“Proof of reserves,” born out of tragedy, will slowly become the global gold standard for financial auditing.

How bizarre that common criticisms of Bitcoin revolve around the issue of trust, or lack thereof. Perhaps more than any other point, Bitcoin beats most modern standards on the issue of “trust” hands down. As the world wakes up to this fact, the new concept of “proof of reserves” provides a valid contender as the vanguard for a large shift in perception by the public.

But first, let’s look at some of the trust-based concerns that get brought up time and again.

Example #1: We don’t know who made Bitcoin, so how can we trust that somebody won’t just print more of it?

Implicit to this statement is the contention that the purveyors of fiat currency can be trusted to analyze the economy and decide precisely how much money to add or subtract from the market, facilitated by the manipulation of interest rates through open market activities. Maybe they can, but that Bitcoin will maintain the 21 million hard limit is so assured as to be almost 100% certain. Whether this is a good idea may be cause for debate, but that you can trust it to be so is not.

This opinion is simply born out of ignorance for how the blockchain is maintained by powerful incentives that provide distributed security and consensus. There is no governing body to appeal to, no man behind the curtain, and even if somebody were to commit financial suicide by spending the 100’s of millions of dollars necessary to mess with transaction confirmations, they would still fail in coercing the Bitcoin community to adopt and use a currency with a more flexible supply. It’s just not going to happen.

Example #2: Bitcoin isn’t regulated, so we can’t trust that crimes committed involving Bitcoin will be subject to the rule of law.

Up until last year, this argument actually held water, but not because of anything inherent to Bitcoin. Rather, it was a failure of authorities to recognize Bitcoin as property with value (whether currency, commodity, or otherwise). Because it was new, and hard to understand, police who were notified of Bitcoin thefts initially laughed it off as kerfuffles over internet geek points.

But that has all changed. Even without strong regulatory guidance, the powers that be have already cracked down on notorious scammers (or incompetents) such as Trendon Shavers and Mark Karpeles, applying existing law to the process of investigation, prosecution, and restitution. And they didn’t miss the chance to hunt down the anonymous Silk Road kingpin either. Bitcoin has gone mainstream with respect to ownership, theft, money laundering, and acceptable uses. Whether you agree with those laws is a different matter.

Example #3: Banks have to meet certain standards and reporting requirements whereas companies that use Bitcoin can do so anonymously – we can’t tell what they are doing with the money.

Anonymous it may be, but only in the weakest sense. On the contrary, the immutable paper trail of every transaction ensures that Bitcoin is 100% traceable, and 100% transparent at the protocol level. This record is open to any member of the public, and can be viewed and analyzed to no end.

After the fall of Mt. Gox, skeptics were right to criticize the poor business, security, and accounting practices that are now apparent, but while they were still busy bashing Bitcoin, they missed one of the most revolutionary innovations in financial auditing to emerge in the last century: The “proof of reserves.”

Eager to convince their customers that they were solvent, Bitcoin exchanges and brokers worldwide offered a simple yet effective guarantee in the form of a digital signature (a secure cryptographic principle used in all industries). By pointing to an address on the blockchain and then providing proof that they were in control of those coins, they were able to immediately put everyone at ease. Sure, the coins might still get stolen at some point (let’s not claim an early victory), but at least we knew they were there.

Think about the possibilities for proof of reserves, or its cousin, proof of use. How would you feel if, instead of getting a quarterly report from the companies in which you have invested, you actually had real-time visibility into their finances? Companies might not like this idea, but I expect that their shareholders would, particularly in the case of banks or insurance companies.

Or consider the public institutions that we hold accountable with the fiscal health of our nations. Wouldn’t it be nice to see how much money is “in the vault” and where it is being spent? Governments should be in favor of such radical transparency because, after all, as they frequently remind us, if you have nothing to hide then you have nothing to fear…

The possibilities are quite limitless. Even an individual, say a homebuyer, could do away with the onerous process of vulnerably displaying their finances to the lender, who pores over their net worth and questions their transactions. One day you may be able to simply send an email with a digital signature: “My name is Satoshi, these are my coins, and I would like to buy this house now. Thanks.”

Going forward, this will undoubtedly be a consumer-driven process. If Bitcoin exchanges and brokers continue to use this honorable standard, then it won’t be long before the rest of the public wakes up to the bright and trustworthy future that we can engender from the proper application of a humble crypto currency.

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