Auditability Fallacy

Solvency of a Bitcoin custodian cannot be audited. A custodian is a person with discretion both in the release of an asset and issuance of securities against it. If both realease of the asset and the issuance of securities against it are controlled by machines then the relationship is not actually custodial. This is the distinction between a reserve and a layer.

An audit requires simultaneous proof of both the full amount of the asset held by a custodian and the securities issued against it. Such a process would require a halt of all transaction in both, and collective, comprehensive and secure deanonymization of all securities by a trusted auditor. In the case of a national reserve this would require complete knowledge of all fiat issued against the reserve, which is infeasible and unprovable.