How not to do Proof of Reserves - a look at Uphold / BitReserve

Uphold, formerly known as BitReserve, recently came into some people's attention thanks to a Reddit user by the handle of askwhy10, who noticed the company might be somewhat insolvent according to their own Proof of Solvency. Anyone that has been around the Bitcoin world when MtGox has collapsed will know how important maintaining solvency is in our little corner of the world. But before we delve into that issue, lets have a retrospective on Uphold / BitReserve.

What is BitReserve?

BitReserve has been an interesting project for me to observe from a distance every now and then. Early on it was mostly a project about creating hedged accounts - you would deposit BTC, and then you could convert it over to USD or other currencies. In that sense it was similar to Locks from Coinapult or CoinJar's Hedged Accounts - BitReserve would dictate the exchange price, and it looks like you could only move money in and out of the system using BTC. One advantage it had over the other hedged accounts at the time was that one could transact directly in those hedged currencies, making it a bit more usable.

While lacking the free flow and exchange of money that systems like Ripple provided with their gateways, BitReserve still had a good idea to focus on the Proof of Reserves / Proof of Solvency to avoid insolvency:

"What people do with their money is their business,
what we do with people's money is everyone's business"

As BitReserve put it: "When you transfer your Bitcoin to your dollar card, we actually take your bitcoin and we sell it and we put those dollars in our reserve. And then, through our transparency system, we show that you are now actually holding dollars, not Bitcoin.", etc.

It is a very reasonable strategy for any financial service to take. In the Bitcoin world, you don't want to get caught in a swing holding the wrong currency and end up insolvent like MtGox. As long as you have 100+% reserves on all outstanding balances in all currencies, you can call yourself solvent. If you want to be strict about it, you combine Proof of Reserves with Proof of Liabilities, etc. So, how solvent is BitReserve / Uphold?

Uphold's solvency question

BitReserve, rebranded as Uphold in late 2015, seems to have shifted their focus away from Bitcoin and focus more on a PayPal-like model - allowing users to directly deposit and withdraw in fiat currencies as well as precious metals. They also seem to have expanded their trademarks to include such entries as bitdollar, bitgold, bitelectrum, reservechain, reserveledger, etc. and getting on the bad side of people like Andreas Antonopoulos. But lets go back to the issue of solvency.

Askwhy10 has made a post on 2016-02-15, in which he calculated that Uphold was insolvent at the time. It was short about $120k out of its expected balance of $5.6M (without Voxels, more on that later), so about 2% of total money was missing. But that was the total difference in balances. Looking at individual currencies, the company had only 4'594 out of 5'834 BTC (short 1'240BTC, 21%, or just shy of $500k). Missing 21% of your reserves in a currency that can swing by 10+% on a rough day is essentially gambling!

Uphold's BTC balance, 2016-02-14.
Columns: Currency, Obligations to our Members, Assets in Reserve, Exchange Rate.

Despite those glaring omissions, Uphold's transparency page on 2016-02-14 stated it had "101.0% Full reserve status". Most of that came in the form of Voxels, an "official coin of virtual reality".

Reading into this I am reminded of the timeless Bitcoin tale - "Story of Bob Surplus", wherein an altcoin pumper would create elaborate stories to attach to worthless currencies in order to pump them. Voxels looks like an altcoin looking for a problem - in this case, "wouldn't it make sense if Unity's Asset Store had it's own currency?", missing the point that you can just use Bitcoin...

Going back to our topic, with $350k worth of Voxels sold at the presale, Uphold evaluated that their share is worth, I kid you not, $110M. They hold 314 times the value of Voxels as were sold at the entire presale, with a surplus of $1.2M:

Uphold's Voxel balance, 2016-02-14

As the story went on, Uphold apparently became solvent again within a day of askwhy10's post, has removed Voxels from their transparency page, but they apparently are still going short on Bitcoin (holding 3'652 out of 4'944 BTC, 1'292 BTC or 26% short, worth $537k):

Uphold's BTC balance, 2016-03-27

While it may be understandable to hold some small imbalances between a few fiat currencies that won't swing more than a few percent per day in relation to one another, having such a short position on Bitcoin is a MtGox waiting to happen. At least Uphold is insignificant in the Bitcoin economy, but if I were someone holding Voxels...


Any company that doesn't hold at least 100% reserves on EVERY currency it operates in is gambling with their customer's money at least, and posing themselves to be the next MtGox at worst. Full Proof of Solvency is a requirement we should challenge all Bitcoin financial companies with and not accept any shortcomings or deficiencies. Lastly, if a company's CEO thinks Bitcoin won't exist in five years, especially if they are going short on BTC, they are not running a Bitcoin-friendly company and don't deserve your business.

Related discussions:

1 comment:

  1. This was news 6 weeks ago, and as per the author's own admission, the math was wrong. In the meantime, Uphold removed Voxel from the total tally of the Transparency page, and it's plainly visible the reserve is still over 100%. This seems like an opportunistic attack on a company going out of their way to present Transparency data.