Note to the Reader: Technically, Proof of Reserve engagements are not “audits,” but are “attestations.” The main difference between “audits” and “attestations” is that Proof of Reserves attestations are over a limited scope, and do not incorporate the full Company’s financial statements within its purview. Additionally, differences also apply based on the type of attestations performed. However, for the purposes of this article, we have referred to stablecoin and proof of reserves “attestations” as “audits,” as it is often colloquially used for parties less familiar with the nuanced differences between audits and attestations. We invite readers to read information about the differences between audits and the attestations from documentation provided by the AICPA.

Proof of Reserves has become a core expectation for stablecoin issuers. Investors, counterparties, and regulators rely on these reports to understand whether a token is fully backed and whether supply movements are recorded accurately. While the concept seems straightforward, the underlying stablecoin audit processes are more complex than most expect.

Across engagements, stablecoin auditors and proof of reserves auditors observe recurring challenges that can affect the clarity and reliability of reserve reporting. Understanding these pitfalls helps issuers strengthen their operations and prepares them for smooth and effective assurance engagements.

What Proof of Reserves Aims to Demonstrate

A Stablecoin Proof of Reserves audit evaluates whether a stablecoin’s circulating supply is fully backed by verifiable reserve assets. Additionally, issuers disclose redemption terms, custodial arrangements, liens or encumbrances, insurance mechanisms, and the like.

To verify these representations by the issuer, the stablecoin auditor typically inspects:

Blockchain total supply and amounts held in non-circulating treasury wallets

Reserve assets held by custodians, including asset type, maturity date, fair value, and more.

Reconciling items, such as mints or redemptions in process, or frozen tokens.

Key documents, such as insurance agreements, custodial agreements, and the terms of service.

The goal of every proof of reserves audit is to present an accurate depiction and 1:1 back of stablecoins in public circulation.

Pitfall 1: Undisclosed Non-Treasury Wallets

Non-circulating treasury wallets hold issuer-controlled balances that are not included in public circulation. Importantly, these tokens held in these wallets are not backed 1:1 by reserves like cash or treasury securities, nor are they intended to.

Issuers should ensure these wallets are earmarked and proven to the auditor that they are not holding tokens in “public issuance.” This is especially important when reconciling tokens in public circulation to reserves, because often tokens these non-circulating tokens are not intended to be backed 1:1 with reserves.

Pitfall 2: Timing Differences Between On-Chain Activity and Reserve Movement

Mint and burn activity does not always occur at the same time as the movement of reserve assets. For example:

Tokens may be minted prior to fiat funds actually settling at the bank.

Tokens may be received related to a redemption, but the corresponding fiat may not yet have been sent to the customer.

Blockchain halts or delays may cause timing differences when token balances are reflected on chain.

These timing differences can create reconciliation challenges during a stablecoin audit if not monitored and documented carefully.

Pitfall 3: Infrequent or Manual Reconciliation Processes

Some issuers rely on reactive or manual reconciliation workflows. These can be prone to delays and errors, especially as transaction volumes grow. When reconciliations are not performed consistently, discrepancies between internal ledgers, bank statements, custodial records, and blockchain data can go undetected.

Regular and well-controlled reconciliations help maintain accurate reporting throughout the period, not only at the assurance date.

Pitfall 4: Limited Visibility Into Reserve Composition

Stablecoin reserves may include cash, treasury securities, repo agreements, other assets, or even tokenized assets. Without clear reporting on reserve composition, it can be difficult to determine:

liquidity of the assets backing the token

whether reserves meet internal policies and external regulatory requirements

the fair market value of the underlying reserves

the resilience and reliability of the underlying custodian holding the reserve assets

Transparent reserve breakdowns support stronger market confidence and more reliable disclosures. The issuer should also ensure assets held in the “reserve basket” adhere to all relevant laws and regulations of a given jurisdiction. A proof of reserves audit conducted by an experienced stablecoin audit firm can verify these details and enhance credibility.

Pitfall 5: Challenges With Multi-Chain Deployments

Many stablecoins operate across multiple blockchains. Each chain may introduce differences in:

minting mechanics

burn timing

transaction finality

Issuers sometimes struggle to maintain a unified view of total supply across all chains. Consistent monitoring and coordinated reporting are essential to avoid discrepancies.

Why These Pitfalls Matter

Proof of Reserves is most effective when issuers maintain accurate supply records, clear documentation, and well-structured operational workflows. Addressing these areas does not only simplify assurance engagements with your auditors, but it also strengthens transparency for users, partners, exchanges, and regulators.

Final Thoughts: Strengthening Trust Through Reliable Processes

A trusted stablecoin audit firm does more than verify numbers and stablecoin Proof of Reserves is ultimately about providing the market with confidence. Reliable reporting depends on disciplined supply tracking, clear wallet structures, and consistent reconciliation processes. Issuers who invest in these foundations are better positioned to demonstrate the stability and integrity of their systems as the industry evolves.

The Network Firm delivers industry-leading audit and assurance for stablecoin issuers and digital asset organizations - helping you earn user trust, meet regulatory expectations, and scale with confidence.

Book a consultation with us today to get started.

Jericho Sarmiento

Author Bio:
Jericho Sarmiento is a Staff Auditor at The Network Firm, where he supports audit and attestation engagements involving digital assets and blockchain-based financial systems. He is a Certified Public Accountant (CPA) with a strong foundation in accounting and assurance.

Jericho brings over five years of professional experience, including one year focused on crypto and digital assets. He has assisted in audit and attestation engagements across industry participants such as exchanges, custodians, and stablecoin issuers. His work includes supporting stablecoin attestations, Proof of Reserves (PoR) procedures, crypto asset verification, and the preparation of detailed audit documentation and workpapers in accordance with evolving assurance standards.

In addition to his professional work, Jericho independently researches smart contract security, focusing on understanding protocol mechanics and analyzing logical behaviors and potential security risks.

Jericho’s professional focus is on applying established accounting and assurance principles to blockchain-based systems, helping ensure digital asset data is verifiable, auditable, and reliable.

Connect with Jericho on LinkedIn for more expert advice.

Common Pitfalls for Stablecoin Proof of Reserves Audits