The PROOF Act would impose new regulatory requirements on digital exchanges and digital custodians that hold customer digital assets or commodities. It would mandate strong protections for customer assets (including keeping customer assets separate from the exchange’s own funds, and limiting co-mingling and use of customer assets for other trades). It would require monthly independent attestations of “proof of reserves” plus cryptographic verification of reserves and related liabilities, with evidence supplied to the Treasury’s Office of Domestic Finance. The act directs the creation of a standardized attestation framework through industry input (PCAOB and AICPA) within 18 months, and makes noncompliance subject to civil penalties scaled to users or assets under management (AUM). The reporting would be public, and penalties could be appealed. The effective date hinges on the industry-standard approval process. In short, the bill aims to increase transparency and solvency protections by requiring verifiable proof that exchanges/custodians actually hold enough assets to cover customer holdings, plus strict asset custody rules and public reporting, all backed by Treasury enforcement.
Key Points
- 1Definitions and scope:
- 2- Covers digital exchanges and digital custodians dealing with digital assets and digital commodities; defines terms like covered asset, digital asset, digital custodian, digital exchange, digital wallet, and investment contract.
- 3- Distinguishes certain activities (e.g., clearing/settling services) from being custodial for the duration of those processes.
- 4- Clarifies that owning a DAO membership alone does not automatically create an investment contract.
- 5Customer asset treatment and custody:
- 6- Exchanges must establish baseline accounting standards to protect customer assets.
- 7- Customer assets must be held to minimize loss and ensure access, with strong segregation rules.
- 8- Prohibits co-mingling customer assets with non-covered assets and restricts using customer assets as collateral for other customers or trades, with limited exceptions for banking-like intermixing and normal settlement activities.
- 9- Explicitly allows certain limited substitutions or withdrawals in ordinary course, and permits explicit customer consent for asset substitution.
- 10Attestation and audit requirements:
- 11- Within 30 days after the section becomes effective (and monthly thereafter), exchanges and custodians must obtain an independent attestation of proof of reserves, plus supporting evidence.
- 12- If an independent auditor can’t be procured, a disinterested third party can provide the services; they must meet the same requirements.
- 13- Industry-standard development: a joint call for comments within 90 days post-enactment, an advisory committee, and a proposed standard for attestations; final approval by PCAOB and AICPA within 18 months (extendable in 180-day increments if not approved).
- 14Contents of attestations and public reporting:
- 15- Auditors must report cryptographic proof of possession/control of keys, verification of reserves, and cryptographic proof of liabilities (e.g., via Merkle trees or similar cryptographic methods).
- 16- Reports must be made public and include entity names and auditing firm names.
- 17Enforcement and penalties:
- 18- Civil penalties for failures to meet the attestation requirements, scaled by user count or total assets under management (AUM) and capped per year.
- 19- Penalties publicly disclosed; an appeals process is available; penalties can be waived if noncompliance is due to auditing firm actions/omissions; there is a pause in payment during appeals.
- 20Effective date:
- 21- The section takes effect only after the industry-standard for attestations is jointly approved by the PCAOB and the AICPA.