Binance’s efforts to improve the transparency of its reserves have also exposed red flags in the cryptocurrency exchange’s finances, according to accounting and finance professionals consulted by The Wall Street Journal.
As a former member of the Financial Accounting Standards Board (FASB) and investment manager pointed out, the report issued by the auditing firm Mazars does not give investors confidence in the exchange’s finances, as it lacks information on the quality of internal controls and how Binance liquidates assets to cover margin loans.
Another red flag raised by the newspaper’s sources relates to the lack of information about the structure of Binance. According to the report, Binance Chief Strategy Officer Patrick Hillman was unable to name Binance’s parent company, as Binance has been going through a corporate reorganization process for nearly two years.
The differences between the total Bitcoin liabilities are also highlighted. Proof of reserves on the exchange shows that Binance is 97% collateralised, except for assets lent to users through loans or margin accounts, indicating that the 1:1 ratio of reserves to customer assets is not achieved. Mazars’ letter states the difference:
We found that Binance was 97% collateralized without taking into account out-of-band assets pledged by clients as collateral for in-band assets that were lent by offering margin and loan service resulting in negative balances in the customer liability report. With the inclusion of in-band assets that were By lending it to clients via margin and loans added with collateral via off-scale assets, we found that Binance was 101% guaranteed.”
John Reed Stark, Senior Lecturer at Duke University School of Law and former head of the SEC’s Office of Internet Enforcement, stated in a Twitter post:
Binance’s “Proof of Reserve” report does not address the effectiveness of internal financial controls, does not express an opinion or assertive conclusion, and does not guarantee numbers. I have worked in SEC Enforcement for over 18 years. Thus identifying a red flag.”
After the FTX crash, Binance last month released a proof of reserves system that allows users to verify their assets using Merkle tree. However, competitors called the initiative “futile” because it failed to include commitments.
Mazars revealed the audit report of Binance’s Bitcoin reserves on December 7. According to the international auditing firm, the cryptocurrency exchange has control over 575,742.42 bitcoins belonging to its customers, worth $9.7 billion at the time of the report. According to the methodology, “Binance was 101% foolproof,” the company said.
The scope of the report included spot clients, options, margin, futures, financing, loans, profit accounts for Bitcoin and Bitcoin Coated (WBTC). Aside from the Bitcoin network, Ethereum’s BTC, BNB Chain, and BNB Smart Chain were also included in the inquiry, Cointelegraph reported.