Mazars stops “proof of reserves” work, and Binance outflows hit $6bn

Following the demise of a rival cryptocurrency exchange FTX, Binance attempts to reassure investors of its financial stability. On Tuesday, the exchange lost $1 billion in a single day. The exchange reported on Friday that between Monday and Wednesday, net withdrawals totaled about $6 billion. For Binance and other exchanges, such as Crypto.com and KuCoin, Mazars had created “proof of reserves” reports to reassure anxious customers that they have enough assets to cover all customer deposits. But according to a statement released by the accounting firm on Friday, it has

“paused its activity relating to the provision of proof of reserves reports for entities in the cryptocurrency sector due to concerns regarding the way the public understands these reports.”

Communications obtained by the Financial Times indicate that Mazars’ decision was also influenced by the media’s attention to the situation. As cryptocurrency exchanges attempt to avoid “run on the bank” scenarios like the one that brought down FTX, which is suspected of having committed fraud and making off with customer assets leaving a multibillion-dollar shortfall in client funds, the willingness of auditors like Mazars to issue proof of reserves reports has been a critical factor in calming anxious investors. The reports are significantly less thorough and have a much narrower scope than a traditional audit of a company’s financial records, including its liabilities. An auditor uses the agreed-upon procedures to create a proof of reserves report but does not vouch for their appropriateness.

Unlike in a full financial audit, the auditor does not express any assurance or opinion regarding the figures in the report. According to a person briefed on the decision, particular financial issues did not motivate Mazars’ decision to halt work on proof of reserves at any of the companies. Due to the firm’s limited scope of work, it had “not looked that much” into the companies’ financial standing. People at Mazars worried that the company was “lending credibility to a very volatile sector” despite warnings in its reports and thought it had been “naive” and “silly” to accept the work, the person said. The Mazars report, according to Binance, was “additional validation” that the exchange’s assets were at least as significant as its customer liabilities. The exchange said on Friday that it had “passed a stress test over the past week that should give the community extraordinary comfort that their funds are secure,” adding that it had been able to process recent withdrawals “without breaking stride.”

According to Binance, it has enough assets worth more than $60 billion to honor withdrawals. Liabilities are not disclosed by the company, making it challenging to evaluate its financial standing. Changpeng Zhao, the chief executive of Binance, declined to say in a recent interview with CNBC whether the exchange could finance a potential $2.1 billion clawback from FTX should money be needed as part of FTX’s bankruptcy proceedings. Zhao stated, “We are financially OK,” adding that he would leave legal matters of this nature to Binance’s attorneys. Binance reiterated that it would send proof of reserves to its users, but it made no timeframe promises. According to the exchange, the Big Four and other sizable companies have been contacted but are currently unwilling to conduct a proof of reserve for a private cryptocurrency company. In the upcoming months, Binance said,

“We are looking into the best ways to provide those details because we embrace additional transparency.”

However, the dedication to transparency in the cryptocurrency industry has some auditors in doubt. Paul MacIntosh, co-leader of EY’s US financial services crypto practice, claimed on LinkedIn that FTX’s demise was ultimately because proof of reserves reports do not evaluate a company’s internal controls. He urged the sector to invest in better accounting systems, IT controls, and independent corporate governance, saying that moving to true transparency and trust in the industry “requires a much bigger step up.”

The FTX founder’s accusation According to several audit companies, they have classified some or all of their crypto-related clients as “high risk,” necessitating more thorough work that will take longer and result in higher costs. In response to Mazars’ decision, KuCoin stated that it was “open to working[ing] with any leading and reputable audit[or].” According to Crypto.com, “reputable audit firms will continue to be engaged with in 2023 and beyond.” KuCoin and Crypto.com claimed to have allowed customers to check their online holdings independently.