main conclusions
Mazar’s, the accounting firm that worked with Binance on the proof of reservations report, pulled the link from their website They also paused all crypto work indefinitely Controversy followed the report, with critics denouncing its lack of information on the liability Mazar’s had previously stated that this was a “report” and not an “audit” Oops… Binance’s “audit” – with plenty of quotes – no longer exists. Mazar’s, the audit firm that worked with Binance on the proof of reservations report – which was referred to by Mazar’s, rather than an audit – has removed the report from its website. The company also announced that it would stop its work with all crypto clients. In addition to Binance, this includes Crypto.com and KuCoin. “Unfortunately, this means that we will not be able to work with Mazar’s at this time,” said a Binance spokesperson.
Why was Mazar’s report controversial?
I have written extensively about the failure of the proof of reserves initiative. All in all, it couldn’t be less of an audit, with the report throwing up more questions than it answers. Most prominently, there was a refusal to come forward with accountability, with CEO Changpeng Zhao stating on Twitter that this was “harder” and that we should just “ask around” to verify that Binance owes nothing to anyone.
yes, but liabilities are harder. We don’t owe any loans to anyone. You can ask around. — CZ 🔶 Binance (@cz_binance) December 7, 2022
Needless to say, this instruction to ask didn’t exactly appease the investing public, fresh off of FTX CEO Sam Bankman-Fried’s “assets are fine” assertion, before immediately deleting the tweet, filing for bankruptcy and being arrested this week. Now, Binance has nothing to do with FTX, but the post-traumatic stress investors have over the latter’s collapse is fueling a very sensitive market right now. Then came the terribly timely news that US prosecutors were considering bringing criminal charges against Zhao and other Binance executives in relation to a money laundering case that has been ongoing for several years, and Binance was suddenly the number one news story. a. Withdrawals then flooded into Binance. Additionally, the BNB token has pulled back, which had previously been holding up well throughout 2022 — at least compared to the rest of the cryptocurrency market.
What will happen next?
Mazar’s revocation of the report doesn’t change much. Clearly, space now needs more transparency. Binance – and other exchanges – operate opaquely compared to traditional financial firms. It’s an ironic truth in an industry that is built on the premise of a lack of truth, where investors are forced to trust the assurances of executives on Twitter. Hopefully, the furor this episode caused will force Binance to come clean and present the world with a bona fide audit. There is certainly nothing to suggest that the company has any reason not to, but for paranoid investors, the opposite is also true – there is currently no way to verify that Binance is keeping its word. Mazar’s had stated that Binance was 101% guaranteed. “At the time of the assessment, Mazar’s noted that the in-scope assets controlled by Binance exceeded 100% of its total platform liabilities,” the report said.
Audited proof of reserves. Transparency. #Binance https://t.co/IClZxTYaWp — CZ 🔶 Binance (@cz_binance) December 7, 2022
But looking closer, the data wasn’t quite as satisfying. Binance’s assets totaled 582,486 bitcoins and its liabilities totaled 597,602 bitcoins. This seemed to suggest an undercollateralization of 3%, but when including assets loaned to customers through loan and margin accounts, it arrived at a collateralization ratio of 101%. While things seem to have slowed down recently, with Binance withdrawals returning to normal levels, the episode sums up that the cryptocurrency has a transparency issue. It’s great that Binance survived this little “stress test”, but in reality, it never should have happened in the first place. Until crypto companies bring their disclosures in line with what is presented in traditional finance, however, these episodes of apprehension will continue to emerge over time. For its part, Binance stated that it is moving towards more transparency. That’s great — and something the space desperately needs.
