In light of the FTX disaster, many large exchanges have been pressured to issue proof of reserve audits to demonstrate that all of the funds that they hold for their users are always fully backed 1:1.
Exchanges’ proof of reserve reports are scrutinised
Many of the largest exchanges have now submitted and publicised their proof of reserve reports, which have come under varying degrees of scrutiny as users attempt to ensure that their funds are safe and the exchanges are fully solvent.
Proof reserve reports are far from a panacea, given that they don’t all rely on cryptographic proofs and don’t display liabilities.
Moreover, exchanges have been known in the past to intentionally corrupt the validity of their reserve reports by moving funds around at the eleventh hour.
Binance admits they have comingled funds in the past
The scrutiny has been the heaviest for Binance, given that they are the largest exchange and have the most customer deposits to take care of. Thus far, they have fared well, and so has the value of their native token BNB, which plays host to the Binance Smart Chain ecosystem.
Hey @cz_binance .. are you okay ?
— Crypto ₿ ™️ (@Crypto_bn) January 25, 2023
Until now, it seemed that all was well at Binance, but it now appears that some of their tokens weren’t always backed.
They have now admitted that some of their tokens, particularly the tokens that were used for bridges and to back BUSD, were not always backed 1:1, but were instead backed with some user deposits.
In a public statement, they claimed that this wasn’t intentional, but solely the responsible of a historical lapse of operational soundness, and they are working to resolve the issue as soon as they possibly can. CZ has reiterated that the best thing that Binance can do to whether the storm of a turbulent bear market is just to continue to operate and function effectively, and to continue to process all their customers’ withdrawals without an issue, which they have so far been able to achieve.
Nevertheless, the fact that this has now been exposed has raised further questions about Binance’s proof of reserves report, given that it now seems that many of the funds previously believed to be customer funds were in fact supposed to be used to back assets such as Binance-pegged bitcoin (BTCB).
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