Following the collapse of Sam Bankman-Fried’s FTX exchange, transparency and restoring confidence have become an industry priority. On December 7, the auditing firm Mazars released a report commissioned by Binance that appears to show that its bitcoin reserves are fully collateralized. But the document does not show the full picture.
Whilst some reporting has referred to the report as an audit, it is not one. The report is an AUP (Agreed Upon Procedure) which is neither a full audit, review nor an assurance engagement. According to the International Auditing and Assurance Standards Board, an assurance engagement is:
“…an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.”
The report itself explicitly states:
“This AUP engagement is not an assurance engagement. Accordingly, we do not express an opinion or an assurance conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported”
In short, by the professional standards of the industry, Mazars is not expressing broad confidence in the exchange’s finances. Mazars is simply checking against a pre-agreed set of criteria. Even if this were a report into all of Binance’s holdings – and not just BTC, BTCB, and BBTC – it would not be a financial bill of health. If this was a full audit, believe me, Binance would tell you. They haven’t. But they are probably pretty happy for you to believe that it is.
Another eyebrow-raising move is the decision to bundle BTC and Binance’s wrapped forms (BBTC and BTCB) together. The report states that they will “not differentiate” between them and they will be “assessed interchangeably”. For full confidence, these assets need their own separate reports. A knowledgeable source told BeInCrypto: “This report alone is not enough to give anyone comfort on the existence of the assets. Several other procedures would need to be performed and compiled into their own reports. If anyone were to suggest that this report was sufficient to prove the existence of all the assets, then I would take that as a yellow flag.”
It’s Only A Snapshot
The report is also only a snapshot of Binance’s BTC, BTCB, and BBTC at a specific time. In this case, at 23:59:59 UTC on the 22nd of November 2022. Theoretically, if Binance were trying to hide something, they could temporarily resolve their books before the report time. This does not mean Binance is doing anything illegal or manipulating its reserves. But it does mean we do not have the full picture.
On Twitter, CZ said Binance were planning on a full independent audit against their reserves. He also confirmed that other coins would be looked at in time. He did not state whether this would be a full audit or another AUP. “Liabilities are harder,” he said. “We don’t owe any loans to anyone, you can ask around.”
The question is: why isn’t Binance choosing the path of maximum transparency?
The report is unlikely to reverse the crisis of confidence in crypto exchanges, which has collapsed in recent weeks. According to research by Coinjournal, over 200,000 bitcoins have been withdrawn from exchanges, following the devastating FTX collapse. Beating the 128,000 bitcoins that were pulled from exchanges following Celsius’ insolvency in June.
Who Are Mazars?
Mazars is not one of the Big Four accounting firms that you might expect to audit a company of the scale and complexity as Binance. Together the Big Four audit over 88% of all large accelerated filers (or companies with a public float exceeding $700 million) registered with the SEC.
Interestingly, each of the Big Four has relatively similar-sized revenue. In 2021, Deloitte had an annual revenue of 50.3 billion USD, PwC had 45.14 billion, Ernst and Young stood at 40 billion USD, and KPMG took in 32.13 billion. However, Mazars has a fraction of that with only $2.1 billion and is considered a rising mid-tier firm. Mazars can still boast they have audited big clients, including AIG, British Steel, and the European arm of Goldman Sachs.
It is worth noting that Mazars is still significantly bigger and more experienced than Armanino ($520m) or Prager Metis ($1b) who audited the now-defunct FTX.
Few People Will Talk About Binance Publically
There are other potentially worrying signals. According to one tweet, seven of Binance’s executives have left the company in the past 60 days. If true, this points to a tumultuous environment within the world’s largest crypto exchange. However, BeInCrypto could not independently verify the veracity of these claims.
BeInCrypto approached multiple sources for comment on the Mazars report. But, despite people’s concerns about the document, none were prepared to talk on-the-record. Many would not even consider an extended off-the-record conversation after expressing their initial doubts. During the course of our reporting, we were given the impression that individuals were too scared and worried about the consequences of speaking out. One source referred to the company as the “Web3 mafia”, and another described the situation as “nuclear”. “People are scared of swiping at the king,” said another.
BeInCrypto has approached both Mazars and Binance for comment. At the time of publication, there has been no response.
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