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Comment by throwup | Hacker News Reader

I'm still not quite sure you're after, but I guess it would be this quote on page 3:

> 14) Compare the total liabilities from the Client Liability Report extracted from Kraken’s production database as observed within Procedure 5 to the total assets controlled by the Kraken custodied addresses (the “In-Kind Assets”) as of the specified date and time of the assessment time and calculate the collateralization ratio based on the In-Kind Asset-to-Client Liability mapping provided by Kraken Management

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That's measuring how much they owe clients (IE, deposits) against how much crypto they hold (IE, the crypto in wallets they hold). That doesn't at all capture the kinds of liabilities I'm asking about, which is debt external to the blockchain.

Ex: I am Kraken. Someone deposits 1 BTC with me. I then sign a contract with someone else saying "You give me 1 BTC now, I will give you 1.2 BTC in a year". I then sell 1 BTC. In my wallet, I will have 1 BTC, exactly matching my client liabilities. But my total liability is 2.2 BTC. And if those contracts start calling in early (IE, margin calls), I'll end up in a liquidity crisis.

Or more simply, what if Kraken just uses the BTC as collateral for normal loans from a bank? If they fail to pay them, then they'll fork over the client BTC.

You're right, there is no way to cryptographically prove that there are no contracts external to the blockchain. The audit is from a purely "not your keys, not your coins" perspective. And there's no way to prove they won't go get some USD loans tomorrow either, since you can't cryptographically prove the future.

Your defense against these tail risks is to remember, "not your keys, not your coins", and self-custody when you're not actively exchanging. In the end you do have to hope that the < 1 hour it takes you to exchange your coins and transfer them back to your own wallet doesn't overlap with the moment they decide to torpedo their 10+ year old business with no prior warning or red flags. But these are infinitesimally small tail risks.

> You're right, there is no way to cryptographically prove that there are no contracts external to the blockchain.

But there is a very easy way to prove that there are not contracts external to the blockchain.

That's the whole point of an audit.

And it's very telling that they don't want their books audited, but repeatedly point to a clearly incomplete (from the perspective of someone who is concerned that the business might go under) as proof of solvency.

You have a point, but I think you're underestimating how "very easy" of a process an audit is. It's a mountain of time-consuming work for everyone involved. Their audits are encompassing more and more each time. They've talked about wanting to go public, at which point they would need to disclose everything quarterly, so I think it's likely they'll work their way up to your standards one day. But even if I'm wrong, if you keep your keys to yourself, none of this matters.

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