So, lets imagine you have been running this continuously from the beginning and there is absolutely nothing fishy on the chain of the events of the ledger that makes this proof. All customer deposits (1B worth of coins) are backed by respective assets (1B) in the portfolio. Unfortunately the business has been run badly, and in addition to this portfolio, the exchange has assets of one worthless laptop, but there are some tax liabilities worth 2B and an just found loan payable to Italian Mafia worth also 2B. Tax authorities file for bankruptcy.
1. How does the exchange ensure money is paid to the customers instead of Mafia or tax authorities?
2. If/when it can't, how these liabilities are included in the proof of liabilities?
(note: this is a real and difficult problem. That's why there are laws, regulations and deposit insurances around customer funds in finance, which, yes, fail occasionally. I just do not see how that can be solved by blockchain.)
You make good points, this by itself is not sufficient. That doesn't mean it's not useful, though. For Centralized Exchange you need additional regulation to ensure that level of customer protection. And yet, regulation itself is not enough, as you can still defraud in a regulated entity. You need that the weight of criminal punishment is hard enough to disincentivize it. And you possibly need insurance (FDIC and equivalents) too.
Hence why proponents argue to do things on-chain, where we have built-in guarantees and this issue disappears entirely.
1. How does the exchange ensure money is paid to the customers instead of Mafia or tax authorities?
2. If/when it can't, how these liabilities are included in the proof of liabilities?
(note: this is a real and difficult problem. That's why there are laws, regulations and deposit insurances around customer funds in finance, which, yes, fail occasionally. I just do not see how that can be solved by blockchain.)