Solvency

Solvency is the condition of holding assets that exceed liabilities, meaning an institution can ultimately meet all of its obligations in full. It differs from liquidity, which concerns meeting obligations on time. The November 2022 collapse of the FTX exchange, which left a customer shortfall estimated around 8 billion dollars, was a solvency failure rather than a temporary liquidity squeeze.

Why it matters

An insolvent custodian can look perfectly healthy for years, processing withdrawals normally as long as few customers ask for their assets at once. The gap only becomes visible during a run, when everyone asks at the same time and the institution cannot deliver. This is why solvency, not day-to-day functionality, is the correct test of any entity holding other people's money, and why disclosure of assets and liabilities matters more than smooth operations.

In the gold vs bitcoin debate

Both gold and bitcoin holders face solvency risk whenever they use custodians. An unallocated gold account makes the holder an unsecured creditor of a bank, and exchange-held bitcoin makes the user a creditor of the exchange. Bitcoin offers one distinctive tool: proof-of-reserves attestations, in which a custodian cryptographically demonstrates control of on-chain funds against its stated liabilities. Auditing physical gold, by contrast, requires trusted inspectors, vault access, and assays.