- Binance’s audited proof-of-reserve report fails to relieve concerns as analysts point out red flags in the publication.
- Binance management has debunked the concerns with reassurance that the exchange’s finances are solid.
Binance, the largest cryptocurrency exchange by trading volume, has published its audited proof-of-reserve (PoR) report following an audit conducted by global financial audit, tax, and advisory firm, Mazars.
While the report shows that Binance’s customer Bitcoin (BTC) reserves are overcollateralized, it has failed to completely quell concerns over the financial health of the exchange.
A former Financial Accounting Standards Board (FASB) member and investment manager consulted by the Wall Street Journal (WSJ) assert that the reserves revealed by the audit expose several red flags in Binance’s finance.
Per the accounting and financial specialist, one red flag is that the document released by Mazars shows a difference between the total Bitcoin liabilities and assets of Binance. The PoR shows that Binance was 97 percent collateralized, excluding assets lent to users through loans or margin accounts.
Gap in the PoR
Specifically, Binance as of Nov. 23 held 597,602 (worth around $9.68 billion) BTC in liabilities to 575,742 BTC (worth around $9.43 billion) in assets, a difference of 21,860 BTC (or roughly $245 million). This indicates that the 1:1 ratio of reserves to customer assets claimed by Binance was not achieved.
A spokesperson for Binance clarified that the 3 percent gap in the PoR is due to BTC loaned out to users who may have used tokens out of the scope of the report as collateral in response to similar concerns pointed out by Jesse Powell, the CEO of Kraken exchange. According to the spokesperson, Binance’s BTC reserve would be 101 percent collateralized if the other assets are taken into account.
Meanwhile, other concerns raised by the former FASB member include that the audit report lacks information related to the quality of Binance’s internal controls and how the exchange’s systems liquidate assets to cover margin loans.
The lack of information about Binance’s corporate structure was also noted as a significant red flag. According to the WSJ, Binance’s chief strategy officer Patrick Hillman failed to name Binance’s parent company as the exchange has been going through a corporate reorganization for almost two years.
Binance’s collapse could be catastrophic for the crypto market
The attention of the market is highly focused on Binance due to the significant market share that the exchange holds. Analysts have noted that should Binance run into financial troubles, it could be worse than the collapse of the FTX exchange which wiped out over $10 billion of investors’ funds.
Regardless, Binance’s CEO Changpeng ‘CZ’ Zhao has continued to reassure the market that the exchange is in a very healthy position. He points out that the exchange has been practicing financial prudence and transparency which has enabled it to be among the few crypto firms that are still hiring while many others are laying off their workforce.
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