Binance’s Proof of Reserve Reveals Red Flags About its Finance

In its attempt to boost users’ confidence and provide transparency, cryptocurrency exchange Binance contracted leading accounting firm Mazars to ascertain that Binance assets are properly collateralized. This exercise has exposed several red flags concerning the exchange’s finance

According to an accounting and financial guru consulted by The Wall Street Journal, the audit done by Mazars did not entirely reveal transparency but revealed some flaws covered by the exchange. 

While speaking about the development, John Reed Stark the former chief of the Securities Exchange Commission’s Office of Internet Enforcement, in a tweet revealed one of the red flags posed by the exchange. John said Binance’s proof of reserves reports didn’t in any way address the effectiveness of the internal financial controls. Also, the report didn’t exactly quantify the platform’s assets and liabilities.

Most importantly, Mazars did not ensure investors’ confidence with regard to the exchange finances as there was little information revealed about the exchange’s methods of liquidating assets to sort out margin loans. Following this, the newspaper source also revealed the inability of the exchange to release concrete information about its corporate structure.

Meanwhile, last month the exchange released its proof of reserve system which uses the Merkle tree to validate a user’s holding.

However, Kraken’s CEO, Jesse Powell criticized the exchange for providing wallet addresses thereby failing to incorporate liabilities. Jesse in his opinion said the proof-of-reserve audit should contain the total amount of client liabilities as well as signatures indicating the custodian’s authority over the wallets.

Exchanges Reveal Proof-of-Reserve to Instill Users’ Confidence

In view of recent happenings, especially the collapse of FTX, proof-of-reserves have become the major trend in the crypto space. Most exchanges have resolved in showing their users the financial resources available to support their assets traded.

The renowned crypto exchange platform Kraken last month provided its proof-of-reserves to its customers via a link to a page although its total reserves were hidden from its users. 

Equally, KuCoin earlier in the month passed an audit of its custodial assets and liabilities to ensure users feel very safe. It remains to be seen what will become of the crypto ecosystem as FTX’s collapse has taken a turn on the industry.