Experts warn of alarming signals in Mazars report on Binance reserves

Mazars’ audit of Binance’s bitcoin reserves did not convince experts that user assets on the platform were safe, according to The Wall Street Journal.

On December 7 the company published a letter with the audit results. It concerned the platform’s liabilities and their collateralisation in the first cryptocurrency. It also considered wrapped coins in the Ethereum, BNB Chain and BNB Smart Chain networks. The assets of the U.S. subsidiary were not covered by the audit.

“It is important for us to show users that the treasury is not empty, as with FTX,” said Binance’s director of strategy Patrick Hillmann.

A former member of the Financial Accounting Standards Board and investment manager Hal Schroeder said the Mazars report does not provide a view on the quality of the exchange’s internal controls, including the accuracy of accounting.

“We do not know how good Binance’s systems are for liquidating assets to cover any margin loans. And remember that in the United States, even with good mechanisms, banks have sometimes been caught off guard. In light of what we have seen in the Bahamas, I do not want to conclude that everything is fine,” added the expert.

Sources also pointed to the lack of transparency in the corporate structure, which Hillmann said has been under restructuring for two years.

Mazars’ letter was addressed to Binance Capital Management, registered in the British Virgin Islands. However, the exchange’s top management could not confirm that this structure is the parent and controls the assets.

Baruch College professor and former chief auditor PCAOB Douglas Carmichael noted that the document “does not answer all investors’ questions about the sufficiency of the collateral.”

“That seems to be the main point it is making,” added the expert.

Hillmann, in the course of the interview, repeatedly described Mazars’ review as an audit. Carmichael regarded the use of that term in this context as “a gross distortion.”

Mazars, in the letter, cites three figures:

• volume of exchange-controlled assets — 597,602.29 BTC;
• net liabilities to users — 575,742.42 BTC;
• total assets — 582,485.93 BTC.

The ratio of the first two figures gave the exchange grounds to claim that user funds are backed by assets at 101%. However, if the third figure is taken into account, a 3% deficit arises.

A Binance spokesperson Jessica Jung explained that the 21,860 BTC difference consists of “loans to clients in bitcoin collateralised by other assets.” According to her, these loans are “overcollateralised.”

“Binance’s ‘proof of reserves’ report does not address the effectiveness of internal financial controls, does not express an opinion or assurance conclusion and does not vouch for the numbers. Having worked at the SEC Enforcement for 18+ years, I would define this as red flags,” said John Reed Stark, president of John Reed Stark Consulting.

Binance’s “proof of reserve” report doesn’t address effectiveness of internal financial controls, doesn’t express an opinion or assurance conclusion and doesn’t vouch for the numbers. I worked at SEC Enforcement for 18+ yrs. This is how I define “red flag. https://t.co/6oEqmArjS9

— John Reed Stark (@JohnReedStark) December 11, 2022

In early November, against the backdrop of the FTX collapse, Binance disclosed information about its cryptocurrency reserves. The company also launched the Proof-of-Reserves feature, which allows users to verify that their bitcoins are backed by assets on the platform. For the audit, the exchange planned to invite an external firm.

As reported, Mazars released a reserve report for the Crypto.com platform and announced a similar reserve audit for KuCoin.

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