II
119THCONGRESS
1
STSESSION S. 1405
To impose requirements on digital exchanges, and for other purposes.
IN THE SENATE OF THE UNITED STATES
APRIL10, 2025
Mr. T
ILLIS(for himself and Mr. HICKENLOOPER) introduced the following
bill; which was read twice and referred to the Committee on Banking,
Housing, and Urban Affairs
A BILL
To impose requirements on digital exchanges, and for other
purposes.
Be it enacted by the Senate and House of Representa-1
tives of the United States of America in Congress assembled, 2
SECTION 1. SHORT TITLE. 3
This Act may be cited as the ‘‘Proving Reserves Of 4
Others’ Funds Act’’ or the ‘‘PROOF Act’’. 5
SEC. 2. DEFINITIONS. 6
In this Act: 7
(1) C
OVERED ASSET.— 8
(A) I
N GENERAL.—The term ‘‘covered 9
asset’’ means, with respect to a customer of a 10
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digital exchange, money, an asset, or property 1
of the customer. 2
(B) E
XCEPTIONS.— 3
(i) P
ROPRIETARY FUNDS .—The term 4
‘‘covered asset’’ does not include propri-5
etary funds of a digital exchange. 6
(ii) M
ARGIN ACCOUNTS.—If a cus-7
tomer of a digital exchange has opened a 8
margin account for the purposes of bor-9
rowing cash or digital assets, or other re-10
lated activity, the assets in that margin ac-11
count are not covered assets. 12
(2) D
IGITAL ASSET.—The term ‘‘digital asset’’ 13
means any digital representation of value that is re-14
corded on a cryptographically secured digital ledger. 15
(3) D
IGITAL COMMODITY.—The term ‘‘digital 16
commodity’’ means any form of fungible and intan-17
gible personal property that— 18
(A) can be— 19
(i) exclusively possessed; and 20
(ii) transferred from a person to an-21
other person without necessary reliance on 22
an intermediary; and 23
(B) is not an investment contract. 24
(4) D
IGITAL CUSTODIAN.— 25
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(A) IN GENERAL.—The term ‘‘digital cus-1
todian’’ means an entity that holds, maintains, 2
or safeguards digital commodities, digital as-3
sets, and other assets on behalf of a customer. 4
(B) E
XCEPTION.—Any entity facilitating 5
clearing or settling services of a covered asset 6
on behalf of a customer shall not be considered 7
to be a digital custodian of that covered asset 8
for the duration of the clearing or settling proc-9
ess. 10
(5) D
IGITAL EXCHANGE.—The term ‘‘digital ex-11
change’’ means a trading facility that lists for trad-12
ing not less than 1 digital commodity or digital 13
asset. 14
(6) D
IGITAL WALLET.—The term ‘‘digital wal-15
let’’ means any device, physical medium, program, or 16
service that stores a digital asset or digital com-17
modity. 18
(7) I
NVESTMENT CONTRACT .— 19
(A) I
N GENERAL.—The term ‘‘investment 20
contract’’ means a contract— 21
(i) that provides for an investment of 22
money in an enterprise with a sponsor; and 23
(ii) the objective of the performance of 24
which is primarily profit (rather than con-25
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sumption), which is derived primarily from 1
the managerial or entrepreneurial efforts 2
of the sponsor described in clause (i). 3
(B) U
SE OF CERTAIN TERMS .—For the 4
purposes of subparagraph (A)— 5
(i) the term ‘‘money’’ means— 6
(I) any medium of exchange rec-7
ognized as legal tender anywhere in 8
the world; or 9
(II) any convertible virtual cur-10
rency, as defined by the Financial 11
Crimes Enforcement Network of the 12
Department of the Treasury; and 13
(ii) the term ‘‘sponsor’’ means a man-14
ager or entrepreneur that has solicited in-15
vestment in a contract described in that 16
subparagraph. 17
(C) E
FFECT OF MEMBERSHIP IN CERTAIN 18
ORGANIZATIONS.—A member of a formal or in-19
formal decentralized autonomous organization 20
is not, solely by reason of that membership, or 21
through participation in such an organization, 22
the holder of an investment contract. 23
(D) E
XCLUSIONS.—A contract that would 24
otherwise be an investment contract under this 25
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paragraph is not an investment contract if the 1
obligee of that contract— 2
(i) as of the date on which the con-3
tract became effective, primarily expected 4
profit from performance of the contract; 5
and 6
(ii)(I) at a date after the date de-7
scribed in clause (i)— 8
(aa) primarily expects to con-9
sume goods or services associated with 10
the contract; or 11
(bb) no longer expects profit pri-12
marily from the managerial or entre-13
preneurial efforts of the sponsor de-14
scribed in subparagraph (A)(i) with 15
respect to the contract. 16
(8) O
FFICE.—The term ‘‘Office’’ means the Of-17
fice of Domestic Finance of the Department of the 18
Treasury. 19
(9) U
NDER SECRETARY .—The term ‘‘Under 20
Secretary’’ means the Under Secretary of the Treas-21
ury for Domestic Finance. 22
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SEC. 3. REQUIREMENTS FOR DIGITAL EXCHANGES RE-1
GARDING TREATMENT OF CUSTOMER AS-2
SETS. 3
(a) R
EQUIREDSTANDARDS AND PROCEDURES.— 4
Each digital exchange shall establish baseline accounting 5
standards and procedures that are designed to protect and 6
ensure the safety of covered assets of customers of the 7
exchange. 8
(b) H
OLDING OFCUSTOMERASSETS.— 9
(1) I
N GENERAL.—Each digital exchange shall 10
hold the covered assets of each customer of the ex-11
change in a manner that minimizes— 12
(A) the risk of loss by the customer of any 13
such covered asset; and 14
(B) any delay in the customer accessing 15
any such covered asset. 16
(2) S
EGREGATION OF FUNDS .— 17
(A) I
N GENERAL.—Each digital exchange 18
shall treat and deal with all covered assets of a 19
customer of the exchange that are received by 20
the exchange as belonging to the customer. 21
(B) C
O-MINGLING PROHIBITED .—Except 22
as provided in subparagraph (C), with respect 23
to any covered asset of a customer of a digital 24
exchange, the exchange may not— 25
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(i) co-mingle that covered asset with 1
assets that are not covered assets; or 2
(ii) use that covered asset to margin, 3
secure, or guarantee any trade or account 4
of any person other than the customer for 5
which that item is held. 6
(C) E
XCEPTIONS.— 7
(i) I
N GENERAL.—A digital exchange 8
may, for convenience, co-mingle and de-9
posit a covered asset of a customer of the 10
exchange in the same account as funds of 11
the exchange with any bank, trust com-12
pany, or qualified digital custodian. 13
(ii) W
ITHDRAWAL.—A digital ex-14
change may withdraw from a bank, trust, 15
or digital wallet account such share of a 16
covered asset of a customer of the ex-17
change as may be necessary in the ordi-18
nary course of business to margin, guar-19
antee, secure, transfer, adjust, or settle a 20
transaction regarding a digital asset or 21
digital commodity with another digital ex-22
change, including for the payment of a 23
commission, a brokerage fee, interest, 24
taxes, storage costs, or any other charge 25
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that lawfully accrues in connection with a 1
digital commodity transaction. 2
(iii) S
UBSTITUTION.—A customer may 3
explicitly consent to a digital exchange sub-4
stituting covered assets of the customer 5
with certain other assets. 6
(c) E
NFORCEMENT.— 7
(1) I
N GENERAL.—If, in the process of review-8
ing a report submitted to the Under Secretary under 9
section 4(b) with respect to a digital exchange, the 10
Under Secretary discovers that the digital exchange 11
has violated a provision of this section, the Under 12
Secretary, through the Office, shall impose a civil 13
penalty on the digital exchange in the manner de-14
scribed in clauses (i), (ii), and (iii) of section 15
4(c)(1)(A) (subject to paragraph (2) of this sub-16
section). 17
(2) R
ULE OF CONSTRUCTION .—For the pur-18
poses of a civil penalty imposed under paragraph 19
(1)— 20
(A) an entity that is subject to the require-21
ments of section 4(a), as described in section 22
4(c)(1)(A), shall be deemed to be an entity that 23
is subject to the requirements of this section; 24
and 25
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(B) the failure of an entity to satisfy the 1
requirements of section 4(a), as described in 2
section 4(c)(1)(A), shall be deemed to be a fail-3
ure to satisfy the requirements of this section. 4
SEC. 4. ATTESTATION REQUIREMENTS. 5
(a) A
TTESTATION.— 6
(1) I
N GENERAL.—Not later than 30 days after 7
the effective date of this section, and monthly there-8
after, each digital exchange and each digital custo-9
dian shall obtain from an independent auditing firm 10
an attestation that the applicable entity has proof of 11
reserves, which shall be accompanied by appropriate 12
evidence demonstrating proof of those reserves, as 13
described further in subsection (b). 14
(2) I
NABILITY TO OBTAIN SERVICES OF AUDIT -15
ING FIRM.— 16
(A) I
N GENERAL.—A digital exchange or 17
digital custodian may contract with, or other-18
wise obtain the services of, a disinterested third 19
party to carry out the responsibilities of an 20
independent auditing firm under paragraph (1) 21
only if the digital exchange or digital custodian 22
is unable to contract with, or otherwise obtain 23
the services of, an independent auditing firm to 24
carry out those responsibilities. 25
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(B) APPLICABILITY.—If a digital exchange 1
or digital custodian contracts with, or otherwise 2
obtains the services of, a disinterested third 3
party as described in subparagraph (A), that 4
third party shall be subject to the requirements 5
of this section to the same extent as an inde-6
pendent auditing firm carrying out the respon-7
sibilities described in paragraph (1). 8
(3) I
NDUSTRY STANDARD .— 9
(A) S
OLICITATION OF STANDARD .—Not 10
later than 90 days after the date of enactment 11
of this Act, the Public Company Accounting 12
Oversight Board and the American Institute of 13
Certified Public Accountants shall jointly issue 14
a request for public comment soliciting pro-15
posals from the digital asset industry regarding 16
a standard for the attestations required under 17
this section. 18
(B) E
STABLISHMENT OF ADVISORY COM -19
MITTEE.—After the expiration of the 90-day pe-20
riod described in subparagraph (A), the Public 21
Company Accounting Oversight Board and the 22
American Institute of Certified Public Account-23
ants shall establish an advisory committee that 24
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shall be comprised of the entities that submit 1
proposals under that subparagraph. 2
(C) C
REATION OF STANDARD .—The advi-3
sory committee established under subparagraph 4
(B) shall— 5
(i) create a proposed standard for the 6
purposes described in subparagraph (A); 7
and 8
(ii) submit to the Public Company Ac-9
counting Oversight Board and the Amer-10
ican Institute of Certified Public Account-11
ants the proposed standard described in 12
clause (i) for approval of the proposed 13
standard by those entities. 14
(D) A
PPROVAL OF STANDARD .— 15
(i) I
N GENERAL.—Not later than 18 16
months after the date of enactment of this 17
Act, the Public Company Accounting Over-18
sight Board and the American Institute of 19
Certified Public Accountants shall jointly 20
approve a proposed standard submitted to 21
those entities under subparagraph (C). 22
(ii) E
XTENSION OF DEADLINE .—If, as 23
of the date that is 18 months after the 24
date of enactment of this Act, the Public 25
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Company Accounting Oversight Board and 1
the American Institute of Certified Public 2
Accountants have not issued a joint ap-3
proval described in clause (i), the 18- 4
month deadline described in that clause 5
with respect to that approval shall be ex-6
tended by consecutive 180-day periods 7
until the date on which those entities issue 8
such an approval. 9
(b) R
EPORTS.— 10
(1) I
N GENERAL.—An auditing firm that pre-11
pares an attestation under subsection (a) with re-12
spect to an entity shall, after making the attestation, 13
submit to the Under Secretary a report that ad-14
dresses the following with respect to the entity: 15
(A) Cryptographic proof of possession or 16
control over keys that are capable of effec-17
tuating the transfer, change of control, or 18
movement of a chain of assets that are owned 19
by a person other than that entity, such as a 20
customer of the entity. 21
(B) Verification of cryptographic proof of 22
reserves of the entity. 23
(C)(i) Verification of cryptographic proof 24
of the liabilities of the entity. 25
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(ii) For the purposes of clause (i), cryp-1
tographic proof means a cryptographically 2
verifiable attestation using a Merkle tree struc-3
ture, a zero-knowledge proof, or another similar 4
mechanism that can prove— 5
(I) the existence of the applicable li-6
abilities; and 7
(II) that the applicable liabilities are 8
the legal responsibility of the entity that is 9
the subject of the report. 10
(2) P
UBLIC AVAILABILITY.—The Under Sec-11
retary, through the Office, shall make each report 12
received under paragraph (1) available to the public, 13
which shall include, in addition to the material de-14
scribed in subparagraphs (A), (B), and (C) of that 15
paragraph— 16
(A) the name of the entity for which the 17
attestation that is the subject of the report was 18
performed; and 19
(B) the name of the auditing firm that 20
made the attestation described in subparagraph 21
(A) of this paragraph. 22
(c) E
NFORCEMENT.— 23
(1) C
IVIL PENALTIES.— 24
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(A) IN GENERAL.—With respect to an en-1
tity that is subject to the requirements under 2
subsection (a) and fails to satisfy those require-3
ments, the Under Secretary, through the Office, 4
shall, subject to subparagraph (B), impose a 5
civil penalty on the entity as follows: 6
(i) If that failure is the only such fail-7
ure by the entity during the most recent 8
24-month period, the amount of the pen-9
alty shall be the greater of the following: 10
(I) 25 cents per user or customer 11
of the entity (as applicable), as of the 12
date on which the penalty is imposed. 13
(II) 2.5 basis points of the total 14
assets under management by the enti-15
ty, as of the date on which the penalty 16
is imposed. 17
(ii) If the entity has 1 additional such 18
failure during the most recent 24-month 19
period, the amount of the penalty shall be 20
the greater of the following: 21
(I) 55 cents per user or customer 22
of the entity (as applicable), as of the 23
date on which the penalty is imposed. 24
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(II) 5.5 basis points of the total 1
assets under management by the enti-2
ty, as of the date on which the penalty 3
is imposed. 4
(iii) If the entity has more than 1 ad-5
ditional such failure during the most re-6
cent 24-month period, the amount of the 7
penalty shall be the greater of the fol-8
lowing: 9
(I) 90 cents per user or customer 10
of the entity (as applicable), as of the 11
date on which the penalty is imposed. 12
(II) 9 basis points of the total as-13
sets under management by the entity, 14
as of the date on which the penalty is 15
imposed. 16
(B) L
IMITATION.—The Under Secretary, 17
through the Office, may not impose a penalty 18
on an entity under subparagraph (A) if the im-19
position of that penalty would cause the total 20
amount of penalties imposed on that entity 21
under that subparagraph for the year in which 22
the penalty would be imposed to exceed the 23
lesser of the following: 24
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(i) $1 per user or customer of the en-1
tity (as applicable), as of the date on which 2
the penalty would be imposed. 3
(ii) 10 basis points of the total assets 4
under management by the entity, as of the 5
date on which the penalty would be im-6
posed. 7
(2) P
UBLICATION.—The Under Secretary, 8
through the Office, shall make publicly available, 9
with respect to the most recent 24-month period, the 10
name of each entity that is subject to the require-11
ments under subsection (a) and has failed to satisfy 12
those requirements. 13
(3) A
PPEALS.— 14
(A) I
N GENERAL.—The Under Secretary 15
shall establish a process through which an enti-16
ty on which a penalty is imposed under para-17
graph (1) may appeal that penalty. 18
(B) W
AIVER OF PENALTY .—The Under 19
Secretary shall waive a penalty imposed under 20
paragraph (1) if the Under Secretary deter-21
mines in an appeal brought under subpara-22
graph (A) of this paragraph that the reason 23
that the Under Secretary did not receive a re-24
port under subsection (b)(1) is because of an 25
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action or omission by an auditing firm and not 1
the entity on which the Under Secretary im-2
posed the penalty. 3
(C) P
AUSE IN PAYMENT .—An entity on 4
which the Under Secretary imposes a penalty 5
under paragraph (1) shall not be required to 6
pay that penalty during the period in which an 7
appeal brought by the entity under this para-8
graph is pending. 9
(d) E
FFECTIVEDATE.—This section shall take effect 10
on the date on which the Public Company Accounting 11
Oversight Board and the American Institute of Certified 12
Public Accountants jointly approve, under subsection 13
(a)(3), an industry standard for the attestations required 14
under this section. 15
Æ
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