Binance has admitted that it holds collateral for its BNB Smart Chain and BNB Beacon Chain versions of 94 crypto assets in the same wallet as customer funds amid uncertainty over its recent audit.
According to recently website listing, the asset balance in the Binance wallet «Binance 8» exceeds the number of digital assets it issued on BNB Smart Chain and BNB Beacon Chain, which means that part of the asset balance probably belongs to customers.
Binance Mixes $1.3 Billion of Customer Assets with B-tokens
Binance offers B-tokens for multiple crypto assets such as Bitcoin, Ether, USDC, and Tether, for use on other blockchains. According to Bloombergthe exchange must keep reserves of the original tokens with their B-Token equivalents in a separate customer wallet.
The exchange admitted that funds were commingled and said it will move the B-Tokens to a collateral asset wallet. Binance wallet 8 has approximately $1.3 billion in customer assets. Until the funds are separated, customers cannot be sure that Binance will honor 1:1 redemption requests.
The exchange’s reputation has come under scrutiny after reports surfaced that Binance moved nearly $350 million to Russian exchange Bitzlato. This latest association with money laundering has fueled speculation that Binance’s measures to combat it have been exaggerated.
Crypto Industry Learns The Importance Of Accountability The Hard Way
The discovery of the Binance error highlights the importance of customer due diligence when choosing a centralized exchange.
Former FTX CEO Sam Bankman-Fried is facing charges of conflating FTX customer funds with Alameda Research to bolster the hedge fund’s solvency. FTX customers deposited funds on FTX through the Alameda account with Silvergate. The Silvergate Exchange Network connects crypto investors’ bank accounts with exchanges.
Binance recently issued a Merkle Proof-of-Reserves report to attest to its collateral holdings of Bitcoin to honor customer withdrawals. He tried unsuccessfully to enlist one of the big four accounting firms, Deloitte, EY, PricewaterhouseCoopers(PwC), or KPMG for his audit.
Crypto and accounting professionals, including former Kraken CEO Jesse Powell, criticized the report, which was eventually released by non-big-four accounting firm Mazars. Proof of Reserves means little without insight into the exchange’s liabilities and internal financial controls, experts say.
Shortly after Binance’s «independent audit», Mazars shut down its proof-of-reserves operations, leaving more questions about customer assurance.
The Limits of Proof of Reserves Are Painfully Clear, Says PwC Report
PwC recently estimated whether Proof of Reserves reports add anything to customer confidence.
He concluded that since PoR reports show the exchange’s assets at a particular point in time, they do not provide any insight into the firm’s internal processes and controls and its history of handling customer assets. These insights are only available through SOC 1 or ISAE 3402 Type 2 reports from accredited auditors.
SOC 1 reports invite accounting firms to obtain assurance from company management that certain internal controls are in place at the firm. On the other hand, ISAE 3402 Type 2 reports show how internal controls have been managed over time.
The report emphasizes that only audited financial statements can alleviate fears of bankruptcy. It also highlights the need for professional accounting standards across the industry so that customers know what they are doing. Standards also ensure that reports from different exchanges are comparable.
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BeInCrypto has reached out to a company or individual involved in the matter for an official statement on the recent developments, but has yet to hear back.