Although Binance preaches customer-platform transparency, a new finding from its Proof of Reserves (PoR) report says there may be some loopholes in its internal finance management. According to a report on the Wall Street Journal website, Binance's PoR shows that it has a long way to go to convince investors about its financial stance.
Even after releasing details of its wallet addresses a few weeks ago, Binance, the largest crypto exchange platform, boasts that it'll make its PoR report public. And it did, as released by an independent auditing firm, Mazars, on December 7, 2022. You can find the PDF report on the Mazars website.
But this report raised some concerns about the company's finances. The PoR reveals that Binance is 97% collateralized. This means the company can't boast solvency, as it fails to fulfill a 1:1 reserve in customers' assets.
However, the report further reveals that Binance's current 97% collateral doesn't include Out-of-Scope assets pledged by customers. Including these will further increase collateral to 101%, as reported in the PoR.
But besides this, some more insightful criticisms reveal that the PoR has more potential issues.
According to a tweet by John Reed, a former SEC staff, one of the problems identified was that the report lacks details on Binance's internal financial control. Reed calls this a red flag and argues that the PoR "doesn't vouch for the numbers."
Jesse Powell, the CEO of Kraken Exchange, who appears to be a top critic of Binance, also tweeted that the Binance PoR system using the Merkle Tree has some salient discrepancies. He further argues that the PoR failed to detail a comparison of Binance assets and liabilities.
"This is just the easy stuff that says this OBVIOUSLY is not a traditional Proof of Reserves and should immediately have had actual journalists digging," says Powell.
However, in response to Powell's tweet, Binance affirms that Powell only categorically criticized an aspect of the report without considering trailing details.
Binance's response also further clarifies the PoR report by tweeting that "The 3% “gap” is due to BTC loaned to customers, through the margin or loan programs, who may have used tokens out of the report’s scope as collateral. If we take these into account (in other words, if we didn’t provide these BTC loans), we would be 101% collateralized." In other words, Binance claims that it has solvency if the report accounted for Out-of-Scope assets.
A Proof of Reserves is undoubtedly a trust-proof solution for crypto exchange transparency. But how transparent and detailed can it be to convince investors? Although some experts claim it doesn't contain enough financial details, the Binance PoR still reveals salient information about the firm's credibility.
While many exchange platforms are looking forward to releasing similar reports due to the FTX bankruptcy, we hope to see further improvement in the audit.