Report: Binance’s proof that it has reserves raises red flags


Concerns include corporate structure, Bitcoin liabilities, and internal control quality. News Own this piece in crypto history. According to financial and accounting experts consulted by The Wall Street Journal, NFTBinance’s attempts to increase transparency of its reserves also revealed red flags in the cryptocurrency exchange’s finances. The report by Mazars, an audit firm, does not give investors confidence in the exchange’s finances. It lacks information about its internal controls and how it liquidates assets to pay margin loans. This was noted by an ex-member of the Financial Accounting Standards Board (FASB), and investment manager. The newspaper’s sources also raised concerns about the lack of information regarding Binance’s corporate structure. According to the report, Binance’s chief strategy officer, Patrick Hillmann was unable, due to Binance going through a corporate restructuring for almost two years, to give the name of Binance’s parent company. Also, there were differences in the total Bitcoin liabilities. According to the proof-of-reserves, Binance was 97% secured if it excludes assets that were lent to users through loans and margin accounts. This indicates that the 1:1 ratio between reserves and customer assets was not achieved. Mazars wrote about the difference in their letter: “We found Binance 97% collateralized without taking into consideration the Out-Of–Scope Assets pledged to customers as collateral for In-Scope–Assets lent through margin and loans service offering. This resulted in negative balances on Customer Liability Report. Binance was 101% secured by the addition of In-Scope assets lent to customers via margin and loans that are overcollateralized with Out-Of-Scope Availables. John Reed Stark, Senior Lecturer at Duke University School of Law, stated in a tweet about Binance’s reserves that Binance’s “proof of Reserve” report does not address effectiveness of internal financial controls, does not express an opinion or assure conclusion, and doesn’t vouch the numbers. For 18+ years, I was employed by SEC Enforcement. This is how I define red alert. Binance, in response to the FTX collapse, released last month a proof of reserve system that allows users verify their assets using a Merkle Tree. Rivals branded the initiative “pointless” because it did not include liabilities. Mazars released its audit report on Binance’s Bitcoin reserves on December 7. The audit firm claims that the crypto exchange has control over 575742.42 Bitcoins of its customers and is worth $9.7 billion as of the date of the report. According to the company, “Binance had 101% collateralization”. The report covered customers’ spot, options and margins as well as funding, futures, funding and loan and earn accounts for Bitcoin. Wrapped Bitcoin (WBTC) was also included. Cointelegraph reported that the inquiry also included BTC wrapped on Ethereum and BNB Chain, as well as BNB Smart Chain.


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