Binance Audit Raises Red Flags From Own Team

Consumers are hungry for reassurance as fear, uncertainty and doubt pollute the crypto landscape. At the same time, the crypto industry is equally eager to shore-up user confidence via a mix of stability, trust, and regulation surrounding internal reporting and controls, among other things.

This, as the widely reported collapse of cryptocurrency exchange FTX last month, continues to roil companies scrambling to provide transparency over the scope of their reserves to reassure users that they have access to enough liquidity and collateral to prevent any potential insolvency events.

In particular, industry leader Binance is out to show the world the difference between it and former rival FTX, whose demise it played a key part in. When FTX began to unravel in November, Changpeng Zhao (aka “CZ”), the founder and CEO of Binance, quickly offered to acquire FTX as part of a rescue deal.

However, a quick scan of the targeted company’s books revealed them to be lacking, which subsequently saw Binance pull out of the deal, leaving FTX with little recourse outside of declaring bankruptcy.

Even at its own reduced levels — Binance is reported to be nearly as large as the combined totals of the New York, London and Tokyo stock exchanges, and the company is looking to solidify its market position as the industry consolidates, casting light — and questions — on its bookkeeping and balance sheet.

Binance Balance Sheet Remains a Mystery

As reported by PYMNTS, some industry watchers felt Binance’s recent audit had not gone far enough on the transparency front.

The firm that undertook the exercise, Mazars, has stated they “make no statement regarding the appropriateness” of its work for the crypto exchange, adding that its report does not “express an opinion or an assurance conclusion.” The Mazars report only focused on Binance’s bitcoin holdings and liabilities. Still, it did not expand the scope of its audit to any of the many other cryptocurrencies held and traded on Binance.

“Had we performed additional procedures, other matters might have come to our attention that would have been reported,” the auditors wrote in their statement. It is hardly a reassuring conclusion for retail investors who trusted their money with the exchange or plan to.

Representatives for Binance and Mazars did not reply to PYMNTS request for comment.

As a private company, Binance is permitted to keep its financial statements, well, private. The company has yet to provide a wholly comprehensive overview of its financial condition and has not indicated that it plans to, outside of the five-page letter from Mazars and subsequent reports that are reportedly in the works around the exchange’s other crypto holdings.

Clearly, the stakes are huge, for both the company and the teetering industry in which it exists, as Bitcoin investors have moved over a billion dollars out of the market in November alone, marking the largest recorded outflow of the digital asset while underscoring the lack of consumer confidence.

As with FTX and most other exchanges, Binance employs a complex corporate structure made up of various affiliates licensed across far-reaching jurisdictions. It remains unclear even who Binance’s ultimate parent company is, although the enterprise’s founder — CZ — is listed as the majority owner of the exchange and Binance’s U.S. operations.

Reporting Controls

If nothing else, the complexity of Binance’s corporate structure makes it more difficult to get a clear picture of the company’s balance sheet, and that’s not even taking into account the constantly shifting values of its crypto assets.

The fact that Binance maintains recovery funds for both itself and the broader crypto industry has done little to soothe investor concerns.

There’s also the fact that a criminal investigation focused on Binance’s compliance with U.S. anti-money laundering (AML) laws has been ongoing since 2018.

War of the Giants

Elsewhere, a separate skirmish is ongoing that may define the future of crypto transactions. Stablecoins, like Tether (USDT), which are supposedly backed by fiat currencies on a 1-to-1 basis, help facilitate the bulk of crypto transactions. They are particularly helpful for making exchanges like Binance, Coinbase and FTX, run smoothly. Tether was a favorite of FTX, which reportedly accounted for nearly a third of all USDT trading volume.

Now, exchanges are taking sides. Coinbase is telling its customers to switch from Tether and other pegged assets to USDC stablecoins, which the exchange itself had a hand in founding, and is offering to do the swap free for users.

At the same time, Binance has started to automatically transfer its users own stablecoins to BUSD, a stablecoin developed by the company. That initiative also excludes Tether.

For now, it remains to be seen whether or not the ongoing stablecoin consolidation plays will make it easier for crypto exchanges to account for their finances.

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