Uphold - a follow-up

Two weeks ago, I wrote a blog post about Uphold's proof of solvency. Since then, I was in contact with Rebecca Geller, a PR, and by her proxy, with Jorge Pereira, chief product & engineering officer at Uphold to discuss the recent concerns with their platform and the perceived insolvency. Having exchanged a few lengthy emails, I would like to present what I learned about the situation and give a more informed opinion on the matter.


While Voxels appeared to be an important part of the insolvency claim early on, they don't seem to play an important part anymore. As they are currently held separate from the main currencies and not counted towards the solvency anymore, it should be impossible for them to be used as an asset to cover the liabilities of currencies other than itself.

It is very unfortunate there isn't much publicly available historical data to draw on in trying to evaluate whether the Voxel balance was consistently counted towards the solvency proof when other assets were not enough to cover the difference, or was 2016-02-14 an anomaly. While archive.org does have some records of that page from before February, it doesn't render correctly. Retrieval of the data would be possible, but would take a skilled web developer to decipher. Perhaps in the future, we could see the transparency data being regularly exported to say, Factom, where it could be used for analysis in the future (disclaimer - I work at Factom).

Beyond that, Uphold handling Voxels appears to be a simple deal - Voxelus paying Uphold to list and handle their currency, handle the currency conversion, etc. As long as the currency itself is handled separately from everything else, I personally see nothing wrong or shady in the arrangement.

$38k deficit into a $57k surplus

While the Voxels can be ignored, we are still left with probably the main problem that needs addressing - the $38k deficit turning into a $57k surplus.

On 2016-02-14, Uphold's total obligations to their members was $115M, and assets - $116M. Subtracting the value of Voxels ($109M, $110M), the totals were $5.7M and $5.6M, with a deficit of $38'145.29. On 2016-03-27 Uphold's total reserves were $5'359'978.76 in obligations and $5'417'435.54 in assets, with a surplus of $57'456.78.

In other words, $95k worth of assets appeared seemingly out of nowhere in a span of a month and a bit. This either meant that either:
  1. Voxels were indeed counted towards the solvency in February
  2. The transparency website misreported some numbers
  3. The balances were mismatched due to some recent trades or money movement
  4. The numbers were fabricated
Either one of the four outcomes would show the platform in an unfavourable light, but some would be more damning than the others. 

Uphold explained the issue with option number 3 - the money was in transit between bank accounts and exchanges, and thus wasn't taken into account by the automated system tallying everything and publishing the numbers onto the transparency page. When asked for a proof that the funds were indeed in transit at the time, instead I received an a reply of

"To some extent, that’s a fair request, but if you trust the data illustrating what is perceived as a shortage of $38k, it’d stand to reason you’d trust the same source presenting an additional explanation, particularly seeing as the issue resolved itself within hours. The explanation we have provided rests on the same logic and transparency as the data you believed that illustrated the shortage."

Shorting Bitcoin, speculating with customers' funds

Another important accusation levelled against Uphold was the issue of their Bitcoin balances being short in favour of fiat currencies.

On 2016-02-14 Uphold's BTC obligations were listed as 5'834.056BTC, and their assets as 4'594.390BTC, short 1'239.666BTC, or 21.25%. On 2016-03-27, their BTC obligations were listed at 4'944.479BTC and assets at 3'652.980BTC, short 1'291.499BTC or 26.12%.

This raises a few questions - why was this done in the first place, what was the contingency plan in case of a price swing (with their $57k surplus, a 44.5BTC/USD price swing would turn the website insolvent again) as well as whether the company is speculating using their customer funds.

The reasoning behind the short balance was stated as trading sideways to save on exchange fees. As Uphold doesn't charge a conversion fee, they focus on lowering their operational costs by not immediately covering their customers' trades. In a perfect system, the trades would be going back and forth, allowing Uphold to only correct a fraction of the total trade amount on an external exchange, thus lowering the fees they pay. However, when the trades are more one-sided, the balance discrepancy grows further and further apart and needs to be corrected eventually.

Second question had a fairly straightforward answer - stop-loss mechanism. When the price swings too wildly, automatic trades are executed to protect the reserves.

Lastly, the company stated it does not condone the practice of speculating with one's customers' funds without an explicit permission from them. As such, Uphold is claiming not to engage in such a practice, and does not aim to make a profit by being over-exposed to one currency or another.

All in all, we seem to be running into the main trade-off that might have been the cause of this BTC shortage - whether one should prioritize keeping the fees low, or the reserves rigid. Neither one is a wrong answer - they both have their merits and drawbacks, but they do send a message about the company's priorities and values.

Interestingly enough, between 2016-03-27 and 2016-04-01, during my email exchange with Uphold, their BTC reserves seem to have corrected themselves:

Uphold BTC balance, 2014-04-01

Whether this balance correction was coincidental after over a month of running on a BTC deficit, or it was a deliberate action by the company, it can be hard to prove. Despite asking about "What is the threshold before your company would consider itself over-exposed on Bitcoin?", no direct answer was provided. At least I can take comfort in Uphold's statement to consider their BTC reserves more closely:

"This is feedback we’ll incorporate, and in all likelihood will just result in us adding a bit more of our own funds to the reserve surplus on the asset side of Bitcoin, to ensure it’s always close to over-reserved. "

Proof vs claim

A few times during the email exchange the topic of proofs came up. As Uphold is focusing on providing "a public, real-time, traceable and verifiable proof of solvency", it is important to distinguish between what constitutes a proof, and what is just a claim.

A proof needs to be independently verifiable and falsifiable, while a claim does not. Whether you use a send-to-self transaction, use a set of addresses and balances, or do something else an independent third party (or better yet, the public) can verify and possibly disprove, that can constitute a proof. Self-reported balances as is the case with Uphold's current transparency page, do not constitute any proof, but are merely a claim of solvency.

While Uphold is claiming that their reserves are independently audited on a quarterly basis and are currently working on publishing those audits in the future, as of the time of writing, I have no evidence of this, despite Uphold being asked to provide "independent, verifiable, sources for the information" for this article. I would exercise caution until such proofs are provided, even if this might be erring on the side of overt caution.

All in all, in an ideal world, I would like to see the following proofs:
  • Proof of liabilities - allowing anyone to verify that their assets are counted in Uphold's total liabilities and that everything adds up
  • Proof of reserves - independently verifiable proof that Uphold does indeed own the stated currencies and assets, crypto or otherwise
  • Proof of existence / records - Ideally, the other proofs would be timestamped or published on a platform like Factom to prove they weren't altered in the future
  • Proof of exchange rate - while one is able to claim they are not charging an exchange fee, a crafty party could hide the fee in the exchange rate spread and charge it covertly. While I don't know of any company that incorporates such proof, shy of using an open ledger, it might be a mark of the highest standards of transparency

At the current time, one can only wait for the first two or three to be eventually published...

Everything else

During the email exchange, a few less important topics were discussed. Some of the statements make the company appear fragile to criticism:

When asked whether Uphold stands by their CEO's tweet labeling the first Reddit post about the company's possible insolvency as "ridiculous, untrue & libellous lies", I was reassured:

"Absolutely, and it’s unfortunate that people end up misinterpreting the information we make available in good faith, without offering us the chance to clarify it. I can understand the confusion regarding VOX, and I hope our updates  address that.
Our CEO Anthony Watson is an award winning social  advocate, who does a great deal of good in the world to support people's basic human rights. He’s got no interest engaging with an anonymous Reddit poster who set up an account up several hours before he made this post seemingly only to cast doubt upon Uphold, without making any effort to engage with us to clear up these questions. "

The middle part seems like an appeal to emotion. In their closing remark, another two quotes appear to be putting the company in a victim role:

"[...] while some people may see us as “just a corporation”, we instead see ourselves as a group of people on a mission. We want to do the right thing, and being so poorly perceived is damaging to the morale of those working hard to make Uphold a reality. "
 "[...] We’re building bridges, so we’re bound to find trolls, but we see no value in taking part of a conversation where the conclusion has been decided beforehand and there is no opportunity for open dialogue."

While I'm glad that despite that the company decided to address some of those criticism in their blog post as well as answer my doubts and questions on the matter, failing to address the criticism head on because they came from an anonymous user while taking that criticism to heart and letting it lower your morale might not be the healthiest approach to take on the Internet.


Having had the chance to discuss the insolvency accusations with Uphold, I remain cautiously optimistic for their platform and their customers.

While they failed to provide any verifiable proof of their platform's solvency or where the $95k of extra solvency came from between February and March, their promise of publishing audits in the future might address similar issues in the future. 

Uphold's changed commitment to maintaining a more rigid BTC balance should similarly keep that issue from cropping up again.

While the company might not wish to engage "trolls" raising criticisms of their platform, it is at least good to see them addressing the concerns raised and improving themselves based on that feedback. One could see it as either being wise enough to reconsider one's stance, or desperate enough to pander to critics however.

So here's for hoping we'll get our proof of solvency soon enough and Uphold will be a shining example of transparency, rather than turning into another cautionary tale in the Bitcoin world.

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