(Kitco News) - In the push to reassure crypto investors that their funds are safe, many centralized exchanges have implemented proof-of-reserve policies designed to show that they have the assets they claim to have, relying on auditors to confirm their holdings.
Some of those firms' plans have just run into a roadblock as two of the most prominent auditors in the industry have halted their crypto auditing services, leaving exchanges without an obvious alternative to confirm their books.
As first reported by Bloomberg, the French auditing firm Mazars Group – which was providing proof-of-reserve services to Binance – has suspended work for crypto firms, citing the fact that markets haven’t been reassured by the proof-of-reserves reports that it has published so far. The firm also highlighted the intense media scrutiny that it has been under since the FTX collapse.
According to a statement from a spokesperson for Binance, “Mazars has indicated that they will temporarily pause their work with all of their crypto clients globally.” A look at the official website for Mazars Groups confirms this development as the section labeled Mazars Veritas, which is dedicated to crypto audits, is now offline.
Mazars was also the auditor for several other prominent crypto exchanges including Crypto.com and KuCoin.
The situation was further complicated after Forbes revealed that Armanino – the auditing firm conducting proof-of-reserves for multiple platforms including FTX US, Kraken, Gate.io and the crypto lenders Ledn and Nexo – also indicated that it would be withdrawing from the space after eight years.
Armanino helped kick off the proof-of-reserves movement with the launch of its crypto holdings assurance portal in 2020, which allows exchange users to confirm the status of their digital assets.
The fact that Armanino was named in a class-action lawsuit filed last month alongside former FTX CEO Sam Bankman-Fried, Prager Matis, as well as FTX insiders Caroline Ellison and Gary Wang probably influenced the firm's choice to pull back from crypto auditing. According to Forbes, the company may have faced pressure from its more traditional clients due to the reputational risk it faced in light of the FTX scandal.
The plaintiffs in the case have claimed Armanino failed to meet its professional obligation to ensure FTX wasn’t engaged in malpractice. Investor Stephen Pierce, who had roughly $20,000 stored on the exchange when it went under, said Armanino was “wilfully blind” to FTX’s pattern of alleged racketeering.
FTX was able to funnel at least $1 billion in user funds to Alameda under the radar by utilizing a secret software backdoor that allowed for the movement of funds without alerting any third parties, such as auditors.
It remains to be seen whether one of the “Big Four” auditors or other reputable firms will step forward to fill the gap in crypto auditing left by the exit of Mazars and Armanino.
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| Binance users' Bitcoin accounts are 101% collateralized with BTC: Mazars |
CryptoQuant backs Binance’s proof of reserves
In an attempt to help clear up some of the FUD (fear, uncertainty, and doubt) surrounding Binance’s recent proof-of-reserves audit, blockchain analytics provider CryptoQuant has released a report analyzing the audit which confirms that Binance's reserves are accounted for.
Binance released its proof-of-reserves report earlier in December, but it was criticized as being an “agreed-upon procedure” and not a full audit and didn’t address the effectiveness of internal financial controls.
According to CryptoQuant, the liabilities reported by Binance are very close to its estimation of 99%, validating the findings in the audit report from Mazars.
“The report shows Binance’s BTC liabilities (customers deposits) are 97% collateralized by the exchange assets. Collateralization increases to 101% when the BTC lent to customers is accounted for,” CryptoQuant said.
The analytics firm added that on-chain data suggests that Binance’s Ether and stablecoin reserves are “not showing 'FTX-like' behavior at this point.”
Binance has been under increasing scrutiny since the report was released and in the wake of revelations about the lack of risk management at FTX. As a result of the FUD, Binance saw $5 billion in withdrawals on Dec. 13 as fears of another black swan begin to rise in the minds of crypto investors.
Changpeng Zhao, the CEO of Binance, responded to the spike in withdrawals by saying that the day's outflows weren’t even in the top five largest for the exchange, and reassured crypto investors and Binance staff that the exchange would survive the ongoing crypto winter.
