After over a week of repeatedly trying to dampen concerns over the crypto exchange Binance’s financial viability, CEO Changpeng “CZ” Zhao now has his work cut out for him as the company conducting a targeted audit of his company exploded with hardly a word to anyone.
On Friday, Bloomberg first reported that Mazars, the French company that had conducted a so-called “proof-of-reserves” audit for Binance, was going to “temporarily pause their work with all of their crypto clients globally.” This “pause” won’t just impact Binance, but also fellow crypto firms Crypto.com and KuCoin, according to a statement sent from Binance to CoinDesk. According to Bloomberg’s report, Mazars decided to suspend these targeted audits because “proof-of-reserves” hasn’t actually made anyone any less concerned about the incredibly shaky state of digital currencies.
From Dec. 12 through 14, Binance experienced nearly $6 billion net withdrawals, according to the company. In an email, a Binance spokesperson told Gizmodo they were able to fulfill all the withdrawal requests, adding “Over the past week, Binance passed a stress test that should give the community extraordinary comfort that their funds are secure.”
You see, Binance first proposed this audit back in November after the collapse of rival exchange FTX, which was followed by a string of reports showing how that exchange and its CEO Sam Bankman-Fried had basically treated user funds as his own personal piggy bank, shunting billions of dollars of customer crypto over to his hedge fund Alameda Research.
Mazars’ initial assessment of Binance found its assets “controlled in-scope assets in excess of 100% of their total platform liabilities,” making it just slightly overcollateralized. As pointed out by CoinDesk in an interview with financial accounting experts, the audit didn’t touch Binance’s other balances from outside venues, like independent banks or other custodians. Now that proof-of-reserve audit is no longer available because the company’s website is also no longer available.
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So why were the heads of Binance and other crypto firms so eager for such dumbed-down, targeted audits versus a full scale review of company finances? Well Binance, which remains by far the largest exchange by market cap, has struggled with a rash of users withdrawing billions from its exchange over the past week. Zhao tried to reassure both investors and staff that they have enough in reserves to make up for any withdrawals, and that they regularly process billions of dollars in transactions, so it’s no biggie.
The Binance spokesperson did not reveal any plans for additional audits, but did say “we embrace additional transparency and we are looking into how best to provide those details in the coming months.”
But there could be other threats coming for Binance’s balance sheet. In an interview with CNBC Thursday, Zhao seemingly avoided answering a simple question about whether his company could handle it if the ongoing FTX bankruptcy tries to claw back $2.1 billion that was the proceeds from an earlier investment into Bankman-Fried’s failed exchange. The Binance CEO simply reiterated “We are financially strong” despite the obvious exasperation of interviewers.
When asked if he planned to facilitate a large-scale audit of his platform from any of the big, accredited firms, CZ said “Audits don’t reveal every problem… many of them don’t even know how to audit crypto exchanges.” This of course ignores that Binance’s only remaining rival with a market cap above $1 billion, Coinbase, received a positive report from Deloitte, a major global firm.
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