🤠Texas PoR Bill - HB1666 Fast FAQs
Texas House Bill No. 1666.
Introduction to HB1666
HB 1666 is the first time the set of procedures colloquially known as “Proof of Reserves” has been codified into a US State law.
Purpose: The goal of HB 1666 is to protect customers of Digital Asset Service Providers (“DASP”) operating in Texas who hold customer assets.
Approach: This is accomplished by demonstrating both customer assets and customer liabilities in the Proof of Reserves process. Additionally, the DASP must have a compliance plan to demonstrate segregation of company and customer funds and outline the PoR quarterly and annual plan.
Responsible Agency: Texas Department of Banking
Which Companies are In-Scope for 1666 Compliance?
New & Existing Texas MTL Holders with either:
500 or more customers registered in the State of Texas, or
$10,000,000 in customer assets in custody.
Excluding:
Banks, and
Entities excluded by the Commission.
Note: This may exclude public companies or companies that have completed a full ICoFR Audit. However, the Department of Banking has yet to clarify their interpretation.
Timing: When do you have to comply?
The effective date is September 30, 2023.
The DASP has 90 days after their fiscal year end to submit the Plan and it’s Proof of Reserve Attestation by a CPA (Auditor-attested Proof of Reserves Report + Customer Verification System).
Scope of the "Proof of Reserves"
Assets within scope of Proof of Reserves: Includes digital assets, fiat, and other property deposited by the customer and custodied by the DASP.
Note: This includes fiat held on behalf of customers. DASPs should ensure customer fiat is held in separate fiat accounts segregated from Company funds. Customer fiat can be held in a single omnibus account, or many individual sub-accounts (by customer).
Note: The term “other property” may imply that other assets outside of digital assets, such as stocks, bonds, and other assets may be within scope.
Note: The “long tail” of smaller market cap tokens, on newer blockchains can present challenges for PoR, so the scope-of-report topic is one to raise with the Audit Firm as well as in your Compliance Plan for DoB review.
Preparation for Proof of Reserves Assessment
Segregation of Funds
DASPs must segregate Company and Customer funds. However, as noted in section (g), a small amount of Company funds may be commingled with customer funds for operational needs. While the Company funds are commingled with Customer funds, they are to be considered Customer funds.
Note: In practice, this is important, because as DASPs earn trading revenue, “company funds” earned as revenue as commingled with customer assets until withdrawn.
Note: We recommend that DASPs implement a policy of “sweeping” the portion of company funds earned as revenue at least once a quarter (aligning with the quarterly self-attestation requirement).
Compliance Plan
DASPs must Create a Proof of Reserves Compliance “Plan” to enable users of the DASP to see their outstanding balance and associated assets (i.e. a Proof of Reserve) and to enable an auditor to view the information at any point in time.
Note: In preparation, the DASP should create a plan and submit it to the Texas DOB.
Note: The DASP should ensure historical reporting for customer balances as of any point in time is technically feasible. DASPs should work with their engineering team to ensure this type of reporting is available.
Note: To fulfill the “outstanding balance and associated assets” requirement, the DASP should present it’s total customer liabilities and total customer assets within a report. Then, in order to ensure each customer can see their specific balance, they can make a user’s specific information available via a Merkle Tree (recommended for privacy) or a pseudonymized version of the dataset.
What are the Attestation Requirements?
Quarterly Requirements
Publish management’s self-attestation report/memo of the Company’s custodial assets (held of behalf of Customers) and total associated Customer liabilities
Make the attestation and customer liability balances available to users of the DASP
Annual Requirements (as of Fiscal Year-End)
Execute and deliver to the Texas Department of Banking a Proof of Reserves Attestation Report prepared by an Independent US Licensed CPA Firm, covering custodial assets and associated customer liabilities
Make the attestation and customer liability balances available to users of the DASP
Note: The attestation vehicle will likely be AICPA’s Attestation Standards (AT-C 105 & AT-C 215) AT-C 105 Defines Concepts Common to All Attest Engagements, and AT-C 215 Defined “Agreed Upon Procedures” Engagements and Reports. Auditor-attested PoR Reports have not been completed under any other standard in the US to date.
The Texas Finance Commissioner
The Commission may waive requirements and enable the submission of alternative information to satisfy requirements. The department may suspend or revoke a DASP’s MTL or impose penalties on companies or persons who violate this chapter.
Note: The Commissioner may conduct an additional examination of a DASP.
Note: The Commission may adopt rules and enforcement methods to implement this law. However, at this time the TX Department of Banking leadership believes the requirements are relatively clear, and that questions of Licensed DASPs can be handled through the compliance process.
House Bill No. 1666:
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