Binance’s Asia-Pacific chief Leon Foong said that accounting firms must develop standards to address crypto volatility before they can fully audit crypto firms.
Foong said that Binance will only conduct a full balance sheet audit of assets and liabilities once accounting firms still coming to terms with the crypto sector agree on standards related to crypto’s inherent volatility.
Binance Offers Limited Disclosures After FTX Collapse
Foong said that agreeing on these standards will “take a longer time” because accounting firms do not specialize in crypto. Consequently, any errors or omissions committed during hasty audits would tarnish firms’ reputations.
Binance came under scrutiny after competitor FTX allegedly catalyzed downfall by lending customer assets to sister hedge fund Alameda Research.
FTX filed for bankruptcy on Nov 11, 2022, after Binance CEO Changpeng Zhao’s tweet exposed its lack of liquidity as customers withdrew crypto en masse.
In the aftermath of the FTX collapse, Zhao promised greater transparency into Binance’s reserves. They soon released a Proof-of-Reserves report to verify its customer assets and liabilities.
The report showed that Binance’s holdings of BTC and wrapped BTC, roughly 16.5% of its client asset base, were collateralized 101%, without subtracting Bitcoin lent to users engaged in margin trading. Taking margin into account, Binance’s BTC and wrapped BTC were undercollateralized by 3%. Accounting firm Mazars conducted an agreed-upon procedure (AUP), meaning they could only verify findings within parameters predefined by Binance.
Binance promised to include its BNB token and self-branded BUSD stablecoin in future reports. It also said future reports would include zero-knowledge proofs to ensure margin positions are fully collateralized.
Binance also admitted that it mistakenly commingled customer funds with collateral for other tokens it issues in the same wallet. The term “commingled” worked its way into mainstream consciousness after FTX founder Sam Bankman-Fried was accused of mixing customer funds in Alameda’s bank account.
Foong confirmed that the exchange was busy separating the funds.
Request for Audit Time Could be a Stalling Tactic
Still, the company’s limited financial disclosure and ambiguity surrounding the location of its headquarters raises questions.
Zhao founded Binance in 2017 and built its client base from investors largely unconcerned with its corporate structure and governance. After Japan rebuked the company for illegally conducting trades in 2018, the exchange stopped revealing the location of its headquarters.
In response to Foong’s assertions, Binance skeptics point out that big-four firm Deloitte audits the financials of U.S. exchange Coinbase. Unlike Binance, Coinbase’s status as a publicly traded company in the U.S. compels it to disclose regular audited financial results.
By choosing to remain a private company, Binance denies its customers a similar level of disclosure. Additionally, no one knows whose accounting rules the exchange should follow if it has no local regulator. So while crypto is a relatively new area for accounting firms, Binance could be using an alleged lack of accounting standards to conceal its desire to reap massive profits while continuing to fly under regulators’ radar.
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