S. 1405 — PROOF Act

This section defines nine terms for purposes of the Act: (1) covered asset (generally, a customer's money, asset, or property held by a digital exchange, excluding the exchange's proprietary funds and assets in customer margin accounts); (2) digital asset (any digital representation of value recorded on a cryptographically secured digital ledger); (3) digital commodity (fungible, intangible personal property that can be exclusively possessed and transferred person-to-person without an intermediary and is not an investment contract); (4) digital custodian (an entity that holds, maintains, or safeguards digital commodities, digital assets, or other assets for customers, excluding entities providing clearing or settling services during that process); (5) digital exchange (a trading facility listing at least one digital commodity or digital asset for trading); (6) digital wallet (any device, medium, program, or service storing a digital asset or digital commodity); (7) investment contract (generally, a contract involving investment of money in a sponsor's enterprise where profits are primarily from the sponsor's efforts, with specified definitions of money and sponsor, exclusions for decentralized autonomous organization members, and exceptions for contracts shifting to consumption expectations); (8) Office (the Office of Domestic Finance of the Department of the Treasury); and (9) Under Secretary (the Under Secretary of the Treasury for Domestic Finance).

This section requires each digital exchange to establish baseline accounting standards and procedures designed to protect customer covered assets and to hold such assets in a manner minimizing risk of loss or access delay. It mandates segregation of customer covered assets—treating them as belonging to the customer—and prohibits their co-mingling with non-covered assets or use to margin, secure, or guarantee others' trades or accounts (with exceptions for co-mingling in bank, trust company, or qualified digital custodian accounts; limited withdrawals for ordinary business purposes such as fees; and customer-consented substitution). It further directs the Under Secretary, upon review of reports submitted under section 4(b), to impose civil penalties on violating digital exchanges as described in section 4(c)(1)(A).

This section requires digital exchanges and digital custodians to obtain, not later than 30 days after the effective date and monthly thereafter, an attestation from an independent auditing firm verifying proof of reserves, accompanied by evidence (with a disinterested third party permitted only if an auditing firm is unavailable, subject to the same requirements). It directs the Public Company Accounting Oversight Board (PCAOB) and American Institute of Certified Public Accountants (AICPA) to solicit industry proposals for an attestation standard within 90 days of enactment, establish an advisory committee, and approve a standard within 18 months (extendable by 180-day periods). Auditing firms must submit reports to the Under Secretary detailing cryptographic proof of (1) possession/control over customer asset keys, (2) reserves, and (3) liabilities (i.e., using Merkle trees, zero-knowledge proofs, or similar); the Under Secretary must publicly release the reports, including entity and firm names. It imposes tiered civil penalties on noncompliant entities, based on failures within the prior 24 months: (1) first failure, the greater of 25 cents per user/customer or 2.5 basis points of total assets under management (AUM); (2) one additional failure, the greater of 55 cents per user/customer or 5.5 basis points of AUM; and (3) more than one additional failure, the greater of 90 cents per user/customer or 9 basis points of AUM.