BINANCECOIN tumbles after gloomy "proof of reserves" report

After the collapse of Crypto exchange FTX, Binance CEO urged other crypto exchanges to reveal details regarding their financial health (especially the level of reserves), which was supposed to restore investors’ confidence. For this purpose,  the world’s largest crypto exchange hired an audit company Mazars to prepare a “proof of reserve report” which is supposed to provide more details regarding the company's assets and liabilities, including some data about the exchange’s finances. The report was to show that Binance had sufficient funds to cover all of their user assets 1:1, as well as some reserves.

However, the publication of the report caused a storm on social media, as some experts believe that the audit was fake and evidence of reserves shows that client funds are 97% secured, excluding assets lent to users through loans or margin accounts. John Reed Stark, Former Chief at SEC Office of Internet Enforcement tweeted:

“Binance’s “proof of reserve” report doesn’t address effectiveness of internal financial controls, doesn’t express an opinion or assurance conclusion and doesn’t vouch for the numbers. I worked at SEC Enforcement for 18+ yrs. This is how I define a red flag.”

In the opinion of CEO of Kraken exchange Jesse Powell, Binance made an attempt to prove collateral rather than reserves in its report. In his opinion Binance may be insolvent and admits to the same with regard to actual assets owed versus tokens controlled. Powell pointed out that FTX exchange also showed solvency for some time thanks to the “collateral” accounting trick.

Other experts point out that Mazars report was not a full audit report and didn’t address the effectiveness of the company’s internal financial-reporting controls. Also Mazars admitted that the report was created based on “agreed-upon procedures” requested by Binance. The letter refers to a Binance entity called Binance Capital Management Co. Ltd., which is located in the British Virgin Islands and it is unclear whether clients funds are held by this entity or by Binance International or Binance US.

Report highlighted three figures, denominated in bitcoin, including the "Customer Liability Balance Report," with a balance of 597,602 bitcoins and the "Asset Balance Report," with a balance of 582,486 bitcoins, representing a client asset coverage of 97.4%. The third figure, the "Net liability balance (excluding In-Scope Assets lent to customers)," was adjusted downward by about 21,860 BTC to 575,742 bitcoins as it was loaned to customers and this measure confirms that customer funds are 101% backed by reserves.

Binance spokesperson Jessica Jung said that the difference of 21,860 bitcoins was "made up of BTC loans made to customers through the Binance loan program" and that "the collateral for said loans are not in BTC, but in other currencies."

One need to remember that Mazars report focused solely on bitcoin, and excluded other cryptocurrencies held by the company as collateral, which raised more concerns among investors. On the other hand, Binance pledged that it will release data regarding  other cryptocurrencies available on its platform and related reserves in the near future, which should provide more information regarding the company's real financial situation.

Last week BINANCECOIN was trading in between 50- and 200-hour moving averages, however Mazars report may act as catalyst for a potential break lower. Currently the price is testing 200 SMA (red line), and should break lower,  the downward move may deepen towards support at $254.25, which is marked with previous price reactions. On the other hand, initial reaction after publication of the report was rather muted, therefore there is a chance that buyers will regain control. In this case another upward impulse towards key resistance at $295.00 may be launched. This level coincides with 23.6% Fibonacci retracement of the downward wave launched in November 2021 and 50 SMA (green line) Source: xStation5