Binance’s Proof-Of-Reserves Raises Red Flags: Report

Concerns include corporate structure, Bitcoin liability, and internal control quality.

According to accounting and financial experts interviewed by The Wall Street Journal, Binance’s attempts to boost transparency of its reserves also revealed red flags in the crypto exchange’s finances.

According to a former Financial Accounting Standards Board (FASB) member and investment manager, the audit firm Mazars’ report does not instill confidence in the exchange’s finances because it lacks information on the quality of internal controls and how its systems liquidate assets to cover margin loans.

The lack of knowledge on Binance’s business structure is another red flag highlighted by the newspaper’s sources. According to the article, Binance’s chief strategy officer, Patrick Hillmann, was unable to give the name of Binance’s parent business since the firm has been through corporate restructuring for over two years.

Differences in total Bitcoin liabilities have also been observed. According to the exchange’s proof-of-reserves, Binance was 97% collateralized if omitted assets were lent to customers via loans or margin accounts, suggesting that the 1:1 reserve-to-customer asset ratio was not met. The difference is stated in Mazars’ letter: ” “Binance was found to be 97% collateralized, excluding the Out-Of-Scope Assets pledged by customers as collateral for the In-Scope Assets lent through the margin and loans service offering, which resulted in negative balances on the Customer Liability Report. Binance was 101% collateralized when we included In-Scope Assets issued to clients on margin and loans that are overcollateralized by Out-Of-Scope Assets.”

In a Twitter post about Binance’s reserves, John Reed Stark, Senior Lecturing Fellow at Duke University School of Law and former chief of the Securities and Exchange Commission’s Office of Internet Enforcement, stated: ” “The “proof of reserve” report from inance does not address the effectiveness of internal financial controls, expresses no opinion or assurance conclusion, and does not vouch for the numbers. I spent almost 18 years in SEC Enforcement. This is my definition of a red flag.”

Following the demise of FTX, Binance launched a proof-of-reserves mechanism last month, allowing users to validate their assets using a Merkle tree. Rivals, meanwhile, called the plan “pointless” since it did not contain liabilities.

On December 7, Mazars released its audit report on Binance’s Bitcoin reserves. According to the international audit firm, the crypto exchange controls 575,742.42 Bitcoin from its clients, which was valued $9.7 billion at the time of the study. According to the technique, “Binance was 101% collateralized,” according to the corporation.