Binance admitted that it keeps collateral for its BNB Smart Chain and BNB Beacon Chain versions of 94 crypto assets in the same wallet as client funds amid uncertainty around its recent audit.
According to a recent list of websites, the asset balance of Binance’s “Binance 8” wallet exceeds the number of digital assets it has issued on BNB Smart Chain and BNB Beacon Chain, which means that part of the balance of the assets probably belongs to the customers.
Binance Mixes $1.3 Billion in Client Assets with B-Tokens
Binance issues B-Tokens of several crypto assets such as Bitcoin, Ether, USDC and Tether, for use on other blockchains. According to Bloomberg, the exchange must keep reserves of the original tokens represented by their B-Token equivalents in separate client wallets.
The exchange acknowledged the fund mix and said it would move the B-Tokens to a portfolio of collateral assets. The Binance 8 Wallet has approximately $1.3 billion in client assets. Until the funds are segregated, clients cannot be sure that Binance will honor 1:1 redemption requests.
The reputation of the exchange has come under scrutiny after reports surfaced that Binance moved nearly $350 million for Russian exchange Bitzlato. This latest association with money laundering has fueled speculation that Binance’s measures to combat it have been exaggerated.
The Crypto Industry Is Learning the Importance of Accountability the Hard Way
The discovery of the Binance error highlights the importance of customer due diligence when choosing a centralized exchange.
Former FTX CEO Sam Bankman-Fried is accused of commingling FTX client funds with Alameda Research to bolster the hedge fund’s creditworthiness. FTX clients deposited funds to FTX through Alameda’s account with Silvergate. The Silvergate Exchange Network connects crypto investors’ bank accounts with exchanges.
Binance recently released a Merkle Proof-of-Reserves report to attest to its Bitcoin collateral holdings needed to honor customer withdrawals. He had tried in vain to call on one of the big four accounting firms, Deloitte, EY, PricewaterhouseCoopers (PwC) or KPMG for his audit.
Crypto and accounting professionals, including former Kraken CEO Jesse Powell, criticized the report, which was eventually released by accounting firm Mazars, which is not a Big Four. According to experts, proof of reserves without insight into the exchange’s liabilities and internal financial controls means little.
Shortly after Binance’s “independent audit”, Mazars shut down its Proof of Reserves operations, leaving more questions about client assurance.
The limits of proof of reservations are painfully obvious, according to a PwC report
PwC recently assessed whether Proof of Reserves reports contribute significantly to client confidence.
He concluded that since the PoR reports reflect the exchange’s assets at a specific time, they provide no insight into the company’s internal processes and controls and its history of managing client assets. This information is only available through SOC 1 or ISAE 3402 Type 2 reports from reputable auditors.
SOC 1 reports ask accounting firms to attest to a company’s management’s assertions that the company has certain internal controls in place. On the other hand, ISAE 3402 Type 2 reports show how internal controls have been managed over time.
The report stresses that only audited financial statements can allay fears of impending bankruptcy. It also underscores the need for professional, industry-wide accounting standards so clients know what they’re getting into. The standards also ensure that reports from different exchanges are comparable.
To be[In]Crypto’s latest Bitcoin (BTC) analysis, click here.
BeInCrypto has reached out to a company or individual involved in the story for an official statement on recent developments, but has yet to receive a response.