Binance, like many other crypto exchanges, has unveiled its Proof-of-Reserves. The aim of this is to close the trust gap in exchanges, but there has been a lot of criticism of the initiative. Now it appears that there is much more wrong with Binance’s evidence that it actually owns clients’ assets.
Uncertainty at Binance
The Wall Street Journal has consulted a number of accounting specialists. Although Binance has a ‘Proof-of-Reserves’, there would at the same time be quite a bit of uncertainty about where the assets are housed. This seems to have been tampered with consciously or unconsciously.
A former Financial Accounting Standards Board (FASB) member emphasizes that the audit for the Proof-of-Reserves, done by renowned accounting firm Mazars, offers little certainty about where the assets lie.
Binance has gone through major reorganizations over the past two years, which has created Binance US, among others. Now there is some ambiguity about Binance’s corporate structure, Binance’s Chief Strategy Officer Patrick Hillmann was unable to name what Binance’s parent company is exactly.
Gap in Binance balance?
Perhaps even more important is that the crypto exchange Mazars has made no distinction between the assets that belong directly to tokenholders and the assets that customers borrow for, for example, leveraged trades. Taken together, Binance controls 101% of customer bitcoins. But if you exclude the assets that the exchange reserves for leveraged clients, it is only 97%.
Thus, Binance would use some of clients’ assets to pay traders who invest with debt. So far that has gone well because not every customer with direct bitcoin exposure without leverage withdraws their coins and puts them in cold storage.
But of course this can change. Previously, the crypto industry seemed convinced that companies such as BlockFi, Celsius, and FTX could not go out of business. Still, these companies have experienced some kind of bank run due to financial problems, and Binance need not be an exception.
It should also be emphasized that the recently revealed Proof-of-Reserves only related to bitcoin (BTC), thus excluding the many altcoins offered by Binance.