Accounting firm Mazars is putting its crypto markets practice on hold.
The reversal comes just days after the firm faced pushback following its recent work for digital exchange Binance, a limited project that has now caused the international audit group to announce it is pausing all work with existing cryptocurrency clients and will not be taking on any new business.
“Mazars has indicated that they will temporarily pause their work with all of their crypto clients globally, [which include Crypto.com, KuCoin and Binance]” a Binance spokesman said in a statement delivered to Bloomberg on Friday ( Dec. 16). “Unfortunately, this means that we will not be able to work with Mazars for the moment.”
Auditors are well known to be risk averse, and the crypto markets are well known for their volatility.
Mazars gave an indication that the firm will issue a statement regarding its decision at a date to be determined.
Proof of Reserves
Earlier this month, Mazars’ South African affiliate published a five-page letter reporting on crypto exchange Binance’s finances after their auditors performed a “proof of reserve” report.
As reported by PYMNTS, some industry observers said the report only raised more red flags around the exchange’s transparency.
Media outlets in particular homed in on the slim scope of the performed work, and the fact that the findings only focused on Binance’s bitcoin-specific holdings and liabilities — even though its U.S. website says it handles trades on over 130 different cryptocurrencies. Separately, the report only provided information around the exchange’s holdings for a single day in November.
The letter’s own conclusions additionally confirmed that the Mazars audit team made, “no statement regarding the appropriateness” of its work and that the report did not, “express an opinion or an assurance conclusion.”
The letter, which was previously made public, is no longer viewable on the Mazars website.
Investors have since pulled about $3 billion from Binance’s digital asset platform.
Rival exchanges Crypto.com and KuCoin have similarly engaged Mazars for proof of reserve reports around their own holdings in the past.
The problem with proof of reserve reports is twofold. First, the general consensus is that they are not actually full audits; and second, crypto exchanges looking to reassure investors aren’t as transparent as they could be about this fact, often tending to promote the reports as though they are full audits.
“I would just say we’re parroting others’ descriptions of this as an independent audit,” The Wall Street Journal (WSJ) reported Binance’s Chief Strategy Officer Patrick Hillman as stating.
Both Hillman and Wiehann Olivier, the Mazars partner who wrote the letter, did not reply to PYMNTS’ request for comment.
Proof of Solvency
The public decision by Mazars represents a setback for an industry that’s been dealing with trust issues since its inception. Those issues have largely been exacerbated after the recent blink-of-an-eye collapse of crypto exchange FTX.
Proof of reserve reports serve as singular snapshots in time to confirm information provided by companies generally checks out. They are not comparable to having a full financial audit performed, nor do they prove that a company is, in fact, solvent.
For example, a proof of reserve report of FTX prior to its collapse may have speculatively shown that the exchange was actually in decent shape. However, that would only be because FTX’s reserves, made up in large part of its own internally minted FTT token, were massively and potentially fraudulently overvalued.
Touting incomplete practices as full audits will only serve to cause further marketplace confusion and undermine investor trust in the emergent cryptocurrency industry.
What’s in a Name
Cryptocurrency trading platforms, like Binance and at one point FTX, have leveraged the connotations of calling themselves “exchanges” to acquire a veneer of legitimacy through association with more traditional and trusted financial institutions (FIs), like the London Stock Exchange or NASDAQ.
But whereas the more staid landscape of the traditional financial industry is highly regulated, cryptocurrency exchanges often choose to exist within regulatory gray areas that allow them to operate with minimal oversight and few internal controls.
Depending on the jurisdiction they’re incorporated in, privately held crypto exchanges might not have to disclose information around how customer money is handled or provide any transparency into their bookkeeping.
In a CNBC interview Thursday (Dec. 15), Binance CEO Changpeng Zhao pointed to the crypto industry’s image as a way for bad actors to launder money and fund illicit activities as having kept the big-four auditors — Deloitte, Ernst & Young (EY), KPMG and PricewaterhouseCoopers (PwC) — at bay.
But Coinbase, the No. 2 crypto exchange by trading volume and a public company, regularly works with Deloitte’s Blockchain and Digital Assets team to prepare and disclose its financial statements. CoinShares, another public company, engages Grant Thornton for its annual audits.
The options are out there. It remains up to the privately-held exchanges to make a good faith effort if they truly want to shore up trust in the crypto industry.
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