Texas ‘Proof of Reserves’ Bill Passes House of Representatives

The Texas House of Representatives, a 150-member lower chamber of the Texas State Legislature, has approved a bill that will require cryptocurrency exchanges to maintain reserves ‘in an amount sufficient to fulfill all obligations to digital asset customers.’

The bill seeks to amend the state's Finance Code to add a chapter on digital asset regulation that will ensure exchanges maintain funds in such a manner that all customers should be able to "fully withdraw" their assets.

Additionally, the bill will prohibit digital asset service providers from "commingling," or mixing customer deposits, with other accounts including the provider's operating capital, proprietary accounts, digital assets, fiat currency or "other property that is not customer funds."

Giovanni Capriglione, a Republican member of the Texas House of Representatives, introduced the bill earlier this year to address a crucial "proof of reserves" issue across the crypto market. Proof of reserves is a method used by financial services providers to provide audited or on-chain proof of customer assets held at an exchange.

Exchanges will be required to submit an annual report on customer deposits and evidence of assets held by the exchange, "documented using zero-knowledge encryption or a similar industry standard," while customers must be able to access a quarterly accounting of outstanding liabilities and assets held in reserve on their behalf.

The state will have the power to suspend or revoke service providers' licenses if they are found to be violating the rules.

What happens next?

Having been approved by the House of Representatives, the bill will pass to the state Senate, which comprises 31 members, and later signed by the Governor to pass into law. If passed, the law will come into effect from September 2023.

Lennix Lai, chief commercial officer of crypto exchange OKX, told Decrypt in an emailed statement that the bill shows proof of reserves is “increasingly recognized as an indispensable way to show transparency and guarantee solvency using foolproof cryptographic methods.”

Cody Carbone, vice president of crypto advocacy group Digital Chambers, told Decrypt that, “Requiring proof of reserves and segregation of assets is exactly what should be required by custodians to further improve transparency in the digital asset markets. This bill does just that.”

Texas recently also moved a Bitcoin mining bill to reprieve miners of specific benefits to restrict their usage during peak demands. The Senate has passed the bill, pending the House's approval. Fred Thiel, CEO of mining firm Marathon Digital, told Decrypt that, "I don't think it's going to make it out of the House intact."