Binance’s proof-of-reserves is just another black box
When the crypto market melted down, Binance appeared as both the main antagonist and market savior. The exchange started the run that felled its rival, FTX, and has since promised to help bail out struggling crypto firms.
Binance also led the way in offering to prove to its customers and the broader market that it has the assets it says it does, which is known as proof-of-reserves. Specifically, Binance claims that it performed a “Merkle tree” proof-of-reserves audit, which is a cryptographic way of collecting blockchain data and making it more easily accessible.
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At first glance, the breakdown of Binance’s assets and liabilities shows a $245 million hole. However, Binance’s auditor Mazar claims that this is because Binance holds collateral for lent out bitcoin that was out of the audit’s “scope.”
Former SEC regulator John Stark told Decrypt that there were several red flags with the audit, including using Mazar, instead of a big-four auditing firm, and being able to dictate the terms of the audit. Mazar also did not issue an official opinion on the effectiveness of the audit it performed.
The future of Binance’s finances are also in question as the US Department of Justice (DOJ) weighs charging the exchange with anti-money laundering and sanctions violations, according to a new report in Reuters.
The exchange’s lawyers are allegedly talking with the DOJ about the possibility of entering into plea deals for exchange executives, including CEO Changpeng Zhao, instead of fining the exchange. Binance didn’t immediately respond to a request for comment from Quartz.
How did we get here?
November 2: CoinDesk published a story revealing that a chunk of Alameda’s balance sheet was made up of FTX’s native exchange token FTT.
November 6: Binance sells its FTT tokens, pushing down the price of FTT and starting a run on FTX.
November 8: Binance offers to buy rival FTX.
November 9: Binance rescinds the buyout offer.
November 11: FTX files for Chapter 11 bankruptcy.
November 25: Binance says it will set up a $1 billion recovery fund for the industry.
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