Auditing firm Mazars’ report on Binance’s bitcoin reserves did not convince users of the safety of user assets on the platform. The interviewees said so The Wall Street Journal experts.
On Dec. 7, the company released letter with test results. He was about platform obligations and their provision in the first cryptocurrency. Also taken into account “wrapped coins” on the Ethereum, BNB Chain and BNB Smart Chain networks. The audit did not involve 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 provides no insight into the quality of the exchange’s internal controls, including accounting accuracy.
“We don’t know how effective Binance’s asset liquidation systems are in covering 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 don’t want to conclude that all is well,” added the expert.
Sources of the publication also drew attention to the lack of transparency of the corporate structure, which, according to Hillmann, has been undergoing reorganization for two years.
Mazars’ letter is addressed to Binance Capital Management, registered in the BVI. However, the top manager of the exchange could not confirm that this particular structure is the mother and controls the assets.
Professor at Baruch College and former Chief Auditor PCAOB extension Douglas Carmichael noted that the document “does not answer all of the investor’s questions regarding the appropriateness 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 case “false 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 fixed assets balance is 582,485.93 BTC.
The relationship between the first two indicators gave the exchange reasons to declare that user funds are 101% asset-backed. 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 “super-secured,” 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 safeguards, and does not even guarantee numbers. Having worked for over 18 years in the law enforcement department SECI would call those alarm bells,” said John Reed Stark, president of John Reed Stark Consulting.
Binance’s “proof of stock” report does not address the effectiveness of internal financial controls, does not express an opinion or conclusion for guarantees, and does not guarantee numbers. I have worked at SEC Enforcement for more than 18 years. That’s how I define “red flag”. https://t.co/6oEqmArjS9
— John Reed Stark (@JohnReedStark) December 11, 2022
In early November, during the FTX Binance crash disclosed information about their cryptocurrency reserves. The company also rolled out a feature Backup test, which allows users to make sure their bitcoins are backed by assets on the platform. For the audit, the exchange intended to invite a third-party company.
Recall that Mazars was released reserve report cryptographic platforms Crypto.com e announced a similar check of the KuCoin exchange.
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