Cryptocurrency investment product provider Grayscale Investments has refused to provide on-chain proof of reserves or wallet addresses to show the underlying assets of its digital currency products, citing “security concerns”.
In a Nov. 18 Twitter wire To allay investor concerns, Grayscale explained information about the security and storage of its crypto holdings, saying that all crypto underlying its investment products is stored with Coinbase’s custodial service, which means wallet addresses are not are revealed.
6) Coinbase performs regular on-chain validation. For security reasons, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic proof of reservation or other advanced cryptographic accounting procedure.
— Grayscale (@Grayscale) November 18, 2022
“We know that the foregoing point in particular will be a disappointment to some,” added Grayscale, “but panic fueled by others is not a good reason to circumvent complex security arrangements that have kept our investors’ assets safe for years .”
Grayscale’s move comes as pressure mounts on the crypto business to introduce proof of reserves in the wake of FTX’s liquidity problems and subsequent bankruptcy.
Some Twitter users reacted to Grayscale’s view that security concerns surrounded its decision to withhold his wallet addresses, with one Comment Bitcoin (BTC) inventor Satoshi Nakamoto’s addresses are known and of higher value to attackers, “yet Satoshi’s Bitcoin remains safe.”
Grayscale shared one letter co-signed by Coinbase CFO Alesia Haas and Coinbase Custody CEO Aaron Schnarch, breaking down Grayscale’s holdings into its investment products and reaffirming that the assets are “secure”, that each product has its “own on-chain addresses” and the crypto always belongs to the applicable grayscale product.
Grayscale added that each of its products is set up as a separate legal entity and “laws, regulations and documents […] prohibit the digital assets underlying the products from being lent, borrowed or otherwise encumbered.”
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Grayscale is known for its Grayscale Bitcoin Trust (GBTC), a security that tracks Bitcoin’s price. It also has products that track the price of other cryptocurrencies, such as Ether (ETH) and Solana (SOL).
Investor concerns come as Genesis Global, which serves as the liquidity provider for GBTC, announced on November 16 that it had halted withdrawals citing “unprecedented market turmoil”, resulting in significant withdrawals from its platform that exceeded current liquidity.
Genesis is part of the crypto-focused venture capital firm Digital Currency Group (DCG), which also owns Grayscale. GBTC is trading at a discount of nearly 43% to its net asset value, in part due to investor speculation about GBTC’s exposure to Genesis.