The cryptocurrency market is certainly not going through the best moment. On the one hand, there is the complex macroeconomic environment, which has led throughout 2022 to the devaluation of the main world indices, with special emphasis on technology stocks, in addition to practically any other market and investment asset. Besides, expansionary monetary policies following the pandemic have been halted, and currently the fiscal measures that aim to control inflation paint an uncertain outlook for the future of the markets in the short and medium term. And if that was not enough, to this has been added the falls of some great titans of the cryptocurrency industryas was the Terra project last May or the recent bankruptcy of exchange FTX, the second largest in the world by trading volume. To this, in recent days doubts have been added regarding the operation and management of funds of the main agent in the industry, the exchange Binance.
As a recap, last week Binance found itself in the spotlight of many users who fear that the centralized exchange might be following in the footsteps of FTX, due to solvency problems. Given this, the questions are obvious. First of all, where does the concern come from? Could we be at the gates of an FTX 2.0? Does it pose any risk to the cryptocurrency market?
First of all, it should be noted that the fall of FTX in November took place because, despite being a exchange of cryptocurrencies, it actually functioned more like a bank. That is to say, it managed client funds as liquidity to invest with them in various financial strategies, when it is assumed that this might not be done; in fact, nowhere was it officially stated that this was the case, and nowhere had clients been told that their capital was being used by the company.
The main problem is that, when the house of cards collapsed, the assets that FTX actually had at its disposal did not even reach 10% of the capital deposited by clients, heading into a multi-billion dollar financial hole. In the followingmath of the FTX bankruptcy, many exchanges of cryptocurrencies were quick to point out that they were not carrying out this type of questionable financial accounting practices, trying to endorse it with different measures in favor of transparency regarding the fund reserves they had. His goal was to do this committing to show his so-called “proof of reservations”.
in the center of drama de Binance last week there is a half-hearted attempt to do just this, present in a transparent and traceable way a proof of reserves showing the available funds. To do this, Binance published a proof of reserves already at the end of last november. In addition, last week it included a 5-page audit of its reserves by financial auditing firm Mazars, in accordance with some “agreed-up procedures”.
The doubts presented by the Binance audit
Although it is true that the audit presented clears up some aspects, it also leaves many issues open or to be detailed. First, the brief document and analysis only covers Bitcoin reservesand also in just a few wallets selected by Binance itself.
Within these strictly defined parameters, the Mazars report concluded with three findings regarding numbers. First, the data confirms that at the time of the audit, Binance has a total of 582,486 BTC assets and 597,602 BTC customer liabilities. This means that Binance’s Bitcoin reserves do not support its obligations 100%, with a deficit of 15,116 BTC (2.5%). However, it should be noted that Binance users can also borrow BTC from the exchange as part of the tools available to operate. When these 21,860 BTC loans are factored in, your liabilities are reduced to 575,742 BTC, which indicates that Binance is overcollateralized with 15,117 BTC and therefore its capital reserves do cover its obligations. As a result, the audit concludes that customers’ bitcoin funds are safe.
But what raises questions regarding the Mazars audit is that it was not an audit in the traditional sense as it occurred. Why was only Bitcoin analyzed? What regarding loans that Binance may have offered in other coins like ETH, USDT, or BNB? Those funds are omitted from the “liability” side of Binance’s balance sheet, so a full picture of the balance sheet is not shown.
In any case, the Mazars report does do one thing right, and that is be transparent regarding some of Binance’s responsibilities. This already represents a significant difference with respect to the proofs of reserves presented by other exchanges, and in this case, by also showing the liabilities and being presented by an agent external to the company, such as an auditor, it is closer to a solvency test. But because it neglects all non-BTC assets, unfortunately it falls short in demonstrating a full picture of Binance’s financial health.
Binance has already advanced that it would disclose more information regarding its other assets in the near future. But for now, audit only proves a portion of Binance’s reserves, instead of a comprehensive vision. All this uproar has led to Mazars announcing on December 16 that it would stop its auditing services for Binance, in addition to its other crypto industry clients, including exchanges Kucoin and Crypto.com. Other auditors such as Armanino have joined this measure, so there seems to have been some pressure to separate the auditors from the crypto industry.
Despite the headwind, Binance remains strong
Following the various posts on Binance’s audit and reservations, the exchange It has seen massive outflows of funds in the past week worth billions, reaching as much as $4.27 billion withdrawn on December 14 alone. Nevertheless, Binance shows absolute normality in its communications and operationsand just a few days ago it announced that it had reached an agreement of 1,000 million dollars to acquire the assets of the Voyager company, critically affected by the events in the sector in recent months.
All these indicators show that while Binance experienced a large exodus of funds, the situation is certainly not as precarious as some sources suggest. In fact, the withdrawals of funds are insignificant in percentage terms with respect to those suffered in its day by FTX, and, in fact, some data indicates that funds are returning to the exchange.
Despite the apparent availability of funds and data addressing the limited audit, it should be remembered that Binance is not a public company and is therefore not required to submit audited financial statements and It seems that there will continue to be some opacity over their accounts. Therefore, it should be remembered that a centralized exchange, such as Binance, it will never be as secure as keeping cryptocurrencies in a wallet.
