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Tuesday, January 31, 2023

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Binance’s Alleged Crypto Audit Failed, Not Even Its Auditor Would Vouch For It

Authored by Mike Shedlock via MishTalk.com,

Binance says an audit shows proof of reserves of customer funds. But its auditor will not vouch for the reserves nor the methodology demanded by Binance…

“CZ” Image likeness courtesy of Coin Telegraph article below

Binance’s Proof of Reserves Statement

When we say Proof of Reserves, we are specifically referring to those assets that we hold in custody for users. This means that we are showing evidence and proof that Binance has funds that cover all of our users assets 1:1, as well as some reserves.

When a user deposits one Bitcoin, Binance’s reserves increase by at least one Bitcoin to ensure client funds are fully backed. It is important to note that this does not include Binance’s corporate holdings, which are kept on a completely separate ledger.

What this means in actual terms is that Binance holds all user assets 1:1 (as well as some reserves), we have zero debt in our capital structure and we have made sure that we have an emergency fund (SAFU fund) for extreme cases.

The above Proof of Reserves Claim is interesting. If you have assets 1:1 then you should not need an emergency fund for extreme cases. 

Audit by Whom?

The pseudo audit was by Mazars, a mid-tier global accounting firm according to the Wall Street Journal.

Its U.S. arm Mazars USA previously worked for former President Donald Trump’s company. Earlier this year Mazars USA said it would withdraw from its work for Mr. Trump’s company and could no longer stand by financial statements it had previously prepared.

Binance didn’t specify which of Mazar’s offices would be doing the verification of the reserves. A Mazars spokesman declined comment.

Mystery Finances

After the collapse of Crypto exchange FTX, Binance Is Trying to Calm Investors, but Its Finances Remain a Mystery

  • Mazars said it performed its work using “agreed-upon procedures” requested by Binance and that “we make no representation regarding the appropriateness” of the procedures. 

  • The report didn’t show total assets or total liabilities. Rather, its scope was limited only to bitcoin assets and bitcoin liabilities. Binance said it would begin releasing information about other crypto tokens in the coming weeks.

  • “It’s important for us to show users that the coffers are not bare, like at FTX,” said Binance’s chief strategy officer, Patrick Hillmann.

  • In an interview, Binance’s Mr. Hillmann said the Mazars letter covered all the bitcoin assets and bitcoin liabilities for the company’s Binance.com exchange—although the Mazars letter itself didn’t say this.

  • During the interview, Mr. Hillmann also at times referred to the work performed by Mazars as an “audit.” Asked about the appropriateness of Binance’s use of the term “audit” in the news release and elsewhere, Mr. Hillmann said: “We’re talking about a review of our assets in custody.” He also said: “I would just say we’re parroting others’ descriptions of this as an independent audit.”

  • Other basic information about Binance is lacking. Mr. Hillmann said he couldn’t provide the name of Binance’s ultimate parent company because Binance over the past year and a half has been in the process of a broad corporate reorganization. 

First Rule in Truth Telling

The first rule in telling the truth is “Don’t lie”. 

The second rule in truth telling is to not sound like you are hiding something. This is especially important when overall trust is in the gutter anyway.

This was not an independent audit. Mazars did not describe it that way and the company would not certify the methodology it used. Heck, neither Mazars nor Binance disclosed the precise methodology.

Who was Hillmann parroting in describing the procedure as a audit? Sadly no one asked, but my bet is Hillman was parroting himself or someone else at Binance. 

Nor would Binance disclose its parent company due to a 1.5 year reorganization. WTF?

Potential Kiting

Binance is receiving flak from the crypto community after moving $2.7 billion out of its proof-of-reserves wallet. The exchange responded, saying the move was to a TRX cold wallet.

The procedure was even more bizarre because it comes on the heels contradictory statements by Binance CEO Changpeng “CZ” Zhao.

“If an exchange have to move large amounts of crypto before or after they demonstrate their wallet addresses, it is a clear sign of problems. Stay away. Stay #SAFU.”

Binance CEO Explains 127K BTC Transfer

Please consider the Coin Telegraph Binance CEO Explains 127K BTC Transfer.

A few weeks ago, CZ declared that it’s bad news when exchanges move large amounts of crypto to prove their wallet address.

Cryptocurrency exchange Binance is moving large amounts of cryptocurrency as part of its proof-of-reserve (PoR) audits, according to its CEO, Changpeng “CZ” Zhao.

“The auditor requires us to send a specific amount to ourselves to show we control the wallet. And the rest goes to a change address, which is a new address. In this case, the input tx is big, and so is the change.”

Wait! What?

  1. CZ says it’s bad news when exchanges move large amounts of crypto to prove their wallet address.

  2. CZ Moves 127,000 Bitcoins

  3. CZ says the auditor demanded this but Mazars, the alleged auditor, does not call it an audit.

  4. Mazars would make no representation regarding the “appropriateness” of the procedures.

  5. Mazars said the  “agreed-upon procedures” were requested by Binance not by Mazars.

Not to worry

  • 1 BTC = 1 BTC

  • 127,000 BTC = 127,000 BTC (unless they have been counted multiple times)

Meanwhile please note Global Squabbles Erupt Around the World Over the Remaining Crypto Assets of FTX

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