Binance's Proof-of-Reserves Audit Has Failed to Impress Investors – Is Another Exchange Collapse on the Cards

The Binance exchange released its proof-of-reserves recently to boost user trust in the exchange following the collapse of rival FTX. However, finance experts have called for more clarification, saying Binance needed to be more transparent.

Binance’s proof-of-reserves audit fails to impress investors

A report by the Wall Street Journal has poked holes into the proof-of-reserves audit recently shared by the Binance exchange. According to the WSJ, there was not enough information for investors that was shared in the audit.

The Chief Strategy Officer at Binance, Patrick Hillman, said that the move aimed at showing users that the exchange was in a strong financial position and was not operating like FTX in terms of managing customer funds.

The audit done by the auditing company Mazars showed that Binance had enough Bitcoin within its reserves to cover liabilities. According to Douglas Carmichael, an accounting professor from Baruch College in New York, the information released by the exchange was not adequate for investors.

“I can’t imagine it answers all the questions an investor would have about the sufficiency of collateralization. That’s the main thing it seems to speak to,” Carmichael said.

Industry experts have also said that the report failed to reveal information about the internal controls used by the exchange and how its system liquidates assets to cover margin loans. John Reed Stark, the former chief of Internet Enforcement at the SEC, has also said that the Mazars never expressed an opinion and it did not vouch for the figures, adding that it was a “red flag.”

Binance is joining the list of exchanges scrambling to distance themselves from the FTX fallout. Several exchanges have been releasing their proof-of-reserves, with KuCoin also recently saying that it would also use the services of Mazars to audit its proof-of-reserves.

The FTX demise resulted in a large outflow of funds from exchanges as crypto investors rushed to put their funds into self-custody wallets. The fallout has also attracted regulatory attention, with the former FTX CEO, Sam Bankman-Fried, expected to testify before the US Congress.

Zhao has also refuted claims that the exchange’s audit did not meet investors’ expectations. Zhao has responded to a tweet addressing the concerns saying that the report was poorly researched or just FUD targeting the exchange.

Binance CEO addresses abnormal trading activity

Besides the latest issue about proof-of-reserves, Binance was under scrutiny last week over the abnormal trading of some altcoins on the exchange. The exchange has said that the trading activity was caused by normal market behavior and not attributed to leaked API or compromised accounts, as earlier believed.

The Binance CEO, Changpeng Zhao, said that one user deposited funds into their trading account and started buying some altcoins, and others followed suit. Binance had halted withdrawals from some of the accounts but later lifted the ban after several complaints on social media.


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