PROOF Act
- Bill Number
- S. 1405
- Origin Chamber
- Senate
- Congress
- 119th Congress, Session 1
- Policy Area
- Finance and Financial Sector
- Status
- Introduced
- Latest Action
- 2025-04-10: Read twice and referred to the Committee on Banking, Housing, and Urban Affairs.
- Last Updated
- 2026-03-05T20:22:24Z
AI-Generated Summary
Purpose
The PROOF Act (S. 1405) aims to protect customer assets held by digital exchanges and custodians in the cryptocurrency and digital asset sector. It requires these entities to maintain clear proof of customer reserves, segregate funds to prevent misuse, and undergo regular independent audits. The goal is to build trust, reduce risks of loss or insolvency (like those seen in past crypto exchange failures), and ensure transparency through public reporting.
Key Provisions
- Definitions:
- Establishes terms such as "covered asset" (customer money, assets, or property held by an exchange, excluding the exchange's own funds or margin account assets used for borrowing).
- Defines "digital asset" as any value recorded on a secure digital ledger (e.g., blockchain).
- Defines "digital commodity" as fungible, intangible property that can be exclusively possessed and transferred without intermediaries, but not an "investment contract" (a contract expecting profit mainly from a sponsor's efforts, with exclusions for decentralized groups or consumption-based uses).
- Includes "digital exchange" (platforms trading at least one digital asset or commodity), "digital custodian" (entities safeguarding these assets for customers, excluding short-term clearing/settling services), and "digital wallet" (tools storing digital assets).
- Treatment of Customer Assets (Section 3):
- Digital exchanges must create accounting standards to safeguard customer assets.
- Assets must be held to minimize loss risk or access delays.
- Strict segregation rules: Treat assets as belonging solely to customers; prohibit mixing with non-customer funds or using them to back others' trades, with limited exceptions (e.g., depositing in shared bank accounts for convenience, necessary business withdrawals for fees/settlements, or customer-approved substitutions).
- Attestation and Reporting Requirements (Section 4):
- Starting 30 days after the law's effective date (tied to industry standard approval), digital exchanges and custodians must obtain monthly attestations from independent auditing firms confirming "proof of reserves" (evidence they hold customer assets matching liabilities).
- If an auditor isn't available, a neutral third party can be used but must follow the same rules.
- Reports to the Under Secretary of the Treasury for Domestic Finance must include cryptographic proofs (e.g., using Merkle trees or zero-knowledge proofs—mathematical methods verifying data without revealing details) of asset control, reserves, and liabilities.
- All reports are made publicly available, including entity and auditor names.
- An industry standard for these attestations will be developed within 18 months (extendable) by the Public Company Accounting Oversight Board (PCAOB) and American Institute of Certified Public Accountants (AICPA), involving input from the digital asset industry via an advisory committee.
- Enforcement:
- Violations of asset rules or attestation failures trigger civil penalties from the Treasury's Office of Domestic Finance, scaled by repeat offenses (e.g., 25 cents per customer or 2.5 basis points of assets under management for first failure, up to 90 cents or 9 basis points for multiples; annual cap at $1 per customer or 10 basis points).
- Public list of non-compliant entities.
- Appeals process, with penalties waived if due to auditor fault and paused during appeals.
Significant Changes to Existing Law
This bill introduces new federal requirements specifically for digital asset platforms, filling gaps in current U.S. regulations. Existing laws (e.g., under the Securities and Exchange Commission or Commodity Futures Trading Commission) treat some digital assets as securities or commodities but lack dedicated rules for reserve proofs and segregation in crypto exchanges. It creates novel mandates for cryptographic verifications and public attestations, without relying on intermediaries, and excludes certain decentralized or non-profit-driven activities from "investment contract" scrutiny.
Potential Impacts
- Government Agencies: The Treasury Department (via the Office of Domestic Finance and Under Secretary) gains enforcement authority, including penalty collection and public reporting, increasing oversight workload but standardizing crypto regulation.
- Citizens: Crypto users benefit from stronger protections against exchange failures (e.g., easier asset recovery), reduced fraud risks, and greater transparency, potentially boosting confidence in digital investments. However, smaller exchanges might face higher costs, indirectly affecting users through fees.
- International Relations: Minimal direct impact, though it could influence global standards for crypto custody, encouraging similar rules abroad or affecting U.S. competitiveness in digital finance.
Main Stakeholders Affected
- Digital Exchanges and Custodians: Primary targets; must comply with segregation, audits, and reporting, facing penalties for non-compliance (e.g., major platforms like Coinbase or Binance.US equivalents).
- Customers/Users: Gain safeguards for their assets but may see operational changes or costs passed on.
- Auditing Firms and Industry Groups: Independent auditors (or third parties) perform attestations; PCAOB and AICPA develop standards with input from digital asset firms.
- Government: Treasury enforces rules; appeals and waivers add administrative duties.
- Broader Financial Sector: Banks and trust companies involved in asset deposits; decentralized autonomous organizations (DAOs) indirectly benefit from exclusions.
Notable Legal, Constitutional, or Political Implications
- Legal: Establishes "proof of reserves" as a federal standard, using advanced crypto tech for verifications, which could set precedents for auditing non-traditional assets. Penalties are civil (not criminal), with built-in fairness like appeals, but enforcement relies on self-reporting, raising questions about verification accuracy.
- Constitutional: Aligns with property rights protections (Fifth Amendment) by mandating segregation to prevent unauthorized asset use, but could face challenges if seen as overregulating emerging tech without due process. No direct free speech or privacy issues, though public reports enhance transparency.
- Political: Represents bipartisan effort (introduced by Sens. Tillis and Hickenlooper) to regulate crypto post-high-profile collapses (e.g., FTX), balancing innovation with consumer safety. It avoids classifying most digital commodities as securities, potentially averting broader market disruptions, but may spark debates on federal vs. state oversight or innovation stifling.
This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.
Sponsor
Cosponsors (1)
Sen. Hickenlooper, John W. [D-CO]
Recent Actions
- 2025-04-10: Read twice and referred to the Committee on Banking, Housing, and Urban Affairs.
- 2025-04-10: Introduced in Senate
Bill Versions
- Proving Reserves Of Others’ Funds Act — issued 2025-04-10 — PDF (17 pages)