Binance’s Limited-scope Reserve Audit and Ongoing Scrutiny by the US Department of Justice Raise Alarms

Rohail Saleem
Binance CZ Changpeng Zhao

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

Ever since Binance spurred the fall of the crypto exchange FTX, Changpeng Zhao (CZ) has positioned his firm as one of the cleanest shirts in the crypto sphere. However, a number of back-to-back developments are now calling into question this pristine persona that Binance has worked hard to project over the past few weeks.

For starters, Reuters is now reporting that the US Department of Justice (DoJ) is currently split on whether to formally level charges against Binance in a money laundering investigation that began in 2018, with some investigators now pushing for aggressively moving against key Binance executives, including its co-founder and CEO, CZ. Moreover, the firm’s lawyers have met with DoJ officials over the past few months to discuss a possible plea deal or an out-of-court settlement.

Meanwhile, we previously reported that Binance released the results of an audit of its Bitcoin reserves on the 25th of November. The audit supposedly proved that Binance maintains a 101 percent reserve ratio on Bitcoin. The exchange has also wowed to release audit results for reserves held in other cryptocurrencies and has empowered its customers to verify the backing of their assets via a Merkle Tree.

However, rumors continued to persist that Binance employed a fractional reserve system for some of its coin holdings. For instance, Chico Crypto identified a troubling development in a YouTube video a couple of weeks back. Binance allows anyone to check its proof of collateral. However, on the 10th of November, Binance’s holdings of Bitcoin Cash did not match the on-chain proof, as shown in this video (starting from the 06:10 mark). This led Chico Crypto to theorize that Binance might have accidentally listed its Bitcoin Cash liabilities instead of reserves.

Now, further details have compounded the murkiness around this issue. To wit, Binance had tasked Mazars to perform an “audit” of its Bitcoin reserves. However, as per the auditor’s press statement, the examination was quite narrow in its breadth, focusing only on “in-scope” assets and utilizing “agreed-upon procedures.”

"For the purpose of this engagement the customers’ spot, options, margin, futures, funding, loan and earn accounts for bitcoin (“BTC”) and wrapped bitcoin (“BBTC” and “BTCB”) held on the Bitcoin, Ethereum, BNB Chain and Binance Smart Chain blockchains will be defined as the In-Scope Assets."

Mazars went on to note:

"An agreed-upon procedures engagement is not an audit, review or other assurance engagement. An agreed-upon procedures engagement does not involve obtaining evidence for the purpose of the practitioner expressing an opinion or an assurance conclusion in any form."

This statement calls into question the utility of Binance’s self-proclaimed proof-of-reserves, given the absence of independent vetting by a third party.

Almost all of the crypto exchanges that have opted for a “third-party audit” have only chosen to perform a similar agreed-upon procedure. Consequently, such exchanges should immediately desist from using the word “audit” to describe such procedures.

Predictably, Binance’s CZ has taken exception to tweets that have called into question the firm’s audit results, terming such attempts as “poorly researched FUD or just poorly researched.”

Do you think Binance is standing on a loose footing here? Let us know your thoughts in the comments section below.

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