Bake’s Compliance and Funds Transparency

In a financial environment that is becoming increasingly reliant on digital technologies, maintaining regulatory compliance and transparent operations is more important than ever. 

This article examines the fund safety compliance measures adopted by Bake under the Monetary Authority of Singapore (MAS) regulations and its implementation of funds transparency practices such as Proof of Reserves

Fund Safety Compliance

Headquartered in Singapore, Bake actively complies with all Monetary Authority of Singapore’s (MAS) regulations to ensure a safe and transparent environment for its users and their funds. 

The key regulations Bake specifically adheres to within the MAS framework are:

Payment Services Act (PSA) 2019

The Payment Services Act (PSA) provides a framework for the regulation of payment systems and services. It aims to enhance consumer protection and promote confidence in the use of e-payments. 

The PSA categorizes payment services into different types, each subject to specific regulatory requirements, and mandates that all payment service providers must obtain a license to operate — including Bake. 

By strictly adhering to the PSA, Bake ensures it is operating under strict guidelines to safeguard user transactions and privacy​​.

PSN02 – Prevention of Money Laundering and Countering the Financing of Terrorism (AML/CFT) for Digital Payment Token Service

This requires entities to adhere to rigorous AML/CFT measures. It includes conducting risk assessments, applying due diligence procedures, and ongoing monitoring to prevent and detect potential money laundering or terrorism financing activities. 

Compliance with PSN02 demonstrates Bake’s commitment to maintaining high standards of security and integrity in its operations​.

Technology Risk Management Guidelines

The Technology Risk Management Guidelines are designed to ensure that financial institutions manage and secure their technology infrastructure effectively. 

Entities are required to protect customer information, implement robust security measures, and maintain cyber hygiene to mitigate risks associated with digital services. Bake actively does penetration testing on its systems to ensure that the company’s security infrastructure is robust, in order to protect user’s data.

Compliance with these guidelines ensures that Bake can protect its systems and data against cyber threats, safeguarding its users’ interests​.

Funds Transparency

Asset Segregation

As part of MAS compliance, Bake also engages a third-party service provider to segregate customer assets. The third-party service provider is a regulated entity regulated by MAS. 

This helps safeguard customer assets, and Bake constantly upgrades its processes to adapt and adhere to the ever-changing regulatory landscape.

Proof of Reserves

To enhance trust and ensure transparency, Bake utilizes a practice known as Proof of Reserves to verify its funds under management. This involves creating cryptographic proofs that publicly prove the exchange’s on-chain funds relative to its liabilities. 

Unlike traditional models where the verification of funds might rely on government-issued licenses or external audits alone, Proof of Reserves provides a tangible, verifiable method to demonstrate solvency​​.

Proof of Reserves comprises two main components:

  1. Proof of Liabilities: This is a record of all customer deposits detailing each account’s balance. This record is crucial as it represents the total amount Bake must have available for withdrawal requests.
  2. Proof of Assets: This involves demonstrating the total pool of cryptocurrencies Bake holds across its wallets. The verification of these assets typically involves cryptographic techniques that allow third parties to verify the total without exposing the sensitive details of individual wallet addresses.

The equation that ensures solvency under this model is straightforward: if the total Proof of Assets is greater than the Proof of Liabilities, the exchange is considered solvent and can, theoretically, honor all withdrawal requests made by its users at any given time.

By implementing Proof of Reserves, Bake aligns with modern standards of financial transparency and ensures the platform is equipped to handle transactions responsibly and ethically. 

This method is particularly important in the cryptocurrency space, where regulatory oversight is still evolving, and the risk of mismanagement can be high.

Merkle Tree

Bake also implements a Merkle Tree structure for users to personally validate their proof of funds on the platform. 

This sophisticated data structure integrates the hash of a user’s username with their balance, structuring these into a tree where each leaf (node) represents an individual’s balance and hashed username. 

The significance of a Merkle tree is its ability to efficiently and securely verify the presence of specific data without needing to review all transactions. 

For example, if a user named Charlie wants to verify his funds, he only needs a few key hashes (those that directly connect his account to the root). This selective transparency speeds up the process and ensures verification without compromising the privacy of other users’ data.

Advantages of Merkle Trees in Proof of Liabilities:

  • Enhanced Transparency and Trust: By using a Merkle tree for Proof of Liabilities, Bake openly proves it possesses the assets it claims to hold, confirming its ability to cover withdrawals.
  • Efficiency and Security: Merkle trees allow for the verification of large sets of data without revealing the data in its entirety. This protects individual user privacy while ensuring Bake can publicly verify its asset reserves.
  • Resistance to Tampering: Due to the interconnected nature of hash-based systems, altering a single piece of data within a Merkle tree would alter the entire structure’s root hash, making unauthorized changes easily detectable. This provides a robust defense against tampering.
  • Community Verification: The structure of a Merkle tree also allows for community verification of liabilities. Users can contribute to the overall security by verifying their individual data points, supporting the authenticity of the entire tree.

You can visit the Bake Proof of Reserves page to verify your funds using the Merkle Tree system.

DISCLAIMER: Please note that the information on this blog and in any articles posted on this blog is for general information only and should not be relied upon as financial advice. Cake Pte. Ltd., Cake DeFi, UAB, and its affiliates (the “Cake Group”) are not licensed financial advisers. You may wish to approach your own independent financial advisor before making any decision to buy, sell or hold any product and/or digital assets mentioned in this blog.

Any views, opinions, references, assertions of fact and/or other statements are not necessarily the views held by the Cake Group. The Cake Group disclaims any liability whatsoever that may arise out of or in connection with such statements. Always do your own research before investing in any financial assets and consult a qualified financial advisor if necessary.