Mazars, located in Paris, was engaged last month by Binance, a prominent cryptocurrency exchange, to execute a proof-of-reserves audit on its bitcoin holdings.
This month, the business discovered that the exchange’s reserves were overcollateralized on a single day in late November. Mazars subsequently erased the website providing a report on the inspection, which was published on December 7.
Mazars has halted work on “proof of reserves” reports for its cryptocurrency customers, including Binance, the world’s biggest cryptocurrency exchange, citing concerns that the public might misinterpret them.
Binance and other crypto businesses had engaged the accounting company to compile a “proof of reserves” study, which crypto exchanges have raced to publish in the aftermath of FTX’s collapse in order to reassure worried customers that they had enough assets to match all customer deposits.
“Mazars has announced that they would temporarily suspend their operations with all of its crypto customers internationally, which include Crypto.com, KuCoin and Binance. Sadly, this implies that we will be unable to work with Mazars for the time being,” Binance stated in a statement on Friday.
Mazars stated it has “paused its work connected to the issuance of proof of reserves reports for firms in the cryptocurrency industry owing to concerns over the way these reports are viewed by the public”.
The willingness of auditors like Mazars to sign off on these reports has been critical in assuaging nervous investors as crypto exchanges try to avoid “run on the bank” scenarios like the one that brought down FTX, which is accused of fraudulently stealing customer assets and leaving a multibillion-dollar shortfall in client funds.
The reports are significantly more restricted in scope than a standard audit of a company’s finances, including its liabilities, and are far less rigorous.
An auditor employs processes agreed upon with the firm to compile a proof of reserves report but does not vouch for the appropriateness of those procedures. In addition, unlike a thorough financial audit, the auditor does not provide assurance or an opinion on the statistics in the report.
Mazars stated proof of reserves reports “do not provide either an assurance or an audit opinion on subject matter. Instead, they provide restricted results based on agreed-upon methods carried out on the subject matter at a certain moment in time.”
According to the individual informed on Mazars’ decision, the decision to cease work on proof of reserves reports was not motivated by particular financial concerns at any of the firms. The firm’s work was so restricted that it “didn’t examine very deeply” into the firms’ financial positions.
Binance and Mazars
More than $1 billion was removed from Binance earlier this week as concerns about the larger crypto market grew, coinciding with suspicions that Binance may be the subject of US investigations.
“Over the last week, Binance passed a stress test that should offer the community tremendous assurance that their assets are safe,” the exchange stated on Friday, adding it was able to execute recent withdrawals “without breaking pace”.
Binance has said that it has more over $60 billion in assets, which is adequate to cover withdrawals. However, the company’s filings do not disclose liabilities, making determining Binance’s financial health impossible. The exchange previously assured the Financial Times that all customer deposits were backed by matching assets and its “capital structure is debt free”.
Binance’s CEO Changpeng Zhao declined to disclose whether the exchange would be able to finance a possible $2.1 billion clawback from FTX in a recent interview with CNBC.
“We are fiscally sound,” Zhao remarked, adding that such matters will be handled by Binance’s attorneys.
On Friday, the exchange reiterated its intentions to provide consumers with evidence of reserves but did not commit to a date.
“We have gone out to many big corporations, including the Big Four, who are now hesitant to do a proof of reserve for a private crypto company,” the exchange said.
“We welcome further openness, and we are investigating how best to offer such facts in the future months,” Binance stated.
Some auditors, though, are sceptical of the crypto industry’s dedication to openness.
Following the demise of FTX, Paul MacIntosh, EY’s US financial services crypto co-leader, said on LinkedIn that proof of reserves reports do not review organisations’ internal controls, “which ultimately was the downfall of FTX,” he added.
“To achieve full openness and confidence in the business, a considerably larger step up is required,” he added, urging the industry to invest in stronger accounting systems, IT controls, and independent corporate governance.
Several audit companies have indicated they have raised some or all of their crypto-related customers to the rank of “high risk”, prompting more extensive work that would take longer and lead to higher fees.
Mazars was hired to check the reserves of major cryptocurrency exchanges, including Crypto.com and KuCoin. Mazars USA LLP also serves as Payward Inc.’s worldwide auditor. According to the source informed on the decision, the company wants to continue its work on thorough audits of financial accounts in the cryptocurrency industry.
A spokeswoman from KuCoin stated they were notified of Mazars’ decision and were “open to work[ing] with any prominent and credible audit[or]”.
A representative for Crypto.com said the exchange just completed proof of reserves in partnership with Mazars, adding it will “continue to cooperate with respected audit companies in 2023 and beyond”.
Binance earlier this week was struck by a spike in outflows, which CEO Changpeng Zhao dubbed “business as usual”.
On Monday, the crypto exchange also suspended withdrawals of a major stablecoin due to difficulties in the regular banking system.