Why all VASPs in India should be required to maintain Proof of Reserves
New Delhi : In recent years, the credibility of crypto exchanges has come under intense scrutiny, especially following high-profile collapses like FTX. These events highlighted the urgent need for greater transparency within the virtual asset ecosystem. In India, where millions have embraced crypto despite the absence of a regulatory framework, the stakes are even higher. One method gaining global acceptance to rebuild trust is Proof of Reserves (PoR)—a system that allows exchanges to demonstrate they actually hold the assets they claim, matching customer balances one-to-one.
Proof of Reserves is a cryptographic tool used to verify whether a platform holds enough assets to match its users’ deposits. With the help of technologies like Merkle trees, an exchange can publish data that proves its reserves meet or exceed total customer holdings, without revealing user identities. When implemented properly, PoR allows users to independently confirm that their funds are accounted for while maintaining privacy. It creates a clear link between customer liabilities and actual holdings.
The benefits of PoR go beyond reassuring individual investors. It builds public confidence in the financial health of exchanges. This, in turn, helps prevent panic withdrawals during periods of market volatility. Since PoR reports are publicly accessible, even a small number of users verifying the data can expose irregularities, discouraging mismanagement or dishonest practices.
In the Indian context, the case for PoR is especially strong, given the country’s evolving but still uncertain regulatory environment. While authorities have taken steps to bring VASPs under anti-money laundering obligations, there is currently no statutory requirement for platforms to maintain transparent custody practices. In the absence of a full regulatory framework and given the fragile state of public trust, it is critical that the government mandate Proof of Reserves disclosures for all crypto platforms serving Indian users as an interim measure.
Until a comprehensive legal structure is established, making PoR compulsory would ensure that platforms clearly demonstrate their solvency, significantly reducing the risk of fund mismanagement and protecting consumer interests. Such a mandate would not only bolster investor confidence but also help foster a culture of transparency and accountability within the sector from an early stage. By institutionalizing openness at this crucial point, authorities can help bridge the trust gap and lay a solid foundation for future regulation and responsible growth of the virtual asset ecosystem.
Looking ahead, the Indian crypto sector stands at a pivotal moment. With no robust legal framework in place, trust continues to rely heavily on the ethical conduct of individual platforms. While Proof of Reserves cannot replace formal regulatory oversight, it can act as a temporary trust mechanism until comprehensive legislation is introduced. By requiring or at the very least encouraging—PoR disclosures, Indian authorities could create a safer environment for investors without hindering innovation.
