Binance Is Trying to Calm Investors, but Its Finances Remain a Mystery
The crypto exchange has begun releasing data to shore up investor confidence following the collapse of FTX.
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Binance Is Trying to Calm Investors, but Its Finances Remain a Mystery
Crypto exchange has begun releasing data to shore up confidence following collapse of FTX
Jonathan WeilUpdated Dec. 10, 2022 at 12:30 pm ET
Binance recently made a commitment to transparency, but it has a long way to go before it discloses enough meaningful information to give investors confidence in its future, accounting and financial specialists say.
āItās important for us to show users that the coffers are not bare, like at FTX,ā said Binanceās chief strategy officer, Patrick Hillmann.
Over the past month, Binance has publicized details about its crypto wallet addresses. It has hired an outside accounting firm to prepare a āproof of reserve reportā covering a portion of its assets and liabilities, including a small set of financial data. And it has promised more information will be forthcoming.
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What is your outlook for Binance? Join the conversation below.āWhen we say proof of reserves, we are specifically referring to those assets that we hold in custody for users,ā Binance says on its website. āThis means that we are showing evidence and proof that Binance has funds that cover all of our usersassets 1:1, as well as some reserves.ā
Investors still shouldnāt be satisfied with the report, said Douglas Carmichael, an accounting professor at Baruch College in New York and former chief auditor of the U.S. Public Company Accounting Oversight Board. āI canāt imagine it answers all the questions an investor would have about the sufficiency of collateralization,ā Mr. Carmichael said. āThatās the main thing it seems to speak to.ā The report said its purpose was to show customers that the assets covered in the report āare collateralized, exist on the blockchain(s) and are under the control of Binance.ā
Binance, which is private, isnāt required to produce audited financial statements, and it hasnāt released anything that would provide a comprehensive overview of its financial condition or liquidity. Nor has it indicated plans to do so.
The reserve report, released Wednesday, is a five-page letter from a partner at the South African affiliate of the global accounting firm Mazars. It contained three numbers. The letter wasnāt an audit report, didnāt address the effectiveness of the companyās internal financial-reporting controls, and said Mazars did ānot express an opinion or an assurance conclusion,ā meaning it wasnāt vouching for the numbers.
Mazars said it performed its work using āagreed-upon proceduresā requested by Binance and that āwe make no representation regarding the appropriatenessā of the procedures.
The letter was addressed to a Binance entity called Binance Capital Management Co. Ltd., which is based in the British Virgin Islands, though it wasnāt clear if the assets it counted were held by that unit. The report didnāt 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.
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In an interview, Binanceās Mr. Hillmann said the Mazars letter covered all the bitcoin assets and bitcoin liabilities for the companyās Binance.com exchangeāalthough the Mazars letter itself didnāt say this. Mr. Hillmann also said the Mazars letter didnāt cover any assets or liabilities at Binanceās U.S. operations. āThis is the first step in whatās going to be a much longer process,ā he said.
The Mazars partner who wrote the letter, Wiehann Olivier, declined to comment.
The few numbers in the report raised fresh questions about the ability of Binance to meet its financial obligations to customers.
On the last page of the Mazars letter was a brief section called āreport details,ā which consisted of the three numbers, each denominated in bitcoin. One number was labeled ācustomer liability report balanceā and showed a balance of 597,602 bitcoins. Another number, labeled āasset balance report,ā showed a balance of 582,486 bitcoins.
The upshot is that the total bitcoin liabilities cited in the Mazars letter were 3% greater than the bitcoin assets that were included within the scope of the report as of the reporting date, which was Nov. 22. In other words, Binance didnāt meet its 1:1 ratio of reserves to customer assets. In U.S. dollar terms, based on bitcoinās price at the time, the liabilities would have been about $9.68 billion, while the assets would have been $9.43 billion, or about $245 million smaller, according to calculations by The Wall Street Journal.
The third number painted a different picture. That number was labeled ānet liability balance (excluding in-scope assets lent to customers)ā and showed a liability figure that had been adjusted downward by about 21,860 bitcoins to 575,742 bitcoins. Binance noted that it lets customers borrow crypto assets through loans or margin accounts.
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On this adjusted basis, the Mazars report showed, the liabilities were 1% less than the assets, leading Mazars to state that āBinance was 101% collateralizedā when using that methodology. At the same time, Mazars also wrote that āBinance was 97% collateralizedā when using the larger liabilities number for the calculation.
Binance spokeswoman Jessica Jung said the difference of 21,860 bitcoins was āmade up of BTC loans made to customers through the Binance loan programā and that āthe collateral for said loans are not in BTC, but in other currencies.ā If Binance hadnāt provided these bitcoin loans, she said, then āwe would be 101% collateralized.ā The reasons for the adjustment appear to be tied to the scope of the Mazars report, which focused only on bitcoin so it didnāt count collateral in other currencies.
Binance announced its new āproof of reserves systemā in a Nov. 25 news release that referred to the numbers as āaudit results.ā Mr. Carmichael, the former PCAOB chief auditor, said: āIt is a gross misrepresentation to call this an audit.ā
During the interview, Mr. Hillmann also at times referred to the work performed by Mazars as an āaudit.ā Asked about the appropriateness of Binanceās use of the term āauditā in the news release and elsewhere, Mr. Hillmann said: āWeāre talking about a review of our assets in custody.ā He also said: āI would just say weāre parroting othersā descriptions of this as an independent audit.ā
Other basic information about Binance is lacking. Mr. Hillmann said he couldnāt provide the name of Binanceās ultimate parent company because Binance over the past year and a half has been in the process of a broad corporate reorganization. He confirmed that Binanceās founder and chief executive, Changpeng Zhao, is the majority owner of the Binance.com exchange and Binanceās U.S. operations.
Hal Schroeder, a former Financial Accounting Standards Board member and investment manager who teaches accounting at Rutgers University, said the Mazars report means little without any information about the quality of Binanceās internal controls, such as its systems for keeping accurate books and records.
āWe donāt know how good Binanceās systems are to liquidate assets to cover any margin loans,ā he said. āAnd we know in the U.S., even with all the good systems, banks have occasionally been caught off-guard. In light of what weāve seen in the Bahamas, I donāt want to conclude that all the systems are that good.ā He was referring to FTX, which had its headquarters in Nassau.
What would happen if Binance had a shortfall? The company in a Nov. 9 news release pointed to an āemergency insurance fundā it said it established in 2018, called the āsecure asset fund for users,ā or SAFU for short. The company said, āWeāve topped the SAFU balance back toā $1 billion.
Binance said the fund consisted of a combination of bitcoin and two tokens created by the companyāone called Binance USD and another called BNB. Binance hasnāt released financial statements for the fund showing its assets and liabilities, but it says on its website āthe value of the fund will fluctuate based on the market.ā
Write to Jonathan Weil at jonathan.weil@wsj.com
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