. For example, you have INR 1 lakh, but you have a owe INR 2 lakh! That isn’t a suitable situation right? In net terms, you’ve INR 1 lakh in the negative! Liability is also an important aspect of a business that is often ignored but something that people need to know about. The other side of the story – meaning – what the exchange owes to other people and other parties is also something that needs to be carefully looked at along with reserves. Fundamentally, liabilities should be less than reserves, as a simple rule of thumb. Just looking at Proof of Reserves is looking at only half the story.

In my opinion, the much advocated “Proof of reserves” provides a standalone asset value, it only showcases one side of the part. There’s no visibility of liabilities. Proof of reserve without Proof of liabilities is only half the picture.
So let’s take it one step ahead and

— Sumit Gupta (CoinDCX) (@smtgpt) November 13, 2022

9. What is CoinDCX doing about all the conversation about Proof of Reserves?

From the practical side – this is a long process that takes some time. It is a way of showing that the exchange has more reserves than the value of customer funds with the exchange. CoinDCX had done this for the top 10 tokens and published it recently. Find the data below:

Next Steps
We’re working on publishing the R2L ratio periodically, along with audit certificates. More information to follow soon. Read here for more information.https://t.co/KorIP6ycAU

— Sumit Gupta (CoinDCX) (@smtgpt) November 13, 2022

Another challenge is that the biggest auditing firms like Deloitte, KPMG and the likes aren’t the most comfortable while dealing with crypto firms and exchanges. Hence, publishing a quarterly audited financial report becomes difficult. But we are moving with the objective of not keeping a quarterly financial report, but rather a real time dashboard of the financial condition of the crypto firm. We are in talks with firms who have state of the art technology that will be doing an auditing of crypto firms’ financial conditions and shows both sides of the picture, both reserves and liabilities.