In the aftermath of FTX’s failure last month, crypto exchanges are putting procedures to verify specific assets and obligations in place. These are intended to calm investors and consumers. However, insights into the companies’ finances are limited.
Earlier this week, Binance Holdings Ltd. and Crypto.com enlisted the services of external auditors to deliver a proof of reserves report. This is a growingly common attestation demonstrating the company’s solvency and adequate assets to cover its debts. Most crypto exchanges are private. That is why they don’t have to submit financial statements to the Securities and Exchange Commission.
The method attempts to provide investors confidence that their funds are secure. But the studies aren’t as meticulous as an audited financial report.
Binance announced hiring Mazars, an accounting firm, to verify its reserves independently. A spokesperson for Crypto.com said that the company would release an audited proof of reserves in the next weeks. Several exchanges, not all of which use an external accounting firm, have revealed their efforts to develop their proof of reserves systems in various ways.
Although “proof-Of-Reserves” Is Far from A Full Audit, It Serves as The First Step Toward Transparency in The Industry
Unlike annual financial statements from a public company, these auditors do not personally sign the attestations. Several corporations, like Kraken, publish reserve data with their consumers. Customers can independently confirm that assets secured by the exchange back their Kraken balances. A spokesperson for Kraken said that the firm intends to grow the number of assets covered in future attestations following two proofs of reserves over the previous year. Binance was unavailable for comment.
The American Institute of Certified Public Accountants defines criteria for auditing U.S. reserves. They have stated that certain crypto exchanges and their audit companies are verifying the reserves of the private companies.
The failure of FTX prevented users from accessing their money and resulted in billions of dollars being lent to an affiliate, Alameda Research. Nonetheless, FTX has made an uncommon move within the industry by having its finances thoroughly audited over the previous two years by Armanino LLP and Prager Metis CPAs LLC.
Several experts argued that such a third-party verification is a positive development in crypto exchange transparency. Although there are significant flaws. When snapshots are provided for delivery, investors typically do not know whether the platform has used client assets as collateral for loans or changed asset or liability calculations. The exchange also decides the performing frequency of these attestations. Third-party verification companies don’t have to give auditors information about assets or obligations not on the blockchain. Therefore, non-digital assets may remain unseen.
