On Thursday, December 15th, Binance, the centralized cryptocurrency exchange, was the center of gravity as suspicious news regarding its proof of reserve operations circulated.
The exchange’s corporate structure, BTC liabilities, and internal transparency were among the top concerns. Recently the report published by an audit firm Mazars raised red flags about Binance’s transparency.
Moreover, the report has also raised concerns over investors’ trust in the exchange’s financial matters.
The report also concluded that Binance needed to provide more data about its internal operations. There has been clear uncertainty about how exchange liquidates assets over margin loans.
Another Concern about Binance’s Conduct was raised by a Newspaper
The lack of knowledge of Binance’s business structure is another red flag cited by a major newspaper. The newspaper pointed out that it has been two years since the biggest cryptocurrency exchange underwent corporate reorganization.
But there needs to be more information about the changes being made. Variations seen between aggregate Bitcoin debts, too, were highlighted by the newspaper.
A look at Binance’s proof of reserves points that the exchange was levered 97%. But this number did not include the amount of investment the platform has received in the form of loans or margin accounts.
This means that Binance, as of now, has failed to have a 1:1 ratio of reserves to consumer investment.
John Reed Stark, the former Chief of SEC’s Office of I.E said:
It is a serious issue that can have serious implications for Binance; the proof of reserve report does not address the platform’s internal financial controls and how transparently Binance manages the funds.
This uncertainty over the internal financial matter is a red flag for investors. It is also possible that investors will start withdrawing their money.
Following the demise of FTX, Binance’s CEO stated that the exchange is taking revolutionary steps to ensure the utmost transparency.
Last week the platform published its proof of reserves report. Readers must understand that through proof of funds, investors can validate their assets using the Merkle tree.
But that move should have been appreciated by the ex-regulators and market analysts. Moreover, multiple resources have concluded that this report contradicts Binance’s CEO’s statement.
The legitimacy of the proof of reserves report was questioned by many as it did not include the liabilities.
Experts added that the amount of investment the platform has received from the investors other than the services fees could not be assumed as the company’s assets.
That means Binance has yet to show the exact worth of assets it owns as of now. On the other hand, Mazars’ audit report showed Binance’s Bitcoin reserves.
The international audit firm shows that Binance currently manages 575,742.42 Bitcoin belonging to the investors. At the time report was published, the worth of Binance’s Bitcoin portfolio was around $9.7 billion.
It is clear that Binance, at this very moment, is managing the world’s biggest Bitcoin fund. Even the tiniest of concerns about the exchange’s operational transparency will raise regulators’ eyebrows.
The Report Included the Wide Range of Trading Options Offered by Binance
As far as the scope of the report is concerned, the report’s scope included the Bitcoin investors invested in spot trading accounts, derivatives, futures, loans, interest accounts, and wrapped Bitcoin.
Moreover, the audit report scrutinized BNB Chain and BNB smart Chain. Following all these concerns, the cryptocurrency market immediately suffered from another bearish round.
The investors withdrew funds worth billions of dollars. If these allegations are not addressed on time by the top leadership of Binance, then it is very much on the cards for investors to pull their money out of the platform to avoid losses.
Binance’s CEO, on the other hand, also said that the centralized cryptocurrency exchange would publish a detailed report with updated information about its internal operations and how the funds are being managed with utmost transparency.