Binance outflows hit $6B as Mazars halts ‘proof of reserves’ work | Hacker News Reader

Binance outflows hit $6B as Mazars halts ‘proof of reserves’ work

ft.com

412 pointsthm482 comments

"Binance has said it holds more than $60bn in assets, enough to honour withdrawals. The company’s disclosures do not include its liabilities, which makes it difficult to ascertain its financial health."

Possibilities:

1) They're insolvent. Liabilities exceed assets. (Like FTX.)

2) Their accounting is so screwed up they can't produce a balance sheet. (Like FTX).

3) They have a large number of interconnected corporate entities and nobody has the big picture. (Like FTX).

4) They have enough assets on the books to look solvent, but many of those assets are overvalued or internal transactions. (Like FTX).

OK, crypto people. Full GAPP audit or we all assume you're broke.

If you have assets in an un-audited exchange, get them out now.

> Full GAAP audit or we all assume you're broke.

FTX passed a GAAP audit and was still broke. Safer just to take custody of your coins while your still can.

2021-08-27: "Both FTX and FTX.US have completed requirements to pass the US Generally Accepted Accounting Principles (GAAP) audit" https://blockworks.co/news/ftx-joins-coinbase-kraken-with-us...

I don't think FTX actually applied or passed GAAP. From the filings it is clear they couldn't have. They barely have records of their liabilities, and definitely not of their assets. I am not even touching co-mingling of different classes of accounts. The statement you are referencing is another lie to customers and investors.

I know they employed a "Decentraland" sketchy "auditor." But that's it. It is like employing me to do your haircut -- you are 100% screwed and not getting a haircut, but some hair will be cut.

Binance just unverified everyone yet again, it's safe to say they're trying to prevent people from pulling out.

> FTX passed a GAAP audit and was still broke

Not a finance pro, but as I understand it:

A GAAP audit is not a test for whether or not you are broke.

It is also not a test of whether your financials are honest (except in a very limited sense).

It is a test of whether or not your various pieces of financial information are internally consistent given a standard set of definitions of how pieces should relate, and therefore that summary documents like the balance sheet are accurate, assuming the accuracy of underlying records.

While it is an important quality of work check for internal accounting, if you wouldn’t trust a company without a GAAP audit, there are very few scenarios where having the audit should significantly move the needle of trust.

> FTX passed a GAAP audit

Do we have a source mentioning the auditor?

You can have an audit on Monday and a founder transfer all the assets to an affiliate on Tuesday so timing risk makes this stuff irrelevant.

Maybe time to make crypto decentralized?

FTX had many parts, did that audit actually cover all of them or was that just for a subset of companies?

How did gaap value their magic coins?

What's the value of coins if with Binance down, most certainly Bitcoin will be down too as it was propped up with fake printed USDT, which will collapse as well, and with them evaporating, every other coin will follow? If Binance falls, all crypto will vanish. And good riddance.

> If you have assets in an un-audited exchange, get them out now.

This is Mexican standoff. The only "value" crypto assets have comes from exchanges that will trade them for fiat. If crypto holders stop trusting exchanges and pull all their assets that will cause the exchanges to fail and those assets will then be worth nothing. On the other side if exchanges try to earn the trust of holders by becoming "fully transparent" it will be revealed that there's not nearly enough fiat reserves to support the current valuations. (It does no good for Binance to prove they have a reserve of $18B of Tether to back the $18BN BUSD marketcap if turns out Tether is actually mostly backed by Bitcoin that only has a USD value because it can be traded for BUSD...)

True, but the first out that manage to sell them for fiat through some other way even at a substantial discount are going to be off substantially better than the last.

> If crypto holders stop trusting exchanges and pull all their assets that will cause the exchanges to fail and those assets will then be worth nothing.

maybe you havent heard but it's possible to send "crypto" (lol) directly from person to person

All of the above and:

5) Binance does significant money laundering for Iran and Russia, so any complete picture of their balance sheet would invite sanctions and international retribution.

https://www.reuters.com/business/finance/exclusive-crypto-ex...

This is interesting. Do you have any good links for the Russian connection!

For me, it's the ruthlessness of dumping all the FTT tokens they had to crash FTX to buy it (which went pear shape once they saw FTX's books) makes me think that they're probably not in a strong of a position as they say they are. We see this all the time. Exchanges saying they're strong and assets are safe until suddenly a few hours later they're not.

There are some possibilities. Binance could have just done so knowing that FTX's demise would concentrate their own market share. They also could have (sensibly) not wanted toxic assets on their books - FTX's book value was/is deeply negative so holding tokens correlated to a basically insolvent entity and/or buying them is just a bad trade that hurts their financial position.

It's ruthless but I don't think it says anything about their finances. Their play made sense whether they were strong or weak.

Is there some other action you can recommend for someone holding FTT tokens other than selling them immediately for the best price you can get?

They have constant income. Their mostly daily gains are coming from liquidating people in futures not matter market crashes or not.

Exactly, and one more: they may have been shuttling money around from account to account to look solvent but aren't.

Someone mentioned the early-banking era wheelbarrow of gold travelling around from bank to bank just in time to make the audit.

Isn't this exactly what Tether is accused of doing?

It’s “GAAP.” Generally Accepted Accounting Principles.

Generally Accepted Ponzi Principles

Of course. My bad.

I don't ever entrust any exchange with my crypto. That being said, this episode will be a far better test of Binance's solvency than any audit. The proof is in the pudding. Either they have the reserves to cover the withdrawals or they go belly up.

Any investor who believes any exchange has the assets they say it does deserves to lose their money.

It takes a special kind of ignorant blindness not to see that "reserves" are all based on fake, wash-trade inflated cryptocurrency valuation, and it's all a house of cards. Like FTX. Like all of them.

If you have assets in any* exchange, get them out now. Using regulated exchanges defeats the whole point. Fiat transaction fees are lower / nonexistent compared to CC ones so if you want to gamble on the relative value of something just stick to the stock market, and if you want to send currency on something that is regulated by a government anyways, might as well use Fiat.

The only thing regulated exchanges do is profit by losing you value via fees and then some more via taxes while carrying risks of being rugged or having "your" assets frozen. Just... why?

Exchanges provide a lot of added value, at least ones that aren't run by criminals or idiots.

Wallet keys stored on a phone or laptop, or even a hardware wallet, are generally less safe than the reserve wallets of a major exchange. I can lose the device, it can break or be stolen, etc.

Writing down recovery phrases and stashing them in the sock drawer doesn't feel very safe either.

And if something happens to me, I feel quite sure that my family will get any crypto I have in my Coinbase account, but much less sure that they'll be able to recover any non-custodial wallets.

It is telling that a firm like Jump Crypto has pulled hundreds of millions of dollars from Binance. If smart money is getting out, you might want to get out before the doors close: https://www.coindesk.com/markets/2022/12/13/binance-withdraw...

5) they print more tether when needed to handle withdrawals. But such massive tether prints can cause market issues.

Isn’t Tether controlled by bitfinex?

They also have the potentially very dangerous BNB. If some of their assets are in that company coin to smooth the waves then they could have a crash very similar to FTT

Is Coinbase audited?

Coinbase is going out of business the old fashioned way: losing a lot of money.

Whataboutists have arrived to protect China-owned Binance

is any exchange audited?

Coinbase is public and audited by a big 4 accountant every year (quarter?)

Audited? Isn't that what TradFi and Fiat Currency companies do?

Ewww, gross!

> 3) They have a large number of interconnected corporate entities and nobody has the big picture. (Like FTX).

This isn't true, is it? FTX had <5 corporate entities, right?

The issue was more with (1) and (2).

FTX had more than 100 entities. You can find the org chart in the bankruptcy filing or here:

https://qz.com/ftx-bankruptcy-filing-reveals-a-remarkably-co...

5) Like tether they are solvent despite all the people screaming for an audit

> Like tether they are solvent

Right, but tether isn’t solvent either

If you believe that you must be using all that corporate paper to smoke something.

That doesn't explain why they just cancelled their audit.

Getting downvoted for suggesting a company might be solvent.

Even an audited exchange like Coinbase that is trying to do everything right is still self reporting loses like $430M in quarter 1 of 2022 just by operating their business correctly.

Not your keys, not your crypto. Anyone storing their crypto on any exchange has this risk.

For many users of these exchanges their entire interest in crypto is speculation/trading, which requires them to store their crypto with an exchange so they can trade it because the costs associated with transferring to and from the exchange repeatedly would be prohibitive.

You are so close

All current crypto"currencies" which use transaction fees (which is practically all of them) are negative sum games and thus are scams.

This is so simple and people waste billions on not understanding it.

Money in general has transaction costs - even cash decays every time it changes hands. Is it all a negative sum game? It seems that in order to make that claim, you need to make some comparison between the value produced and the costs incurred. IMO, crypto is pretty scammy but there is some value (note that crypto is most popular in countries with unstable economies and corrupt governments). A crypto that’s optimized for lower transaction fees could be net positive.

Money in general are traded for productive goods and services, not other kinds of money. That's why it's not negative sum. If you had a bunch of people trading between USD and GBP amd EUR and doing nothing else, that would be negative sum and look an awful like what people do with cryptocurrency.

> cash decays every time it changes hands. Is it all a negative sum game

Currency trading is negative sum. (Zero sum less friction.) So are most derivatives.

One must encapsulate broader effects to find a net gain. Incorporating crypto’s benefit to the poor is such an attempt.

> note that crypto is most popular in countries with unstable economies and corrupt governments

"Possibly marginally less bad than an unstable fiat currency propped up by a corrupt regime" is not high praise.

If they’re negative sum then so are traditional payment processors that charge transaction fees, which is not an argument I’d be prepared to make. Unless you see something fundamentally different about the nature of those fees in crypto?

It's because you can transfer money without paying fees, those fees are for convenience. You can not transfer crypto without paying fees.

Also, notably most banks will do SEPA transfers for free. There's nothing inherent in money which would make the action of moving it force giving a fraction of it to some other entity.

Indeed, the only disagreement I am aware of is whether the scam being run by multiple entities ("miners") is a significant difference to a Ponzi and so it's a new kind of scam (suggested name: "Nakamoto scheme") or the difference is aking to an LCD vs CRT TV, nothing significant and it's just a Ponzi. But the fact it is a scam is an indisputable and rather simple mathematical fact.

To quote Preston Byrne who coined the phrase Nakamoto scheme:

> The Nakamoto Scheme is an automated hybrid of a Ponzi scheme and a pyramid scheme which has, from the perspective of operating a criminal enterprise, the strengths of both and (currently) the weaknesses of neither.

You know ACH transfers, have transaction fees right? They are just hidden to the public.

answered that already https://news.ycombinator.com/item?id=34031846

That assumes that at the end of the game your bitcoins etc do not have a market value which does not accord with reality. For better or worse people value them like collectibles.

Email does not have transaction fees, so there is enormous spam. Paying for a service means the service has value.

Junk mail via the postal service has entered the conversation…

You hit the nail on the head here. That's the main crux of the matter.

If they are in just for speculating/trading, they could trade ETFs denominated in BTC or ETH on regulated banks.

Why not go all the way and have cash-settled futures that track random numbers?

> Why not go all the way and have cash-settled futures that track random numbers?

Ha, this is becoming my go-to definition of the lottery.

Regulated banks don't let you trade ETFs of various shitcoins.

With high leverage, too.

Those don’t track well.

AMMs have solved this. The competition is amongst AMMs solving this better than they currently do. The need of custodial exchanges for trading is done. They can be just fiat onramps now as long as liquidity improves on AMMs.

I don't know any pro traders who use Binance but there might be some. Binance is popular with crypto kiddies, small time traders and they're also very strong in less developed countries that aren't served by any other major exchanges. People buying cryptocurrencies to escape high inflation or political risk. Basically a lot of newbies who aren't too aware that Binance is shady despite its size. But it's a diverse user base, they're not all active traders.

Trading requires this, but pure long-$coin speculation does not.

You can speculate fine on decentralized exchanges.

For now at least with Coinbase it is the investors funds at risk, not the customers funds. And that example shows how hard it is to run such a business profitably.

> ... with Coinbase it is the investors funds at risk, not the customers funds

Oh boy are you in for a surprise:

"In its quarterly report, Coinbase added a risk disclosure: if the company were to file for bankruptcy, the court might treat customer assets that the exchange is custodian for -- their Bitcoin, Dogecoin or whatever -- as Coinbase’s assets. And they’d be at the back of the line for repayment, forcing normal people, unaccustomed to the ins and outs of federal bankruptcy court, to claw back their money along with everybody else owed money by the exchange."

From Bloomberg: https://www.bloomberg.com/news/articles/2022-05-11/coinbase-...

Here's the un-editorialized full text from their SEC filing:

> Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors. This may result in customers finding our custodial services more risky and less attractive and any failure to increase our customer base, discontinuation or reduction in use of our platform and products by existing customers as a result could adversely impact our business, operating results, and financial condition.

> Further, we place great importance on safeguarding crypto assets we custody and keeping them bankruptcy remote from our general creditors, and in June 2022 we updated our Retail User Agreement to clarify the applicability of UCC Article 8 to custodied crypto asset — the same legal protection that our institutional custody and prime broker clients also rely upon. UCC Article 8 provides that financial assets held by Coinbase are not property of Coinbase and not subject to the claims of its general creditors. In light of UCC Article 8, we believe that a court would not treat custodied crypto assets as part of our general estate; however, due to the novelty of crypto assets, courts have not yet considered this type of treatment for custodied crypto assets

Source: page 96: https://s27.q4cdn.com/397450999/files/doc_financials/2022/q3...

You call it uneditorialized, but it is simply editorialized in a different direction.

Ouch. Thanks for that. I wonder why the normal customer funds segregation rules do not apply to crypto assets.

See the full text from the SEC filing: "due to the novelty of crypto assets, courts have not yet considered this type of treatment for custodied crypto assets"

Basically, there's no legal precedent. It's anyone's best guess.

Go read FTX's statement to Congress from a few months back on why crypto exchanges should not be hobbled by all those old rules about separation of functions.

There's nothing prohibiting a crypto exchange from having a separate company to hold customer's assets. In a bankruptcy, the custody company should still be solvent. That's required in Japan.[1] Customers of FTX Japan still have their assets.

[1] https://www.coinfirm.com/blog/japan-crypto-asset-regulations...

Basically, because cryptocurrencies aren't considered "money", and what they are is still kind of up in the air...and because, as so many of its proponents are so proud of (despite it being extremely obviously a temporary state of affairs), cryptocurrency is not yet subject to very many laws and regulations.

You can't have the protections of "money" without the regulations of "money". As long as everything was going fine and government was still dragging its feet catching up to technology, the people who got in early got to pretend there was something special about cryptocurrency that made it possible to have their cake and eat it too.

Now, they're starting to find out why that's not the case.

It may not hold up in court. But at that point, you’re trying to claim assets back from a bankrupt entity.

For all brokers, margin accounts can be rehypothecated if broker fails. This is as true for Fidelity as for Coinbase.

This isn’t true in the case of bankruptcy. Note that in early 2022, Coinbase updated it’s disclosures to include that customer coins could be used as collateral to pay debts. That would leave customers as unsecured creditors (ie, stuck at the back of the bankruptcy line).

https://finance.yahoo.com/news/coinbase-keep-customer-balanc...

Yes, Polygamous_bat below made the same observation, I wasn't aware of this at all.

So what does that tell about the exchanges that are managed in an unauditable way...

Essentially that they are most likely dipping in to support either their operations or other projects from the customer funds. That's not proof, but I would not at all be surprised if there isn't a single one of them that is clean.

I mean, being the custodian of funds actually costs money, one should wonder about the motives of the exchanges offering custody for the funds.

There are many banks in europe that will not open accounts for people who just moged there, unless they bring along plenty of money.

This simply means that having your coins on an exchange is the same a forfeiting them unless otherwise proven.

But the crypto exchanges double down on that, they speculate like the banks do, but with zero risk managment and oversight, the biggest accounting firms do not want to offer their services to them.

They have also leveled up their exit strategies, instead of the plain old run away, they run the business while they can extract money and then later they seek legal cover under the umbrella of bankruptcy laws.

There is also the possibility that they have too many assets due to participating in money laundering or tax evasion.

There really aren't a lot of good possibilities here, how did these exchanges get so large before anyone thought of audits?

Even if you have the keys, it’s not your store of value, as people will find out when this implodes.

What are your keys worth if the price of Bitcoin is close to zero?

Bitcoin has already reached 50% of the 27 year lifespan of the average fiat currency.

https://cointelegraph.com/news/bitcoin-is-already-at-40-of-a...

Debunked: http://jpkoning.blogspot.com/2019/09/the-life-and-death-of-i...

That article doesn’t “debunk” anything. Did you read it?

Their argument is that a currency being “replaced” for “political, economic, and cultural reasons” isn’t a currency failing. What?

If they’ve “debunked” the 27 year figure, then what is the correct average lifespan of fiat currencies?

I suppose that makes the case that Bitcoin is a fiat currency. I have yet to see strong indicators of that.

Can you point to any indicator that it's anything else?

EDIT: https://en.wikipedia.org/wiki/Fiat_money

How do you lose so much money when your business it to charge fees? You'd have to do something really stupid to not make money.

Well for starters they have over a thousand employees, plus office leases, plus I'm sure cloud provider fees, marketing, and more. There are expenses for sure.

It's definitely strange. Binance did $40 billion in volume in the last 24 hours. Even if their effective fee is only 1/100 of a percent that's $4 million. If we assume they do half that volume every day on average that's 730 million in revenue per year. Surely costs can't be that high?

> Binance did $40 billion in volume in the last 24 hours.

It didn't

> Even if their effective fee is only 1/100 of a percent that's $4 million.

It's not.

The reason? They "traded" fictitious currencies whose "value" is pure speculation and nonsense. Their fees are also denominated in these fictitious currencies.

However, neither the offices they rent nor the people they employ have any interest in these, because rent and salaries are paid in something that actually has value: the dollar.

Now, where does the actual money come from is a good question, but I'm too lazy to read their SEC filing.

https://s27.q4cdn.com/397450999/files/doc_financials/2022/q3...

They had $365mm in revenue from transactions. They has $1.1b in expenses. $550mm is employee/r&d.

I have calculated salary costs alone to be 30m a month at least. Could also be up to 80m, though, I have used the most conservative calculation I could reasonably come up with.

Then comes office infrastructure, if any and cloud assets.

Depends on how extravagant they are with executive bonuses, employee perks, fancy offices and cloud resources.

It's easy. If you give me custody of a billion dollars, I will immediately fly to Vegas and put it all on red.

If I win, I keep the money. If I lose... You'll have a problem a few years down the road, when you try to withdraw.

Every one of the allergic-to-sunlight exchanges has a huge incentive to do what I described.

Everything you hold a position in translates into risk on the books. If some of those positions (or even a majority of them) ends up losing you will need to make up the difference.

On top of that KYC and other operational costs really add up, and without another revenue stream than the transactions themselves it may simply not be enough of a slice to be viable.

Coinbase is like an empty casino with lots of employees, a solid vault, and no one at the table games. Binance is like a packed casino with few employees and about as transparent as mud.

They’re spending a lot on R&D and staff

They were making money with the current amount of spending but then crypto flipped

They probably will have to lay off more people and give up on their current pace of development. Tickets will take 5 months to complete instead of 2

It's really weird, because "typical" exchanges (NYSE, NASDAQ, CME, etc) typically charge like, what, a few basis points to trade? Coinbase is charging .60%, an order of magnitude of higher fees, and yet they're still somehow losing money?

Volume has been sucked out of the markets throughout 2022. Prop trading firms are suffering in the stock market for the same reason

How do you make that big of a loss just running a matching engine and a bit of regulatory overhead...

Hiring a ton of silicon valley employees to make it really inefficient.

Seriously, though, the NASDAQ matching engine runs on a 1U server, and I doubt coinbase needs anywhere near that amount of processing power. Clouds just make it really hard to run a fair matching engine.

They had almost 5000(!) employees before the layoffs. I honestly can’t fathom what 90% do day to day

> not your keys, not your crypto

what % of BTC is held in binance / crypto.com / coinbase?

if one of them fails/has an issue, how much more can BTC fall and then never recover?

what are the % chances something good happens to one of those exchanges and crypto value/demand goes up?

what are the % chances the inverse/opposite happens and crypto goes even lower?

reporting loses like $430M in quarter 1 of 2022 just by operating their business correctly

Coinbase stock is going to zero.

Whataboutists have arrived to protect China-owned Binance

Mazars is likely wondering if they are going to be the next Arthur Andersen before this is all over. Good luck finding another firm when one of the top firms in the world drops you like a hot potato.

They haven't done anything wrong AFAIK; they didn't sign off on an audit, and withdrew, which is the reality of many smaller accounting practices taking on unfamiliar clients.

Arthur Anderson knowingly fudged the numbers at Enron, and provided both accounting and consulting services, which was a big conflict of interest. The consulting arm came up with new type of revenue opportunities (energy contracts), and the accounting arm cooked the books to show that these were profitable.

It’s actually so nuts. People rarely get into the details of how crazy accounting was in Enron. They made an agreement to build a power plant, then booked 50 years of profit from operating it before they broke ground.

... and shortly after the deal was signed (and the projected profit added to the books), the contract was swapped out / "sold" to a subsidiary mostly owned by Enron, and selling this propped up the books even more.

The associated debt was in the subsidiary, and thus didn't show up on the balance sheet.

I knew about accounting for lifetime costs, but accounting for lifetime profits is a new one hahaha.

https://en.m.wikipedia.org/wiki/Mark-to-market_accounting

Mazars has already been cautioned - together with BDO - regarding their oversight on crypto, the regulators have essentially told them to improve their quality before they grow these branches of their corporation further. That puts them on petty thin ice.

Arthur Andersen messed up big time, not in the least because their Chinese walls failed in every way imaginable but the parallel is pretty close: all of these companies are chasing new markets with abandon when in fact they should out of caution rather than regulatory pressure slow down and do their jobs properly because the financial world depends to a very large extent on that.

This feels a lot like how a credit crunch happens with regular money.

"Coins you own keys to = Coins in some online wallet = coins on exchanges = coins you lent out for interest" is the assumption everyone makes. They're all different types of assets but normal market conditions create the illusion they're all one and the same. There's 1 <-> 1 exchange possible, you can easily move coins from an exchange to your wallet, so they must be the same right? No.

When shit hits the fan, all those links break down and then there's no convertibility. Only what you really own is what you own.

With normal money, atleast there's Fed so they can actually do something about it and stop the links from breaking down completely, here there's no backstop.

And if the funds are held in a regular account the Fed or other local institution like that will likely make you whole up to a point (usually $100K or thereabouts). As soon as you go unregulated that is no longer the case.

FDIC, they collect fees from all banks to finance the fund they pay out account holders from. Limit increased too I think, like 250k now.

FDIC insures assets in US bank accounts. SIPC insures assets in US brokerage accounts.

A company under criminal investigation might have solvency issues?

Someone got a set of pearls I can clutch?

https://fortune.com/crypto/2022/12/12/binance-investigation-...

Binance is China-owned so there's no problems, all criminal allegations are false, company is in great shape, and customer's assets are safe. What about Coinbase?

Is this sarcasm?

Yes

Suggest adding a /s in the future to avoid confusion.

Sarcasm doesn't exist on the internet until you add a slash s.

Slash s.

You're posting pro-Binance, pro-China comments all over this thread

> company is in great shape, and customer's assets are safe

Do you have any proof of this? I assume that to know this for sure, you would have some insight into Binance internals?

The sarcasm is so thick that even a non-native like me picks it up.

The only thing thicker is me, apparently :P

GP missing a /s.

If they're in such dire straights, how is it $BNB is hanging there? Is Binance defending their own magic bean? What is the cost of doing so?

https://finance.yahoo.com/quote/BNB-USD/

One manipulation mechanism is leverage.

Binance and other crypto exchanges offer leveraged trading to all members, and it's fair to say [1] that there's a huge uptake of those services due to their open-door nature, crypto's volatility, and the illusion of fast money. And human psychology, of course.

This means that at any given time, a dominant exchange (i.e. Binance) can run an order books VS leverage liquidations system, where it can be continually (and exclusively) evaluating the cost/profit of using their internal market makers to shift the price of any given asset counter to the leverage trend. Which they, as the exchange holding ALL the data, have full insight into.

When we're talking about an asset that's near-exclusively controlled by a particular exchange - e.g. FTT, BNB, ... - this becomes an even simpler manipulation for the exchange.

This gives them options.

They can allow a "natural" price trend to play out, OR, they can buy out the order books in the opposite direction, and liquidate/take all the money of every leverage trader who tried to leap onboard the trend. The harder the market movement, the more gamblers try to leap onboard, giving the exchange proportional fuel to do as they please.

Until a point.

[1] https://www.cryptometer.io/open-interest

I'm not suggesting you're wrong, but would you care to clarify how exactly binance being "in dire straits" (in the sense of not being able to honor withdrawals, I presume you mean) would affect the value of BNB?

There's not much BNB volume outside of Binance: https://coinmarketcap.com/currencies/bnb/markets/

They could defend the price pretty easily by rigging the price on their exchange by printing BUSD to buy BNB.

I will be shocked if we don't find proof they've done this in the past.

You can do this w/o screwing customers.

Let's assume that some percentage of BUSD is legit (likely a lot of it is).

This means BUSD has some value. Let's say everytime someone converts real money to BUSD - Binance spends 100% of treasuries and then an additional 10% to buy BNB.

They can keep that 10% in their own wallet - and if the value of BNB someone goes to $0 with them playing this game - they can just wipe that account out. They still have all the treasuries to pay their real customers.

However, if you're doing fraud - you're probably doing a lot more of it than this... So you probably won't be able to pay out your customers, because you probably blew all their money on coke and hookers like FTX and every other crypto company so far.

Actual BUSD is issued on Ethereum by Paxos, which is a separate US company that is licensed and regulated by NYDFS. I think it’s unlikely that any of this issuance is fraudulent. Binance then maintains a “pegged BUSD” token on the BNB chain (and other chains.) This is supposed to be backed “1 to 1” by Real-BUSD held in a Binance wallet on chain. They could break this peg at any instant they chose, but it would be visible. I did the math a few days ago over here [1] and it checked out. I’m posting this not to say the situation isn’t risky, just that it seems risky in a highly-transparent way - ie, I can’t see how they would manufacture BUSD without someone noticing. Maybe there’s a loophole I don’t see.

[1] https://news.ycombinator.com/item?id=33976228

Yes, my poetic license path is very heavy withdrawals -> bank run -> dire straits (money for nothing pun).

$60B in assets, $8B in withdrawals. Even if all the assets are correctly valued, I don't anyone would envy their position. But given their own coin in holding in there, maybe they are devoting some money to defend it, or maybe they are actually in decent shape and can handle this quasi bank run.

More succinctly, if they were really toast, then $BNB would be cratering. Given it's holding in there, it seems they are OK (at this very instant in time).

Collapses often happen very gradually (in a time span relative the the majority proportion of the collapse) and then all at once.

As such, its failure to collapse as the crisis continues is not strong evidence that it’s not toast. Consider the examples of any system subject to cascading failures. But neither is there sufficient evidence to determine if it’s in the early stages of a death spiral.

What seems clear to me is that it’s unlikely to improve in value in the very short term, and might indeed collapse, so it could be prudent to transfer assets out while there’s still liquidity to do so especially in light of recent collapses. Of course this has the downside of accelerating or even making a collapse a self-fulfilling prophesy: that’s inherent to the nature of any asset where user confidence is a tent pole of stability.

It is also why traditional finance has evolved mechanisms to have lenders of last resort so that there is no death-spiraling perverse incentive to get your money out early in those situations. But that sort of back stop takes truly massive resources that need to dwarf those of the potentially failing organizations, which is why you see nation-states filling the role. It may take a nation issuing debt against the guarantee assets of a $trillion+ GDP (and really the taxation ability that comes with, though even that oversimplifies things…) in order to back stop and perform that role for organizations on the scale of many $Billions.

> if they were really toast, then $BNB would be cratering

Why exactly, though? That's what I'm asking.

I promise I'm not trolling, I just don't understand the connection.

Well it has lost about one quarter of it's value VS Bitcoin in the past 3 weeks. Whether or not that fits the definition of cratering is up to the individual.

27 Nov: 1 BNB = 0.0188 Bitcoin; 17 Dec: 1 BNB = 0.0142 Bitcoin

My presumption is Binance is the buyer of last resort for $BNB.

>Both KuCoin and Crypto.com said they had provided customers with the ability to verify their own holdings individually online.

How does this even work?

Looks like someone external does an audit(1), and then the auditor creates a Merkle tree which you can then validate (by a Markle leaf which you can access from your account).

Specifically for Crypto.com the auditors:

> obtained and inspected the scripts used by management to extract the Customer Liability Report from the database. Based on management’s explanation of the various parameters we ensured that the logic and the parameters are designed to extract a complete and accurate listing of client liability balances of the In-Scope Assets as at 00:00:00 UTC on 7 December 2022 while excluding any company internal accounts. It was found that the script was queried against the latest production data at the time of the data extract, which showed latest updated time as of 23:59:59 UTC on 6 December 2022. We observed management access the database and execute the scripts to extract the relevant data from the database. We subsequently obtained the data produced from management (i.e. the Customer Liability Report) and performed a row count and sum check on the data set. We did not identify any discrepancies based on the row count and sum check performed.

> Using the Mazars’ Silver Sixpence Merkle Tree Generating tool, we aggregated the client data obtained from management in this procedure and computed the Merkle Root Hash. The Hash for the Merkle Root based on the information supplied in procedure 6 is e535cf418ab603cc4b338069a814037d53 c50bf37dc5776631f3d9c3110e08af

So you do still have to trust the audit, and assume no foul-play, because I think this just shows that your balance was included in the audit (as a liability). I believe this just stops Binance from being able to hide customer liabilities from Mazars.

* (1) In Binance's case this wasn't actually an audit, and Mazars did this piece of work with Binance assuming good-faith according to processes mutually agreed between Mazars and Binance. As per the Mazars disclaimer, "This AUP engagement is not an assurance (financial audit) engagement. Accordingly, we do not express an opinion or an assurance conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported". I would note that IMO the Binance page does use the word "Auditor" a lot on the PoR page which might be slightly misleading (they are an auditor, but they aren't financially auditing Binance...?).

https://www.kraken.com/proof-of-reserves

Shortcomings and Future Improvements

In the interest of championing transparency, we would like to share some of the shortcomings in the Proof of Reserves process that we’ve identified.

A Proof of Reserves involves proving control over on-chain funds at the point in time of the audit, but cannot prove exclusive possession of private keys that may have theoretically been duplicated by an attacker.

The procedure cannot identify any hidden encumbrances or prove that funds had not been borrowed for purposes of passing the audit. Similarly, keys may have been lost or funds stolen since the latest audit.

The auditor must be competent and independent to minimize the risk of duplicity on the part of the auditee, or collusion amongst the parties.

I don't know what crypto.com or KuCoin did, but here are some cryptographic schemes for proof of solvency Vitalik wrote up post-ftx collapse: https://vitalik.ca/general/2022/11/19/proof_of_solvency.html

> How does this even work?

Matt Damon tells them.

https://niccarter.info/proof-of-reserves/ has a lot of info in general and about specific exchanges

Good question! I can’t even guesstimate.

Smoke and mirrors :)

There is a reason why banks have stress tests. And there is no reason this shouldn't apply to exchanges.

The seem to be banks and exchanges. NYSE and Nasdaq are exchanges but don't hold customer funds they execute trades and that is it. These crypto exchanges are more like banks...and that is the problem. Until banks allow crypto accounts and connection to exchanges this will keep happening.

Something closer to a retail brokerage, maybe?

And they shouldnt be allowed to trade or issue tradeable tokens. Something like the Glass-Stegall act, abolished by Clinton.

They're like an exchange and a brokerage firm rolled into one.

We will end up using good old banks to hold those assets… at least the regulations make them solvent.

We need to read history and see what happened when the banks weren’t regulated enough and we are letting the crypto zoo run free and bankrupt many people.

Such a bliss the “we don’t need traditional ecosystem to thrive”.

I know how this is going to end, we will replicate the finance ecosystem into the cryptosystem.

I still remember the “don’t be evil” slogan in google, let’s give random people the power to store all our crypto investment and let’s see what happens…

Ok, so "web3-metaverse-blockchain" bubble is bursting, only the AI one is growing in a good direction.

ML is backed by solid science from the 80's and we've always known it would have uses, we just didn't have the computing power for it.

AI hasn’t threatened anything yet (in a not good way), so it hasn’t met regulation.

Crypto threatened monetary systems, finance, VC, banks… and because of that attracted both all the money and all the ammunition from this recent QE hyper bubble. Now as it pops it’s very easy to say “look see it sucks,” but this shallow analysis, will it hold outside of the current recession?

AI makes lots of splashy headlines but where’s the actual value outside upgrading existing big tech? Sure search and recommendations but what else?

The artistic stuff gets tons of attention but what’s the market cap there - even Hollywood is small compared to finance.

And as it does encroach on bigger industries it’ll face new problems: resistance from humans (copyright/regulation, cultural) and having to contend that by definition it produces “average” works.

Like how remixed music became hugely popular and died off, AI produces remixed content, but humans want fresh. Look at music, film, fashion, anything really creative that AI looks like it’s edging in on - all those industries are driven by fresh content, new perspective. So I see it accelerating things but not revolutionizing, and as it’s very nature draws value from the masses and gives it to the few, it’ll eventually hit hard resistance from voters, unions.

Meanwhile crypto has a ton of problems - UX, scaling, regulation - but it also has good fundamentals in that it stands to distribute power towards the masses and they drive adoption. And if there’s any trend in tech that’s been constant since the 70s it’s that the companies that can deliver value to the largest amount of people succeed.

Am I super confident this is how it plays out? No, this is just a spitball. AI could solve the creativity issues, tech companies can make it seem consumer friendly through tons of persuasion, it may keep scaling well, and big tech can lobby like hell. Likewise crypto can’t outspend finance, and the bubbles and scammers have soured many.

If you look at actual value both now and in the near future, AI is a lot of hot air, people love to share these new images but wheres the revolution in industry? Being both average and a theft at once, combined with being being easy to legislate via copyright is a bad combo.

> but it also has good fundamentals in that it stands to distribute power towards the masses

I have a bridge in Brooklyn to sell you. Heck, I'll throw in some Brooklyn Bridge NFTs in, for good measure. 2,533 NFTs in total at $99 each.

Isn't there still the thorny issue though that we don't know "why" some the ML works? See:

"The Dark Secret at the Heart of AI":

https://www.technologyreview.com/2017/04/11/5113/the-dark-se...

and

"Machine Learning Works Great—Mathematicians Just Don't Know Why":

https://www.wired.com/2015/12/machine-learning-works-greatma...

Why doesn't Binance flex and encourage a complete withdrawal by say Jan 1? Wouldn't that kind of power move boost its reputation above all competitors?

Chances are they'll be dead if enough people act on that. So they're doing the opposite: reassuring people that everything is fine. If there is one common element that precedes every bank run and run on crypto exchanges and such then it is the 'everything is fine' phase just prior to the implosion.

One clarification:

1. For a bank run on an actual bank, it is known that a bank doesn't keep all your assets on hand - they are loaned out, which is (largely) what allows you to earn interest. So it is known that if everyone tries to withdraw at the same time that there won't be enough money.

2. For an exchange/brokerage, your money/assets are explicitly NOT supposed to be lent out without your permission. So, in theory, if everyone asked for their assets all at once, the assets should be there.

Indeed.

But we already have a whole bunch of examples of (2) where the funds ended up in all kinds of places where they should not have been.

Re 2: this is not true if you're doing margin or futures trading, which was FTX's main business (and may be Binance's). This type of business is what characterizes an "exchange" (as opposed to a non-margin brokerage or a custodial bank).

Hence the "without your permission" caveat. Point being, when you lend your assets to brokerage, it's explicit, unlike a fractional reserve bank, where deposits are inherently lent out (and no need to comment that fractional reserve banking doesn't "really" work this way, I get it, but deposits are still part of the capitalization of the bank).

Perpetual futures don't require any margin. All it requires is matching buy side and sell side market participants and transferring money between their accounts as the underlying changes in value. The exchanges don't actually hold any underlying with perps, so there's no need to borrow money.

In theory, the exchanges should lend their own money to margin traders.

If there’s a single case of an exchange using a customer’s assets to make bets isn’t that a fraud charge? Or with the unregulated nature of crypto is it not that explicit?

Dipping into customers funds for operating expenses or other uses (loans to associated parties, investment, leveraging) is a big no for an exchange, obviously, whether or not it is fraud is ultimately for a judge to determine but it sure looks like that to me.

The lure of those balances is invariably too great to resist.

these are the key points that get overlooked. i keep seeing that folks expect these brokerages to work like banks work.

The problem is that these brokerages do work like banks work but pretend that they are holding all of the reserves on the books.

They are leveraging and borrowing from the customer funds with abandon, just like a bank but without the associated regulatory oversight and rulebooks.

In the runup to the Lehman Brothers bankruptcy, the CFO Erin Callan would come on CNBC week in and week out to talk about their "fortress balance sheet" and it would always pump the stock a little bit. Was absolutely infuriating to watch, but you can't get too mad at the people doing it, regardless of how bad things get their incentives are 100% aligned with projecting confidence and praying they can hold on long enough for the market to turn back up.

This is true, but there is some availability bias. There are presumably cases where "everything is fine" turns out to be pretty accurate (at least for a while), but we don't keep track of those.

> as the crypto exchange battles to avert a crisis of confidence.

We used to call those a "bank run".

No, a bank run is the consequence of fractional reserve system. Crypto exchanges should have 100% of their crypto covered by assets.

> should have

lol

Related ongoing thread:

French accounting firm Mazars is pausing all its work with crypto firms - https://news.ycombinator.com/item?id=34026826 - Dec 2022 (39 comments)

We have a problem here

First implied statement: 1. Has funds to buy FTX

Second implied statement: 2. has funds to send back due to fraud conveyance claw back

Notice the pattern yet as not one implied statement has been stated as a direct statement.

SBF showed the same amount of obfuscation.

Not good folks.

Binance has seen much worse.

Binance is shady, but a lot of people in this thread are falling for bear market panic seekers.

This is a MLM scheme that is dissolving in front of it's members.

Let's see how this comments looks in a while.

yes, saving your comment for later

Literally nobody cares about saved comments. Not even the person saving the comment.

You will have to turn this into a bet with cash on the line if you actually mean it and I think bets are stupid so how about you just stop writing comments like that?

Do you have any vested interest in Binance or associated companies/individuals/enteprises?

why does one need a throwaway account to post this

Any firm that survive the current ?recession? will have significantly more chance of surviving and passing the shivers. Maybe the next 6 months or so is critical for Binance or any other central wallet/exchange since people are on the edge.

People they do not lose everything this round of collapse will invest in the next round... lol

Keep it coming. If the entity is solvent this isn’t a problem.

Nothing like a good ‘ol stress test

yeah this is a major misleading headline. they did this for everyone, not just binance

Is it the same FT that wrote about poor Sam Bankman-Fried that would not be able to continue his altruism because of some errors?

Keeping stuff at exchanges is a bad idea if you're not actively trading it and accept the risk. I got burned two times (cryptopia and ftx). I still think Binance is safe in terms of assets. People bring up that big part of the assets is in BUSD and BNB coins. But BUSD is issued by another company - Paxos and is fully collateralized. BNB could be somewhat a problem if it crashed, because it can be used as collateral in futures trading. That could cause liquidations and more selling, but it wouldn't make Binance less solvent in terms of assets/liabilities.

Stop misrepresenting publications.

You can read what they've written about FTX here: https://www.ft.com/stream/555b8eaf-51c0-4d66-bbf3-dfe5dd0bca...

Here's a fun one from April 2022 (before even Terraluna): "FTX/ Defi: If it looks like a duck and quacks like a duck . . ." https://www.ft.com/content/eac0e56c-f30b-4591-b603-f971e60dc...

Both Binance and Coinbase have their "wallet" apps where u can get keys for your coins. They provide a slick interface to use them as well. However in this case, you are sharing your keys with the company which means:

1. they can pull your coins out anytime.

2. They can show your coins on their balance sheet which allows them to print more of their own coins (because they are backed by deposits).

At least coinbase claims they keys remain on your device:

https://help.coinbase.com/en/wallet/getting-started/what-s-t...

Do you have reason to believe this is not the case? Or are you more concerned about a malicious update to the app?

Proof of reserves != proof of liabilities.

Proof today != proof tomorrow.

The proof of reserves can be done in such a way that each user can verify that their balance is backed: https://www.kraken.com/proof-of-reserves

> Proof of reserves today != proof of reserves tomorrow.

You should be able to detect large outflows/inflows from/to their wallets and demand an explanation.

How does Kraken/proof of reserves ensure that in case of bankruptcy there are no creditors with higher privileges?

That's a good point. The exchange's remaining liabilities outside user deposits are still an unknown. (Or at least can't be verified in a trustless manner.)

Doesn’t that make it borderline worthless?

Coffeezilla demanded explanations from Tether. None were offerred.

https://www.youtube.com/watch?v=-whuXHSL1Pg

Providing a proof of reserves is about putting user/investor minds at ease. If you're not willing to go all the way, why bother doing it at all?

Though I guess post FTX, all exchanges are scrambling to avoid losing a large chunk of their userbase. Claiming to have a proof of reserves, even if it was done in a half-assed and non transparent way, is probably good enough for the non-scrutinous user.

Indeed.

An exchange can borrow loads of assets, have an "attestation" that the assets are in their accounts, then pay them back.

Exactly. Exchanges are important to exist. The problem is that some crypto exchanges became ordinary but unregulated banks and they sell "printed" crypto asset giving illusion the user owns crypto on blockchain.

Unless those assets devalue or are not easily liquidated.

Exchanges are in the business of "liquifying". But, indeed, it can go wrong, with severe consequences.

Anything they hold a position in creates risk, the typical exchange business model is that they are fast enough and good enough that they can operate out of the excess through various arbitrage options but with extremely volatile assets the bottom can drop out pretty quickly and once you start borrowing and leveraging it can happen a lot faster still.

Essentially they are operating as banks sans regulatory oversight. It's a recipe for disaster.

Isn’t Mazdas trumps accounting firm lol

Not your keys, not your coins

That outlook has severe limitations though. Specifically that self-custody has very high barriers to actually using those coins without having them pass through some more centralized system at some point. There’s no cash equivalent (as yet) that is as frictionless as actual cash.

Maybe the next gen of tech tech that grows from these ashes will address that problem more directly, and get more traction than prior attempts by users learning from and demanding better than what they are getting now.

You just use the exchange when you want to trade not for long-term storage.

Well, at least we can minimize the period when the keys are not ours. If we keep the coins only for a few days on the exchange, it is unlikely that the exchange falters just during that time. But if we keep it for years, it is likely we will lose it eventually.

> “We are financially OK,” said Zhao

Where have we heard this before? Oh yeah:

<Twitter @SBF_FTX> FTX is fine. Assets are fine.

Interesting how the players change but the script is exactly the same and yet, people keep falling for it. I really don't get it.

I once knew some people that were up to their necks in an MLM/pyramid scheme, it was like a cult, no matter how many examples you gave them of people ending up losing their shirts they would buy more of the crap and stuff it in every nook and cranny of their house being sure that they were the ones to cash out this time. Only they weren't.

If you have any money at all at one of those crypto companies get it out now, don't wait to see if this time it will be different because it won't be.

> the script is exactly the same and yet, people keep falling for it. I really don't get it.

For every voice attempting to warn others, there are 10 others shouting them down with claims of FUD/jealousy/fiat shill. Just visit the subreddits of any of the dead exchanges/rugpull coins.

You would be surprised at human greed.

Was it last week when there was an interview with several "investors", and pretty much all of them admitted they knew they were speculating in a highly volatile and unregulated market before they lost all their savings in FTX' crash?

They knew the risks, they tried anyway, some really needed that money.

It is greed for sure. But it is also the lack of legit opportunities to invest, unless one is an accredited investor. I found a handful of places I wanted to invest, but I can't, because I am not an accredited investor. I am left with stock market and crypto.

It is super funny (sad?) that I can go to Vegas and blow up my life savings in a matter of hours. There are no rules to save me from that. But there are rules conveniently banning non-accredited investors from so many legit investment opportunities. What % of the population are accredited investors? I bet it is not even 10%

At this point, there doesn't seem to be any difference between Vegas and Crypto...

I bet if they were re-interviewed the risks they believed were crypto going to zero not the entire exchange folding with crypto essentially holding up for other exchanges or your own wallet.

Everyone knows it's a scam, they are all just betting they won't be the last sucker out the door. The people you see hyping this stuff are all, save for a clueless minority of largely actual children, doing so hoping to bring in a few more rubes to drive the price up and exit. Sometimes (always if you aren't on the inside to know when the rug is going to be pulled) you are the rube and you try to recoop your losses. MLM works the same way "If I only could get a few more people to sign up under me, then I'd be able to get some of my money back."

In magic/mentalism I think this technique is called "instant stooge"[0], basically play off the agreeable nature of people to get them to shill for you once, at that point they are trapped and you can escalate the ask. Come to think of it cults work the same way, after you made a fool out of yourself it's easier to double down rather than see yourself as a fool.

In short, most people aren't victims but instead aspiring coconspirators who didn't make the cut.

[0]https://boards.straightdope.com/t/is-instant-stooging-in-mag...

I think "cult" is the exact dynamic at play here. As much as I love the internet, it has enabled distributed cults on a level rarely seen before. Not only does it support traditional cults with central leaders and official dogmas (which I think includes most MLMs), but they've allowed for a sort of emergent, leaderless cult based on collective creation of the memes that drive it. E.g., QAnon and the cryptocurrency bubble.

And cults can be very persistent, even in the face of spectacular failure! The Great Disappointment predates the US Civil War, but it spawned at least one group that is still going today: https://en.wikipedia.org/wiki/Great_Disappointment

> they've allowed for a sort of emergent, leaderless cult based on collective creation of the memes that drive it.

with a high entertainment appeal, might i add!

Yep, right down to the Potemkin village of relentless positivity, and 'faith' in the supremacy of [TOKEN].

I mean what else are they supposed to say?

"I invested my families money or corporate funds in a lower yielding account resulting in me being poor or having gotten fired from my pension management advisory position years ago".

Chase that yield, or get replaced by someone who will.

bc some "schemes" do work, like that friend or relative who got in early on a hot stock. any investment, including those granted the veil of legitimacy, can collapse at any time just as they can continue to skyrocket nonsensically. herd behaviour

The desire to build a better life/make money outweighs the risk. There is some desperation involved for sure.

Its very simple, bad money always pushes out good money.

I truly honestly believe Coinbase is reputable. No sarc I personally believe in that company and I'm trying to be complimentary, although I have no personal affiliation other than having been an active historical customer. Anyway, they are/were/IIRC offering a loan product as an investment paying something like 5% APR (back when inflation was running about 10% LOL)

The problem is FTX was/IIRC offering a similar loan product as an investment paying something like 8%. Pyramid schemes always advertise larger numbers than the market can honestly support, its not like that have to actually earn the money LOL.

So you end up with rando speculator-investors tossing money at FTX, who wants to flush 3% down the drain by signing on with the "wrong" website?

Thus either Coinbase has to go out of business, get acquired by FTX, or hope FTX crashes and burns before the first two happen. Apparently the last option happened LOL, bye FTX.

The FTX business model was to get real big real fast and pay politicians for regulation to put their competitors out of business. Can't lose if you're the biggest and its illegal to compete with you. Ran out of money too quickly, oh well.

This is how markets work. The winners are not the "best" in some vague sense of goodness, they're the ones who took on the most risk possible without getting caught, and the more perfect the market and easier it is to flood capital in a different direction, the worse the effect gets.

The biggest dog on the block is always the first to keel over because they ran the most risks to get to be that biggest dog on the block.

This isn't a unique to finance situation, this happens in everything from automotive to mining to fro-yo fad restaurants.

> MLM/pyramid scheme, it was like a cult, no matter how many examples you gave them of people ending up losing their shirts they would buy more of the crap

Let me introduce you to my little friend, the biggest real estate hyperinflation in history. It's double plus ungood badthink to even hint in polite company that once the boomers are done, prices are going to implode to a level the latter generations can actually afford, which isn't much...

Another financial thing to look at, melt ups. Some markets that implode don't melt "down" then melt "up" as the ever shrinking number of people supporting the price disappear, upward pressure on prices actually increase as only the true believers are left.

There are no tanks in Baghdad.

The person you’re quoting is the one who started FTXs decline by calling them out and very publicly selling all their FTX coins…

FTX was also audited by a top firm, Armanino!Changed nothing...

In the article says: Following the collapse of FTX, Paul MacIntosh, EY’s US financial services crypto co-leader, said on LinkedIn that proof of reserves reports do not assess companies’ internal controls, “which ultimately was the downfall of FTX”.

> FTX was also audited by a top firm, Armanino!

This is misleading. FTX, either referring to the specific the company or the whole network of companies, did not. What was referred to as the “WRS Silo” in the bankruptcy proceedings, which includes FTX.US, did.

The “Dotcom Silo”, which includes FTX-the-specific-company, had an audit, too, but by Prager Metis not Armanino, which, in contrast to Armanino’s known status, the post-SBF CEO handling the FTX bankruptcy describes in the bankruptcy papers as a firm with which I am not familiar and whose website indicates that they are the “first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland.”

The other silos, including the Alameda Silo (which naturally includes Alameda Research) had no audited financials.

> Armanino

Armanino is to Mazars as Raspberry Pi is to Apple. They are not even close in stature.

There is a Big Four of auditing, and Armanino is certainly not one of them. I've never heard of them.

Mazars isn't either so that feels a bit irrelevant.

Mazars is in the top 10 though, depending on which country you look at.

> FTX was also audited by a top firm, Armanino!Changed nothing...

I've never heard of this Armanino company. They're not even top 10 worldwide, they claim to be top 25 in the US, they don't have a Wikipedia page, even.

Plus, was that audit even finished and an opinion given? Anything else is worthless.

Armanino is not a top firm. If you're not using Big 4, there's a reason.

There are plenty of reasons for not using a Big 4 their prices being one. They are not the be all and end all of auditing.

If you have billions in reserves and operate all over the world, you might not go with Big 4, but you also aren't going to take your business to a regional branch office in South Africa.

Auditors are not for your company. Auditors are for your investors. Auditors are not your friends. If you are investing a large amount of money in a company, and they are using a non-Big 4 firm, then any problems are on you.

I've routinely joked to my wife that her life would be much easier if they fired their auditors and went with BDO or some smaller auditing that they could bully around. The thing is, that's exactly how companies with weak accounting think, and FTX proves that point.

That's mostly fair, but the Big 4 are very good at billing partner prices for junior work and some of the mid-tier companies do excellent work for a much better rate.

I think it just depends how well a company's CFO knows the firm partners from the last round of golf as to whether they will go easy on your audit.

All the big 4 have been caught turning a blind eye over the last few years to win big contracts. Wirecard, Carillion and NMC Health all spring to mind for me in Europe. If i have 3 committed to memory there are many more.

All the "audit" firms are corrupt, regulation has utterly failed.

Exactly. And people act like this is a problem with cryptcurrency, but it's really a problem with people in corporations behaving badly.

Only that crypto is so unregulated that is hard to define what to audit against. And FTX wad never fully audited anyways, something which woupd be impossible with non-crypto equivalents of whatever FTX was beyond a major scam.

Exactly. However the serious participants in the cryptocurrency space have been begging for regulation.

The complaint however is that the regulations that have been proposed are trying to pidgeonhole the different parts of digital assets and decentralised finance (not defi but decentralised financial services as a whole) into existing categories that they don't cleanly fit in.

Cryptocurrency for example isn't a commodity (representation of a resource) or a security(representation of ownership/control in an organisation/system). It can never fit cleanly under one definition or the other. Some tokens would fit cleanly under the definition of a security, some under the definition of a commodity, and some cleanly under neither.

Likewise, node, relay, and validator operators for networks don't really fit cleanly under any given existing set of regulatory guidelines. Regulations for Money Service Businesses for example are overly restrictive and essentially outlaw any existing cryptocurrency operator from even attempting to operate in the US. It's not that the stated goals are impossible to comply with but rather that the specifics of the regulations are. Conversely, some of the much laxer proposed regulations wouldn't adequately cover operators and would leave the door open to abuses.

AML and KYC regulations are particularly problematic. They mean well and the spirit of the regulations should be adhered to but they have not been written in a way that is compatible with this tech. Networks with privacy preserving transactions can comply with AML & KYC. Projects on those networks can as well. It won't however be in a way compliant with the direct reporting of user identities. Even if you wanted to comply with KYC & AML, you physically couldn't. Instead you can build infrastructure to comply KYC and AML via DIDs, ZK-proofs, and conditional release of private information (via functional encryption and a number of other techniques).

There's a multitude of ways to handle the regulatory complexity without legally crippling privacy preserving & decentralised tech. It just requires that regulators actually work with the communities that have been trying to do things proper and kosher. Instead regulators have essentially ignored the industry's requests & proposals in whole, claimed to have heard nothing, and plowed forward with pushing regulations that would cripple the legitimately useful technology in the space.

> And people act like this is a problem with cryptcurrency, but it's really a problem with people in corporations behaving badly.

Cryptocurrency is designed for, and has a major selling point, that it makes it easier for people to get away with actions which are socially considered bad and evade controls designed to detect, prevent, and reverse such actions.

To the extent that design works, it doesn't just protect the benign little-guy against malign authorities.

Cryptocurrency is a useful proxy for people behaving badly. Maybe because it’s unregulated, maybe because it was such an easy target for grifters of all sorts.

Note that FTX didn’t own a single bitcoin. They had lots of knockoffs, but no bitcoin.

crypto has so many of its own problems i can see why people make this mistake

In other words, the problem isn't capitalism, it is that capital often ends up in the hands of those least equipped to wield it well.

"To prepare a proof of reserves report, an auditor uses procedures agreed with the company but does not vouch for whether those procedures are appropriate. The auditor also does not give any assurance or opinion over the numbers in the report, as it would in a full financial audit."

What does it say that a lower-tier accounting firm wouldn't even complete this garbage process?

Mazars is not lower tier.

They're not in the big four but they are quite large and well respected, at least they were until they - and BDO, another large accounting firm - were flagged as insufficient in terms of oversight by the UK regulators.

See: https://www.bloomberg.com/news/articles/2022-07-20/mazars-bd...

So they're on thin ice and they will not risk going down with this particular ship.

>Mazars is not lower tier.

I don't know much about European accounting firms. But the rest of your comment seems to contradict your initial claim -- i.e. they are not Big Four and they have had a recent scandal.

They are in the top 10 in my country and in many others, and they have been cautioned, which is regulator speech for 'improve your act or we'll go after you'. That means that they are on thin ice with respect to any future mistakes (specifically in their crypto division) and that their reputation (for the whole company) is at risk. The effect is that they will go through their customer portfolio and decide which ones they feel are negatively affecting their risk profile and apparently this is one risk that they are not willing to take.

If this was a canary in the coalmine it just started wheezing strangely and it looks a little dizzy.

> the rest of your comment seems to contradict your initial claim -- i.e. they are not Big Four and they have had a recent scandal.

It doesn't contradict it IMO:

1) In terms of the criticism from the FRC (which I believe is the 'scandal' you are talking about) KPMG were also criticised by the FRC so also would fall foul of this.

2) Just because a company isn't one of the 'big four' doesn't mean that they are lower tier.

EY was the Wirecard's auditor, and PwC did an ad-hoc audit of the same before everything fell apart.

Mazars and BDO are large yes, but they're not well respected. Over the past decade, both have had the ignominious distinction of having the worst PCAOB review scores of the top 100 accounting firms. It appears that their auditing practices in the U.K. aren't any better. (And both Mazars and BDO provided tax and auditing services to the Zuma and Ramaphosa administrations in South Africa, though this is because BDO's former S.A. member firm became Mazar's S.A. member firm.)

A large part of my early career in tax was fixing the mistakes made by tax advisors at these two firms.

Those who know, avoid BDO. (And Mazars too. They're actually worse.)

Is there a resource to look up such things for future reference? Furthermore, are any open-source projects familiar with any of these top 100 accounting firms?

Interesting, ok, I'll take your point, you clearly have had more exposure to them than I have.

They are big, but definitely lower tier. They aren’t even in the top 10 globally, so literally lower tier.

For example, the smallest of the big4 had $32B just in its audit and accounting section. Mazars had $2B in its entire organization, including advisory.

They are by definition lower-tier, as they don't have the resources to run an audit for a firm that purportedly maintains billions in reserves. A contract of that size wouldn't end up at a regional arm in South Africa anyway.

Big 4 auditors aren't exactly cheap, but there is a reason why they audit all the major firms. Mazar's biggest customer appears to be the Trump Organization.

> as they don't have the resources to run an audit for a firm that purportedly maintains billions in reserves

I don't think the resources are the real problem.

The real problem is that Mazars has already been cautioned and they know full well that if Binance goes under their reputation is toast if they keep underwriting them.

Auditing a firm is not an act of charity. It’s a contract. Binance has either asked zero accountants to audit their billions in reserves, or zero have taken the job. Mazars international probably got scared and leaned on the partner. The auditing of a firm this size is usually not a very big deal and nowhere near the capacity of a partner with all the roles below.

Cz said to CNBC that the big four can't audit a crypto exchange. Then the reporters told him that Coinbase is audited by Deloitte. He didn't really have an answer, it's quite awkward clip.

Nothing to do with crypto and TFA:

I disliked working with Deloitte at my first real job, i thought they were asking too much details and putting some useless constraints that had nothing to do with opsec in real life, and that we (me and the manager) had to lightly bullshit through.

Then I worked at a big bank, with an internal audit team, and tbh, I think retrospectively working with Deloitte was the best experience I could have, they are really professional and their price is less surprising to me now. Looking back, i just didn't know better.

stinks arthur anderson isn't around anymore, problems like this is what they were made for

They might both be right. The big4 aren’t really each a homogenous group, rather each country is its own partnership (I think the central registrations are all now in Switzerland).

It’s possible the USA Big4 will touch a crypto firm and… wherever Binance is based… they won’t.

What does it even mean to audit a company that doesn’t follow or reconcile to GAAP (or equivalent)? Are there examples in any other industries?

It means you told the auditor how you want to be audited, and they did it.

Generally speaking, if you look hard enough, you could find an auditor that will happily audit your number of nosehairs, or talking parrots, or not ask too many questions about whether or not your shitcoins reserves are actually worth XY billion.

You may need to scrape the bottom of the barrel for that, though.

thank you

Nothing wrong with saying thank you! but just to save space at the top of the thread, I detached this comment from https://news.ycombinator.com/item?id=34029007.

In the next 6 months binance will go bankrupt. Run as fast as you could

They might - but this doesn't imply any wrongdoing. Maybe everybody will be able to cash out and get all their money back - but then at that point there's no business left for Binance and they go bankrupt. Or, of course, the usual and everybody get hosed.

Months?

What a misleading title

> However, the accounting firm said on Friday that it had “paused its activity relating to the provision of proof of reserves reports for entities in the cryptocurrency sector due to concerns regarding the way these reports are understood by the public”. According to communications seen by the Financial Times, the level of media focus on the matter was also a factor in Mazars’ decision ... Mazars’ decision to halt work on proof of reserves reports was not driven by specific financial problems at any of the companies, said a person briefed on its decision. The firm’s work was so limited that it had “not looked that much” into the financial position of the companies ... Some people at Mazars feared that despite caveats in its reports the firm was “lending credibility to a very volatile sector” and felt it had been “naive” and “silly” to take on the work, the person added.

Nothing indicating that audit did not go well, but that because of its limited scope, the auditor wants to avoid bad PR.

Binance being an exchange, they make money whether cash goes in or out. so outflows are in a way good business?

I don't know if you have ever worked with a large accounting firm but when they 'pause their activity' that means that they are not going to tie their name to yours, effectively that's as much as saying we will not go down with you. Alternative reading is that they found fraud but they don't want to be the ones to ring the bell on a customer.

Binance is an exchange that holds balances, and those balances are in their internal coin, which supposedly is backed by their reserves. But as you've been able to see in the FTX affair that isn't always true and that is exactly the bit that Mazars refuses to continue to work on. Let's assume they know more than you and I and take it as a sign.

Keep in mind that an internal stable coin ledger is just a bunch of numbers that need not necessarily be backed by anything at all.

> when they 'pause their activity' that means that they are not going to tie their name to yours

A parallel that might help people understand this is a "no recommendation" for an employee. When someone is enjoined from saying anything actually negative, silence can speak volumes.

afaik binance uses various wallets, their BNB is used for tranactions

I think the point was, it wasn't even an audit, and Mazars is worried that people will misconstrue it as them giving Binance a clean bill of health (and then hate Mazars if Binance comes crashing down).

Also, presumably Binance has reserves because it needs them. Also, wouldn't the same logic apply to FTX? But then it turned out they were playing with the customers' money.

The title puts "halts proof of reserves work" next to "outflows hit $6B", which on quick reading implies that they halted the actual "audit" presumably because something went wrong , hence why i think it's misleading

And while the article makes it clear that they withheld their report for PR reasons, I'm sure most people here will assume that the "audit" went wrong

>Mazars is worried that people will misconstrue it as them giving Binance a clean bill of health

If they saw the same headlines I did they were worried that people were misconstruing it as them giving Binance a clean bill of health

Except there was no audit, only an attestation.

Outflows are as good as they were for FTX - if there is no 100% coverage of customer deposits.

Chartered accounts are liable for their work. Both Mazars and BDO have already been warned by the UK regulators their oversight is insufficient in July of this year. If they end up being associated with Binance and Binance goes under it could well take Mazars with it, there is good precedent for that, see Enron and Arthur Andersen.

Outflows are good business only if you are fully backed....

Precisely. If they end up dry then that's end of story for them and Mazars as their auditors may well end up in the spotlight and/or the crosshairs of those that wish to seek redress.

Less money on the exchange means less money to be traded

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