Following FTX’s bankruptcy, CZ, the CEO of Binance, the biggest cryptocurrency exchange in the world by trading volume, proposed the “proof of reserve” concept, which calls for exchange platforms to reveal specifics about their reserves in order to reassure users of their financial stability.
Following the release of an independent report by Mazars on December 7, which was used as evidence that CZ’s platform would not take the same course as Sam Bankman-Fried’s, Binance then revealed some unaudited information about its reserves.
Mazars’ assessment on Binance’s Bitcoin reserves has some uncertainties.
However, this research does not simply offer consoling features, according to experts contacted by the Wall Street Journal. These have in fact caused Binance’s finances to raise what may be considered warning signs.
Mazars’ report came under fire for lacking details about the effectiveness of internal controls and how Binance’s systems liquidated assets as part of margin loan hedging.
Concerns regarding the lack of knowledge about Binance’s business structure were also raised by WSJ sources. Notably, Chief Strategy Officer of Binance Patrick Hillmann apparently couldn’t reveal Binance’s parent firm, claiming that the business has been through restructuring for over two years.
The verification of Binance’s reserves, according to experts the newspaper consulted, reveals that client money are 97% collateralized, excluding assets provided to users through loans or on-premises accounts. In reality, the WSJ calculations based on the data from the Mazars investigation show that the 1:1 ratio between reserves and customer assets that Binance had advised was not adhered to.
Depending on the computation technique, Binance guarantees 97% or 101% of customer money.
In contrast, Mazars notes that “we determined that Binance was secured at 101% with the inclusion of In-Scope Assets given to customers through the Margin Service offering and loans that are over-collateralized by Out-Of-Scope Assets.”
The Mazars report specifically included three figures, all of which were expressed in bitcoins, including the “customer liability balance report,” which had a balance of 597,602 bitcoins, and the “asset balance report,” which had a balance of 582,486 bitcoins, or 97.4% client asset coverage.
In the third figure, titled “Net Liability Balance (Excluding In-Scope Assets Loaned to Customers),” the liability amount was reduced from approximately 21,860 bitcoins to 575,742 bitcoins. It is feasible to confirm that the money of Binance clients are 101% insured by reserves thanks to the calculation made on this basis.
The discrepancy of 21,860 bitcoins, according to Binance spokesperson Jessica Jung, was “made up of BTC loans granted to clients through Binance’s lending program,” and the “collateral for these loans is not in BTC, but in other currencies.”
Be aware that one of the potential causes of the change may be because Mazars’ research purposefully avoided discussing any other cryptocurrencies and exclusively focused on bitcoin.
However, Binance announced that it will begin disclosing details about other cryptocurrencies and associated reserves that are accessible on its platform in the upcoming weeks.
Therefore, it will be necessary to wait a little longer before getting a full and accurate picture of the company’s financial stability.