The audit firm Mazars’ report on Binance’s bitcoin reserves did not convince users of the safety of users’ assets on the platform. The respondents said this The Wall Street Journal experts.
On December 7, the company published letter with test results. It concerned the obligations of the platform and their provision in the first cryptocurrency. Wrapped coins in the Ethereum, BNB Chain and BNB Smart Chain networks were also taken into account. The audit did not affect the assets of the American division.
“It is important for us to show users that the treasury is not empty, like FTX,” said Patrick Hillmann, director of strategy at Binance.
Former Financial Accounting Standards Board member and investment manager Hal Schroeder said the Mazars report does not provide insight into the quality of the exchange’s internal controls, including accounting accuracy.
“We don’t know how good Binance’s asset liquidation systems are to cover any margin loans. And remember that in the US, even with good mechanisms in place, banks have sometimes been taken by surprise. In light of what we saw in the Bahamas, I do not want to conclude that all is well, ”the expert added.
Sources of the publication also drew attention to the lack of transparency of the corporate structure, which, according to Hillmann, has been in the process of reorganization for two years.
Mazars’ letter is addressed to BVI-registered Binance Capital Management. However, the top manager of the exchange could not confirm that this particular structure is the parent and controls the assets.
Baruch College professor and former chief auditor PCAOB Douglas Carmichael noted that the document “does not answer all the investor’s questions regarding the adequacy of collateral.”
“That’s the main thing he seems to be talking about,” the expert added.
Hillmann repeatedly referred to Mazars’ audit as an audit during the interview. Carmichael considered the use of the term in this instance “gross misrepresentation”.
Mazars cited three numbers in the letter:
- the volume of assets controlled by the exchange is 597,602.29 BTC;
- the balance of net obligations to users – 575,742.42 BTC;
- the balance of fixed assets is 582,485.93 BTC.
The ratio of the first two indicators gave the exchange grounds to declare that user funds are 101% backed by assets. However, if the third figure is taken into account, there is a deficit of 3%.
Binance spokeswoman Jessica Jung explained that the 21,860 BTC difference consists of “loans issued to customers in bitcoin against collateral in other assets.” These loans are “supersecured,” she said.
“Binance’s ‘proof of reserve’ report does not address the effectiveness of internal financial controls, does not provide an opinion or conclusion on guarantees, and does not even vouch for the numbers. Having worked for over 18 years in the law enforcement department SECI would define it as red flags,” said John Reed Stark Consulting President John Reed Stark.
Binance’s “proof of reserve” report doesn’t address effectiveness of internal financial controls, doesn’t express an opinion or assurance conclusion and doesn’t vouch for the numbers. I worked at SEC Enforcement for 18+ yrs. This is how I define “red flag. https://t.co/6oEqmArjS9
— John Reed Stark (@JohnReedStark) December 11, 2022
In early November, amid the collapse of FTX, Binance disclosed information about its cryptocurrency reserves. The company also launched the Proof-of-Reserves feature, which allows users to verify that their bitcoins are backed by assets on the platform. For the audit, the exchange intended to invite a third-party company.
Recall that Mazars released a report on the reserves of the Crypto.com crypto platform and announced a similar check of the KuCoin exchange.
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