If I were to build a customer safe cryptocurrency exchange, my approach would be different from the current Proof of Reserves model, which is complicated and difficult to understand.
Instead I would take another approach, from a different point of view, the view of the customer.
I would take this view because of what I have learned on Leofinance. Build something easy for the customer by making it familiar to something the customer already knows.
My approach would contain two elements:First look like a bank, and second be safe like a bank.
As a customer of a centralized exchange, these two things would help me sleep better at night.
Step one make it look like a bank.
I would adopt the current process used by banks to open a bank account. Customers know this process, they would provide the usual name, address and other KYC information. It's familiar and so it's easy.
Step two: make it safe like a bank.
This is the tricky part, how to offer some of the same safety features of a bank for cryptocurrency, and I would do this in six ways:
My crypto exchange will segregate customer fiat/cash and customer cryptocurrency from my exchange's cryptocurrency, so there is no comingling of funds.
My exchange would deposit all customer cash/fiat money in a 3rd party bank, as in one I don't own.
My exchange would keep 95% of my customers' crypto in cold storage, as in cold wallets, as in offline and not connnected to the internet.
My exchange would keep 5% of customers funds in a hot wallet on the exchange for trading, but I would back up that 5% 1:1 in a second exchange controlled cold wallet.
My exchange would pay for a 3rd party audit once a year, to verify compliance with these practices.
My exchange Terms of Service and all of my exchange creditor agreements would state that my customers are first in line to receive payments from assets I control, in the event of an exchange bankruptcy.
Last Words
I think this would protect my customers from hacks, due to my exchange keeping their cryptocurrency in offline wallets.
I think this would protect my customers from employee theft, embezzlement or other methods of theft of their cash/fiat and their cryptocurrency having it in carefully monitored cold wallets.
I think this would protect customers from loss of funds during bankruptcy, because custonmer funds are the number one asset on any exchanges balance sheet of assets and liabilities, so making sure all my creditors agree to let the customers get their funds out first, then creditors get funds from my exchange company wallets after customers empty my cold wallets holding customer only funds.
