A new Hong Kong-based exchange is offering its customers unprecedented transparency mechanisms, including automatic proof-of-reserves tests, in a bid to shake up the cryptocurrency exchange sector.
The new exchange, Coinport, is offering proof-of-reserves tests that can be executed by customers with data that is refreshed every half hour.
It has also uploaded its code to Github, where it can be inspected by the public, and is giving customers access to all the exchange’s trading and fund storage data. The startup has raised funds from IDG Capital Partners.
Extreme transparency
Coinport‘s founder, Daniel Wang, said he implemented the “extreme” transparency measures because existing exchanges could easily abuse the faith that customers had put in them, as in the case of the failed exchange Mt. Gox:
“When I look at [existing Chinese exchanges], they are very big right now, their transactions are maybe over 10,000 BTC in China. But I doubt the numbers are true. They have a common problem, the problem is about trust. Why do I need to trust them? […] If they keep running smoothly, that’s probably fine. But there may be a problem one day. It’s just like something happening to Mt. Gox.”
Wang said he discussed the idea of setting up a radically transparent exchange with co-founders Hoss Ma and Chungming Liu in the wake of Mt. Gox’s implosion.
The three come from technical backgrounds and have worked at large consumer technology firms in the past. Wang used to work at Google in Mountain View before joining e-commerce giant JD.com as an engineering director. Liu was JD’s principal system architect and Ma was also an engineer at Google.
Funding from IDG Capital Partners
Wang, who serves as Coinport’s chief executive, said the exchange grew out of an idea to create a cryptocurrency payment processor that merchants could use. But merchants became increasingly unreceptive to the idea as Chinese media cast bitcoin in a bad light, Wang said.
The trio moved on to a backup idea, that of a transparent exchange. Wang pitched the business to Feng Li, a partner at IDG Capital Partners. The venture capitalist supported the pitch, offering the firm a term sheet for a seed round of several million dollars that was signed last December. Wang would not disclose the exact size of the funding round.
The IDG Capital Partners funding round was confirmed by an analyst at the firm with knowledge of the deal. Li, who has led his firm’s investments in cryptocurrency startups like Ripple Labs and Coinbase, did not respond to questions about the investment.
Transparency mechanisms
Coinport opened to the public on 2nd July. It currently allows customers to trade bitcoin and four altcoins, including litecoin and dogecoin. Wang said fiat deposits would be introduced in two months.
Coinport’s reserve page offers a public snapshot of the exchange’s funds. At the time of writing, for example, the exchange held 14.62 BTC in reserve while customer balances were 14.61 BTC. This represented a reserve ratio of slightly over 100%, meaning that customers’ funds would be more than covered even if all the funds were withdrawn simultaneously.
However, the reserve ratio figure is meaningless unless the exchange’s reserves are what it claims. The solution to this is a proof-of-reserves test. The bitcoin community has conducted semi-regular tests on various exchanges in the months since Mt. Gox’s collapse. Coinport wants to make the test one of its essential features.
The firm makes public its wallet addresses and handily displays their balances on its proof-of-reserves page, and will make public documentation that shows it controls those wallets. The sum of these balances should show the amount of funds held by the exchange.
This figure needs to be reconciled with the balances held by exchange customers. To that end, Coinport also makes public its anonymised users’ balances, which are updated every few hours. A further check can be made on the user-balance data by reconciling the transfer records for each account, which the exchange also makes available for download.
When Coinport offers fiat deposits, Wang says his firm will allow customers to check on its bank account’s balances using a public login to the bank’s system. His firm will also publish a daily certificate, endorsed by the bank, that shows the account’s balance.
China’s regulatory environment
Wang said he faces difficulty opening a bank account for Coinport in mainland China, although he has opened an account in Hong Kong.
“Once you mention bitcoin, [banks in China] say, ‘No, we don’t want to have anything to do with bitcoin’,” he said.
In Wang’s view, this is emblematic of the attitude towards bitcoin in the financial establishments on the mainland and in Hong Kong. While banks in Hong Kong are more open to digital currencies, mainland banks remain wary, despite a relatively relaxed stance on the currencies from the central government. He said:
“Officially, the government hasn’t banned bitcoin. It’s just that on the operational level, [mainland] banks are very against bitcoin.”
The banks’ wariness towards digital currencies has even affected China’s high-tech giants, Wang claimed. Firms like Alibaba don’t want to upset financial incumbents because their own financial services products are at stake, he said. Even companies like Xiaomi, which is looking to disrupt the global mobile phone industry with its low-priced handsets, view bitcoin as being too risky for it to get involved.
“I talked to the founder of Xiaomi and I asked him, ‘Are you going to study bitcoin, because you are launching [a payments platform]?’ He said ‘No, we are not going to do that at all. It’s too risky. We don’t know if it’s a scam’,” Wang said.
As a result of the banking and technology firms’ skittish attitudes towards bitcoin, the cryptocurrency economy in China is fragile and dependant on speculators, Wang said:
“It’s just a small circle of [traders] right now. Most of them are speculators. Most of them are measuring their returns using fiat money instead of bitcoin.”
Wang remains bullish on bitcoin’s long-term future in China, citing the central government’s track record of following the lead on financial policy matters from countries like the United States, the United Kingdom and Canada.
“I believe China will follow the US, UK and Canada,” he said. “China will not say no to bitcoin if it is defined as legal property or currency in developed countries. We just need patience, we need time.”
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