Cryptocurrency-trading giant Binance said the accounting firm it used to verify its reserves has paused all work for crypto clients, hampering efforts to reassure customers that their money is safe.
Mazars, a midsize accounting firm that worked for former President
‘s company, on Friday withdrew from its website a report on reserves at Binance and other cryptocurrency-trading companies. The report for Binance, which wasn’t an audit, was published last week.
A spokesman for the accounting firm said it had made the move “due to concerns regarding the way these reports are understood by the public.”
A Binance spokesman said Mazars’s decision didn’t mean customers’ funds were at risk. “Our users want to know that their funds are secure and that our business is financially strong,” he said. “We embrace additional transparency and we are looking into how best to provide those details in the coming months.”
This week, Binance experienced a sharp increase in customer withdrawals, with roughly $6 billion in net outflows between Monday and Wednesday. The company didn’t specify what percentage this represented of total customer deposits. Earlier in the week, it said outflows were around $1.1 billion. The Binance spokesman said the company was able to process the withdrawals “without breaking stride.”
A series of failures involving crypto coins, exchanges and hedge funds, have rocked the world of digital currencies this year. As the world’s largest surviving player, Binance is seen as a barometer for the ability of the broader industry to navigate through the trouble.
The role accounting firms play in the cryptocurrency industry has gained fresh attention since the collapse of Binance rival FTX, which has been accused by federal prosecutors of misappropriating customer funds. Several platforms have turned to accounting firms to validate how they account for customer deposits.
Among them was Tether Holdings Ltd., which issues tether, the world’s largest stablecoin. On Friday, the accounting firm BDO, which recently signed off on reserves reports for Tether, said it is reconsidering its work for crypto companies. “In common with several other professional service firms, we are currently evaluating our approach to this sector and the work we undertake for our clients,” a spokesman for the BDO international network said. The spokesman declined to comment on any individual company.
The Tether attestation was undertaken by BDO Italia, the Italian member firm of BDO. A Tether spokesman said: “As the pre-eminent stablecoin and a pioneer for financial freedom, we remain confident in our relationship with BDO Italia, and we don’t expect any change of plans.”
Customers of crypto exchanges deposit traditional government-backed money in return for private digital currencies. They can also deposit digital currencies directly with the exchanges. Users trade or borrow against their digital coins on an exchange, which match customers and arrange transactions across multiple cryptocurrencies.
Some of the big crypto exchanges promise to back customer holdings one-to-one in segregated accounts, similar to how traditional brokerage accounts operate. But in crypto, there is limited oversight, regulation or auditing to assure customers that the money they deposited is where they think it is.
In addition to work for Binance, Mazars has conducted so-called proof-of-reserves reports for rival exchanges Crypto.com and KuCoin. “We will continue to engage with reputable audit firms in 2023 and beyond as we seek to increase transparency across the entire industry,” a spokesman for Crypto.com said.
A spokesman for KuCoin didn’t immediately respond to a request for comment.
Crypto companies have raced to provide proof-of-reserves reports to reassure investors in the wake of the collapse of FTX. Despite the limitations of such reports, which fall short of a full audit, they are often presented by the crypto companies as evidence their customers’ funds are protected.
Crypto.com this month said that providing audited proof-of-reserves from Mazars is “an important step…to increase transparency and begin the process of restoring trust.” On its website, KuCoin says that “Mazars, the leading international audit agency, independently verifies that all user assets correspond [one-to-one] to real reserves on the chain.”
Binance’s proof-of-reserves report consisted of a five-page letter from a partner at the South African affiliate of Mazars. It contained three numbers and didn’t express an opinion, meaning the auditor wasn’t vouching for the numbers.
Accounting firms face reputational risks if their signoffs, which may not even attest to the accuracy of the limited numbers being reported, are represented as an audit.
The FTX crash underscored the dangers to auditors of getting involved in what is largely an unregulated arena, industry watchers said. Two U.S. accounting firms signed off on the financial statements of FTX units.
The audits by Prager Metis CPAs LLC of FTX Trading Ltd. and Armanino LLP of the much smaller FTX US can’t be relied on, according to John J. Ray, the exchange’s new chief executive. Mr. Ray last month said he had “substantial concerns as to the information presented in these audited financial statements,” particularly in relation to FTX Trading Ltd.
Prager Metis and Armanino didn’t immediately respond to requests for comment. Both firms have previously said they stand behind their audit opinions.
Larger auditing firms have largely steered clear of crypto companies, though Deloitte serves as the auditor for
Coinbase Global Inc.,
one of the few publicly listed exchanges. Most proof-of-reserves and other attestation work for crypto companies has been done by small to medium-size accounting firms, according to industry insiders.
The Binance spokesman said the exchange has “reached out to multiple large firms, including the Big Four, who are currently unwilling to conduct a [proof of reserves] for a private crypto company and we are still looking for a firm who will do so.”
Write to Caitlin Ostroff at email@example.com and Jean Eaglesham at Jean.Eaglesham@wsj.com
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