​Proof of reserves and fight against rumors. What is going on with KuCoin

The KuCoin exchange is making efforts to prove reserves of user funds and refute rumors of insolvency.

KuCoin, the fourth-largest exchange by trading volume, hired Mazars, an international accounting firm, to conduct a third-party audit of the platform’s existing crypto reserves. According to a published press release, this will give the exchange’s customers additional transparency and proof that their assets are secured. The report should be available on KuCoin’s official website within weeks.

After the collapse of the FTX exchange, many centralized exchanges rushed to conduct their own procedures to prove reserves. Binance set the trend, and OKX, Bitfinex, Huobi, Crypto.com, and others reported on reserves in one form or another. At the same time KuCoin also announced that they are working on “proof of reserves,” and apparently, it was important for the exchange to announce this in time.

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Publications began to appear on social networks, the authors of which draw attention to the complex option product of KuCoin called “dual investment,” which allows one to get up to 300% per annum on deposits in various cryptocurrencies and stablecoins. KuCoin’s high-interest rates are inevitably compared to those of Celsius and BlockFi. Both also offered high-interest rates on crypto assets custody and ended up going bankrupt, resulting in multi-million dollar losses for their customers.

In comments to Fortune, KuCoin CEO Johnny Lyu assures that the exchange’s offering is different from other well-known “earn products,” and that KuCoin warns users about its details and risks. According to him, this is enough not to blame the exchange for the “reckless behavior” of those who have not read the information properly.

An interest rate of 254,55% per annum through dual investment in USDT

Source: Kucoin.com

With “dual investment,” an exchange user purchases an option contract, meaning they commit to buying or selling a cryptocurrency at a future date at a target price, receiving interest in return. Investors may end up with a smaller amount compared to the size of the deposit, which explains the high premiums as well as the relative risk compared to earn products on other lending platforms.

With the advent of services such as Robinhood, retail investors gained access to complex derivative products such as dual investments, resulting in massive losses for inexperienced traders. The volatility of cryptocurrencies and the promise of high returns only increase the risks.

Lyu says that KuCoin’s only responsibility is to lay out the possible risks to users, which the exchange does by labeling dual investments as an “advanced” tool and explaining how it works through a list of questions and answers at the bottom of the relevant page. However, experts interviewed by Fortune believe the product is still misleading. The tool is presented on the “earn” page rather than the “derivatives” page, which means, according to experts, it is aimed primarily at unsophisticated speculators.

Of course, such a thing is not unique to KuCoin alone. Binance also offers a dual investment product with similar interest rates. The exchange’s CEO Changpeng Zhao previously wrote on Twitter that users should be wary of platforms that “offer high APYs,” which many took as a hint to KuCoin. After comments pointed out that Binance has similar products, CZ deleted the tweet.

Concerns surrounding KuCoin’s controversial product were also accompanied by concerns about the exchange’s solvency. Lyu published an open letter in which he tried to dispel the rumors and promised to release proof of the platform’s reserves in the form of a Merkle tree. This was followed by the announcement on December 5 that Mazars was hired to conduct an audit.

Some in the crypto industry, including Kraken CEO Jess Powell, believe that releasing proof of reserves is insufficient without considering the exchange’s liabilities. KuCoin’s statement about Mazars says only that the company is reporting on whether customer assets are collateralized. It is unclear whether the process will be a full third-party audit or an assessment of KuCoin’s liabilities.

On November 29, US regulators sent letters to KuCoin and other major exchanges requesting information, including the companies’ balance sheets and their policies in case of a crisis such as bankruptcy. Lyu told Fortune that KuCoin is still waiting for confirmation from its legal team about the request, and is not committing to provide the information. KuCoin is registered in Seychelles, not the US, Lyu said, and any efforts by the exchange to be audited are not tied to any particular state or the requirements of a particular country.