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Is Binance Really 101% Collatralized?

In the wake of the failure of FTX, cryptocurrency exchange Binance has found itself at the epicenter of all the debates around implementing a Proof of Reserves.

Photo by Nick Fewings / Unsplash

A new report claims Binance's finances are a mystery, which comes at a time when criticism of the company is growing.

In the wake of the failure of FTX, cryptocurrency exchange Binance has found itself at the epicenter of all the debates around implementing a Proof of Reserves.

After the failure of FTX, nearly all of the main cryptocurrency exchanges have begun to provide purported proof that they do not engage in speculative activities with the funds belonging to their customers and instead keep them in full.

Because there is not yet a Proof of Reserves (POR) standard that applies throughout the whole business, the community is examining the approach taken by the exchanges with an especially critical eye. Binance, which Changpeng Zhao runs, and its most recent proof of reserve are at the top of the list.

The Wall Street Journal recently published (1) an article about the cryptocurrency exchange Binance. The exchange sought the services of an outside accounting firm to compile a "proof-of-reserve report" that detailed certain aspects of its assets and liabilities.

However, as the cryptocurrency community has recently discovered, this is an "agreed-upon procedures engagement," also known as an "AUP." According to the accounting company, an AUP "is not an audit, review, or assurance engagement."

Recent Report Raises Concerns Regarding the Accounting Practices of Binance

The most recent report from the WSJ also targets this issue. It cautions investors that the report should not be enough to satisfy them. The following is an explanation provided by Douglas Carmichael, an economics professor at Baruch College in New York and a former top auditor for the United States Public Company Accounting Oversight Board

Binance is a private corporation, meaning it is not obligated to produce audited financial accounts and has never done so in the past, as the study explains.

The fact that Binance's Chief Strategy Officer, Patrick Hillmann, was unable to name Binance's parent company is another red flag, according to the article. The report states that Binance "has been undertaking a corporate restructure for nearly two years."

The PoR report is a letter that is five pages long and was written by a partner at the South African unit of the global accounting firm Mazars. The letter also contains three numbers. Nevertheless, this brings up further questions.

The upshot is that the total bitcoin liabilities cited in the Mazars letter were 3% greater than the bitcoin assets that were included within the scope of the report as of the reporting date, which was Nov. 22.

The conclusion drawn is that the total bitcoin liabilities listed in the letter from Mazars were 3% more than the bitcoin holdings included in the analysis's purview as of the end of the data collection period, which was on November 22.

Details of the Study

A distinct image emerges when one considers the third figure, "net obligation balance (excluding assets lent to customers)." It reveals that the liabilities had been reduced by approximately 21,860 BTC, bringing the total to 575,742 BTC.

As a result, Mazar arrived at the conclusion that Binance was "101% collateralized when the technique was implemented." The basis for this is the lending of client crypto assets through loans or margin accounts.

Another issue was brought to light by Hal Schroeder, who had previously served on the Financial Accounting Standards Board (FASB). According to him, the Mazars study is devoid of significance because it does not provide any information about the level of Binance's internal controls:

We don’t know how good Binance’s systems are to liquidate assets to cover any margin loans. And we know that banks in the U.S. have been caught off guard on occasion, despite all the good systems in place. Given what we’ve seen in the Bahamas, I don’t want to conclude that all systems are that good.