Crypto’s Proof of Keys Should Not Be Once a Year; it Should Be Every Second

January 8, 2019 / by Zachary Mashiach

The first annual Proof of Keys event took place on Bitcoin’s 10th anniversary, Jan. 3, 2019. To observe Proof of Keys, Bitcoin users were urged to take control of their Bitcoin and move it into a wallet where they control the private key.

Many Bitcoin users hold their Bitcoin in exchanges and online wallets where they do not have full control of the private key. Therefore, they do not actually control their Bitcoin. This can be dangerous because, if the exchange or wallet site goes down, the user could lose their Bitcoin.

Further, there have been situations in the past when an exchange was running on a fractional reserve, meaning the exchange has less Bitcoin than it needs to honor all of its customers’ balances. The best example of an exchange that was running on fractional reserve is Mt. Gox, which eventually collapsed and took the Bitcoin market down with it.

Proponents of the annual event say it will strengthen the Bitcoin space by exposing exchanges and wallets that are dishonestly running on fractional reserves. It appears that may have been the case with HitBTC and BiteBTC, with a few other exchanges having temporary problems.

HitBTC and BiteBTC Experienced Proof of Keys Failures

BiteBTC reported on Jan. 3 — the same day as Proof of Keys — that a datacenter fire had destroyed its data. BiteBTC asserts that all coins are safe, but instead of simply restoring balances, BiteBTC is asking users to fill out a form that includes their recent activity on the exchange. Further, BiteBTC says only seven percent of users are affected, but on social media, it appears most or all users lost their accounts. To add insult to injury, new users can create accounts and invest money into BiteBTC, and the price of Bitcoin on BiteBTC is 5-10 percent above the global average, enticing people to sign up for BiteBTC to profit off arbitrage. It appears in this case that Proof of Keys was successful in exposing BiteBTC as an exchange which did not have the funds needed to cover user’s balances.

HitBTC appears to have frozen numerous accounts to prevent withdrawals during the Proof of Keys event. There are many complaints posted on Reddit of users buying cryptocurrency and then being prompted to complete lengthy know your customer (KYC) verification once they try to withdraw, and users say HitBTC is not responding to completed KYC submissions. This situation is still developing, so it is unclear if HitBTC is insolvent.

Aside from the more well-defined failures of HitBTC and BiteBTC, Purse.io, Coinbase, and Poloniex experienced some disruptions around the time of the Proof of Keys event, although they are all running smoothly at this point. Robinhood automatically fails Proof of Keys since they have never allowed Bitcoin withdrawals.

During a Proof of Keys event it is important to use some discretion in declaring whether an exchange or service is insolvent, and to wait for firm data, since Proof of Keys is similar to a ‘run on the bank’. Even big name banks would have problems during a run on the bank, since it is unusual for everyone to be withdrawing at once. Funds on exchanges are often kept in highly secure cold storage. Therefore, it is not surprising that a big name exchange like Coinbase would have some disruption before ultimately following through with all withdraw requests.

Proof of Keys Should Not Be Once A Year, It Should Be Every Second

It has been decided that Proof of Keys will occur every year on January 3rd, due to the success of the Proof of Keys event since many Bitcoin users participated and it produced some results that will strengthen the Bitcoin space long term.

Having Proof of Keys every year is a good first step, but it would be best if Bitcoin users followed the principles of Proof of Keys every second without interruption. Bitcoin users should always hold Bitcoin in wallets where they have personal control of the private key, and no one else. This is the only way to truly own Bitcoin. Whenever a Bitcoin user deposits Bitcoin onto an exchange or service they are risking that Bitcoin, since if the exchange gets hacked or goes down for any reason the Bitcoins will be lost.

The best way to use an exchange or service is to deposit the Bitcoins, get the desired cryptocurrency, fiat, or product, and then withdraw any cryptocurrency or fiat immediately. Bitcoins should be kept in personal wallets at all times when they are not being actively traded.