Binance's proof-of-reserves raises red flags: Report
Binance's efforts to improve transparency of its reserves also exposed red flags in the crypto exchange's finances, according to accounting and financial specialists consulted by The Wall Street Journal.
As noted by a former Financial Accounting Standards Board (FASB) member and investment manager, the report released by the audit firm Mazars does not bring investors confidence about the exchange's finance as it lacks information related to the quality of internal controls and how its systems liquidate assets to cover margin loans.
Another red flag raised by the newspaper's sources is regarding the lack of information about Binance's corporate structure. As per the report, Binance’s chief strategy officer, Patrick Hillmann, was unable to provide the name of Binance’s parent company since it has been going through a corporate reorganization for almost two years.
Differences between the total Bitcoin liabilities were also highlighted. The exchange's proof-of-reserves shows that Binance was 97% collateralized if excluded assets lended to users through loans or margin accounts, indicating that the 1:1 ratio of reserves to customer assets was not achieved. Mazars' letter states about the difference:
John Reed Stark, Senior Lecturing Fellow at Duke University School of Law and former chief at Office of Internet Enforcement for the Securities Exchange Commission (SEC), stated in a Twitter post about Binance's reserves:
Following FTX collapse, Binance released last month a proof-of-reserves system that allows users to verify their assets using a Merkle tree. The initiative, however, was labeled "pointless" by rivals as it failed to include liabilities.
Mazars disclosed its audit report on Binance's Bitcoin reserves on Dec. 7.
Read more on cointelegraph.com
