Mazars Group, the accounting firm used by crypto giant Binance Holdings Ltd. and other big players in the industry to vouch for their assets held in reserve, has halted all work for crypto clients, dealing a blow to an industry seeking to shore up confidence in the wake of FTX's collapse.
The French firm suspended work for cryptocurrency firms because of indications that markets haven't been reassured by the "proof-of-reserves" reports it had published so far, according to an email from the firm seen by Bloomberg News. The firm was also concerned about intense media scrutiny, the email said.
"Mazars has indicated that they will temporarily pause their work with all of their crypto clients globally," a spokesperson for Binance said in a statement to Bloomberg News on Friday. "Unfortunately, this means that we will not be able to work with Mazars for the moment." A Mazars spokesperson said the firm will issue a statement in due course, declining to comment further.
The decision is a setback for an industry that's been trying to bolster its credibility with investors following the collapse of crypto exchange FTX, which has been accused of misusing customer funds. Auditors have faced similar backlash in recent weeks, given that FTX itself had engaged such services prior to its collapse that seemingly missed any warning signs. Cryptocurrencies fell after the report, with Bitcoin down as much as 2.7% in early Europe trading. BNB, the native token of Binance Smart Chain, fell as much as 4.5%.
Paris-based Mazars has been at the forefront of the crypto industry's rush to conduct proof-of-reserves reports for the likes of Binance and other large exchanges, including Crypto.com and Kucoin. A spokesperson for Crypto.com said it would "continue to engage with reputable audit firms in 2023," while Kucoin didn't immediately respond to a request for comment. A website hosting Mazars's reports for crypto clients is currently inactive.
Incomplete picture
Proof-of-reserves reports have faced scrutiny as they are not comparable to a full audit, in that they only show a firm's assets, not its liabilities, and instead serve as snapshots in time that say information provided by clients broadly checks out.
These disclosures have failed to calm investors, with many opting to pull their tokens off exchanges in fear of further implosions. Over the past two weeks, a net $554 million in stablecoins and more than $2 billion in Bitcoin and Ether have been withdrawn from centralized exchanges, according to data from CryptoQuant — though this is largely stabilized compared to the mass withdrawals seen when FTX collapsed in early November.
"It is unclear how far the solvency contagion could run, and proof of reserves is not the same as proof of solvency," said Simon Taylor, head of strategy and content at crypto startup Sardine. "The issue with FTX was that while it had reserves, those reserves were massively overvalued relative to their risk in a bank run scenario."
The Binance spokesperson said the exchange is exploring how it might provide additional transparency on its reserves in the coming months.
The cryptocurrency sector has long been plagued with a lack of established auditing standards, the consequences of which were laid bare in the recent unraveling of FTX. The exchange's co-founder and former CEO Sam Bankman-Fried was arrested this week in the Bahamas, and faces civil and criminal charges in the US for wire fraud among other allegations.
John J. Ray, FTX's new CEO, told U.S. lawmakers on Tuesday that the defunct exchange had used accounting software QuickBooks to try and keep track of its finances, a system he said was wholly unsuitable for a company of its size.
FTX had previously engaged auditing services by Armanino LLP and Prager Metis CPAs LLC. Ray said that FTX had yet to go through Armanino's recent audit of the firm's books, adding: "We do have to look through the books and records and look at the audits themselves and see how comprehensive they were to see if the audit would have picked up anything that we see. Certainly we're going to look at the related party disclosures that are in those audits, whether there's any footnotes or exceptions."
Afraid of crypto?
Many crypto companies have argued that they struggled to engage auditors at the top of the food chain for a deeper look at their books, due in part to the industry's tarnished image as a vector for money laundering and other fraudulent behavior. Several companies have pledged to release full audits in due course, including Binance.
"Many audit firms are scared to work with crypto businesses," said Binance CEO Changpeng "CZ" Zhao in a Thursday interview on CNBC. When asked why Binance hasn't engaged a Big Four auditor — a moniker that refers to the largest accountancy companies PwC, Deloitte, EY and KPMG — Zhao added that such firms "don't even know how to audit crypto exchanges."
All four firms either declined or did not respond to requests by Bloomberg News to be interviewed.
Critics have pointed out that, while it may be challenging, it is not impossible for cryptocurrency companies to secure full audits. Coinbase, the U.S.-based publicly listed exchange, works with Deloitte for its annual audited statements.
"Over the last several years, we've seen more auditors build out their practice to cater to the unique challenges crypto companies face," said Maya Zehavi, a cryptocurrency angel investor. "It's a shame that obfuscated business norms that have become the standard for offshore exchanges will ruin access for legit crypto companies to get professional auditing."
Others have bemoaned an historic lack of expertise among top-tier auditors about how to analyze blockchain transactions and cryptoassets. Jean-Marie Mognetti, CEO of crypto asset management firm CoinShares, described several difficulties in getting a 2017 audit of its books by Deloitte over the line.
"It has always been difficult for them to play catch-up, because the people they have in-house don't really have the skills," Mognetti said in an interview. The process required a significant amount of training from CoinShares to teach Deloitte's auditors how to properly vet a crypto firm's books, he said, with the report then passed around to numerous partners overseas out of concern for the firm's reputation.
The following year, the team at Deloitte in charge of CoinShares as a client was turned over with new staff, meaning that CoinShares would need to start the training all over again, Mognetti said. CoinShares now works with Grant Thornton for its annual audit. A spokesperson for Deloitte declined to comment on Mognetti's statement.
Not sufficient
Ultimately, a consensus remains that proof-of-reserves reports are insufficient, even as a stepping stone for crypto companies eager to show their financial health.
"If, for example, there are different parties that have claims on these assets, that might not necessarily come out through a proof-of-reserves report, and similarly that wouldn't look at the internal control environment of these companies," said Esther Mallowah, head of tech policy at the ICAEW, a global professional body for chartered accountants. "It's a start, and it's better than nothing, but I don't think they provide the complete picture that investors need."
A report published Thursday by industry group UK Finance included suggestions that as a first step, crypto firms should be required to meet local accounting and audit standards laid out under so-called client assets rules, which were strengthened after the 2008 financial crisis. "This would provide a framework for identification of client assets, segregation and safeguarding, reconciliation, and registration and legal title," the group said.
— With assistance from Anna Irrera, Sidhartha Shukla and Philip Lagerkranser
