How likely is a catastrophe on Binance on par with FTX, if at all, or is this all just a lot of fuss?
The cryptocurrency exchange Binance has faced criticism and “FUD” (fear, uncertainty, and doubt) from some quarters, with some questioning the company’s viability. However, Binance has responded by highlighting its recent withdrawals and releasing a proof-of-reserves report.
According to blockchain analytics tool Nansen, $2.2 billion worth of ether was stolen from Binance in the preceding week. Binance reports that about $1.9 billion, or 80%, of average daily net withdrawals, occurred over the past 24 hours.
While it is difficult to predict the likelihood of a catastrophic event occurring on Binance, the company has implemented various security measures and has a track record of responding promptly to potential security threats.
It is worth noting that the cryptocurrency industry as a whole is continuously improving its security measures to reduce the risk of such events.
Why is Proof of Reserves in Question?
In the wake of the arrest of FTX’s CEO SBF in the Bahamas and the subsequent demise of the exchange, other cryptocurrency exchanges, including Binance, have taken steps to be more transparent, such as issuing proof-of-reserves reports.
Binance recently released a proof-of-reserves report, which was audited by global accounting and tax advisory firm Mazars. The report indicates that Binance has enough funds to fully cover all of its users’ assets. The release of this report has sparked new concerns about Binance and the overall transparency of the cryptocurrency industry.
The cryptocurrency market’s reaction to the “FUD” regarding Binance sent Bitcoin down to $17,000, so let’s examine why Michael Burry deems such speculation “meaningless.” Crypto firm audits are “Pointless”: why?
Michael Burry, the founder of Scion Asset Management and renowned for predicting and profiting from the 2007-2010 U.S. subprime mortgage crisis as depicted in Michael Lewis’s book “The Big Short,” has stated that proof-of-reserves (POR) audits of cryptocurrency exchanges are pointless.
Burry, who is featured in the book and was portrayed by Christian Bale in the film adaptation, has commented on the current Binance auditings.
Burry tweeted about Mazars Group ceasing crypto proof-of-reserves audits:
Burry’s tweet addresses a Bloomberg article stating that the French accounting company ceased work on crypto firms due to strong media scrutiny and evidence that markets have not been satisfied by its proof-of-reserves reports, notably for Binance, Crypto.com, and Kucoin.
Despite Binance’s growth compared to other exchanges, the cryptocurrency industry as a whole has faced challenges. According to CryptoCompare, spot exchange trading volume slightly increased between October and November 2022.
However, Binance CEO Changpeng Zhao has argued that many auditing firms are unable or unwilling to examine cryptocurrency exchanges, user accounts, and blockchains, leading to a lack of confidence in centralized exchanges as demonstrated by the frequency of customer withdrawals.
Zhao also pointed out that audits do not always reveal all potential issues, and some have suggested that such auditing is simply a cover-up and lacks ethical value. It has been a relatively quiet period in terms of hacks and failures in the crypto sector, but the concerns about centralized exchanges and the validity of audits persist.