The provider of cryptocurrency investment products Grayscale Investments has denied to provide proof of on-chain reserves or wallet addresses to show the underlying assets of its digital currency products citing “security concerns.”
In a November 18 Twitter thread addressing investor concerns, Grayscale exposed information about the security and storage of its cryptocurrency holdings, saying that all cryptocurrencies underlying its investment products are stored with Coinbase’s custodial service, without going as far as to disclose the addresses of the wallets.
6) Coinbase frequently performs on-chain validation. Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.
— Grayscale (@Grayscale) November 18, 2022
6) Coinbase frequently performs on-chain validations. For security reasons, we do not make on-chain wallet information or confirmation information publicly available through a cryptographic Proof-of-Reserve or other advanced cryptographic accounting procedure.
“We know the point above in particular will be disappointing to some,” Grayscale added, “but panic caused by others is not a sufficient reason to circumvent the complex security arrangements that have kept our investors’ assets safe for years.”
Grayscale’s move comes as pressure mounts on cryptocurrency firms to introduce reserve tests in the wake of FTX’s liquidity problems and subsequent bankruptcy.
Some Twitter users lashed out at Grayscale’s view that security concerns surrounded his decision to withhold their wallet addresses, and one of them commented that Bitcoin (BTC) inventor Satoshi Nakamoto’s addresses are well known and have greater value to attackers, “yet Satoshi’s Bitcoin is still safe.”
Grayscale shared a letter co-signed by Coinbase CFO Alesia Haas and Coinbase Custody CEO Aaron Schnarch breaking down Grayscale’s holdings by its investment products and reaffirming that the assets “are safe.” , that each product has its “own on-chain addresses” and that cryptocurrencies always belong to “the applicable Grayscale product.”
Grayscale added that each of its products is established as a separate legal entity and “the laws, regulations and documents […] prohibit the digital assets underlying the products from being lent, borrowed, or otherwise encumbered.”
Grayscale is known for its Grayscale Bitcoin Trust (GBTC), a security that tracks the price of Bitcoin, it also has products that track the price of other cryptocurrencies such as Ether (ETH) and Solana (SOL).
Investor concern comes as Genesis Global, which acts as a liquidity provider for GBTCannounced on November 16 that it had suspended withdrawals, citing “unprecedented market turmoil” that had led to significant withdrawals from its platform that exceeded its current liquidity.
Genesis is part of cryptocurrency-focused venture capital firm Digital Currency Group (DCG), which also owns Grayscale. GBTC is trading at a nearly 43% discount to its net asset value, partly due to investor speculation about GBTC’s exposure to Genesis.
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