Binance Outflows Hit $6 Billion As Mazars Shut Down Proof Of Reserves Business

Binance outflows accelerated to $6 billion in the first half of this week, while accounting firm Mazars halted its work on critical “Proof of Reserves” reporting, as the cryptocurrency exchange struggled to avoid a crisis of confidence.

Binance, which suffered $1 billion in one-day outflows on Tuesday, is struggling to reassure investors of its financial strength in the wake of the collapse of rival cryptocurrency exchange FTX.

The exchange said on Friday that it had experienced about $6 billion in net withdrawals between Monday and Wednesday.

Mazars has produced “Proof of Reserves” reports for Binance and other exchanges, including Crypto.com and KuCoin, as they scrambled to convince worried customers that they held enough assets to match all customer deposits.

However, the accounting firm said on Friday that it had “temporarily suspended its activity related to providing evidence of reserves reports to entities in the cryptocurrency sector due to concerns about the way the public perceives these reports.”

According to communications seen by the Financial Times, the level of media focus on the matter was also a factor in Mazars’ decision.

The willingness of auditors like Mazars to release proof of reserves reports has been key to calming jittery investors as cryptocurrency exchanges seek to prevent “run in the bank” scenarios of the kind that have sunk FTX, which is allegedly fraudulently stolen with clients’ assets leaving billions of dollars in shortfalls in the pipeline. Customer money.

Reporting is much more limited in scope than a traditional audit of a company’s accounts, including its liabilities, and is much less robust.

To prepare the Evidence of Reserves report, the auditor uses the procedures agreed upon with the company but does not guarantee whether these procedures are appropriate. Nor does the auditor give any confirmation or opinion about the figures in the report, as is the case in a full financial audit.

A person familiar with its decision said Mazars’ decision to stop working on Proof of Reserves reporting was not motivated by specific financial problems at any of the companies. The company’s work was so limited that it “didn’t look much” into the companies’ financial condition.

Some people at Mazars feared that despite the warnings in its reports, the company was “giving credence to a very volatile sector” and felt it was “naive” and “ridiculous” to take on the business, the person added.

Binance said the Mazars report was “further validation” that the exchange’s assets were equal to or greater than its liabilities to clients.

“Over the past week, Binance has passed a stress test that will give the community extraordinary relief that their funds are safe,” the exchange said on Friday, adding that it was able to fulfill recent withdrawals “without breaking the step.”

Binance said it has more than $60 billion in assets, which is enough to process withdrawals. The company’s disclosures do not include its liabilities, which makes it difficult to ascertain its financial health.

In a recent interview with CNBC, Binance CEO Changpeng Zhao declined to confirm whether the exchange would be able to fund a $2.1 billion redemption of FTX should the funds be requested as part of FTX’s bankruptcy proceedings.

“We are fine financially,” Zhao said, adding that he would leave such matters to Binance’s lawyers.

On Friday, Binance reaffirmed its plans to offer Proof of Reserves to its clients but did not commit to a timeline.

“We have reached out to several large companies, including the Big Four, who are currently unwilling to do a private crypto company proof of backup and we are still looking for a company that will do so,” the exchange said.

“We are embracing additional transparency and looking at how best to provide those details in the coming months,” Binance added.

However, some auditors question the crypto industry’s commitment to transparency.

After the collapse of FTX, Paul MacIntosh, co-head of US Financial Services cryptocurrency services at EY, said on LinkedIn that Proof of Reserves Reporting does not assess companies’ internal controls, “which was ultimately what was the collapse of FTX.”

“The transition to true transparency and trust in the industry requires a much larger step,” he said, calling on the industry to invest in better accounting systems, IT controls, and independent corporate governance.

Several audit firms have said they have upgraded some or all of their cryptocurrency-related clients to “high risk” status, resulting in more thorough work that will take longer and result in higher bills.

KuCoin said it was aware of Mazars’ decision and was “open to business.”[ing] With any leading and reputable audit[or]”.

Crypto.com said it “will continue to work with reputable audit firms in 2023 and beyond.”

KuCoin and Crypto.com both said they have provided customers with the ability to individually verify their holdings online.