US SEC Warns Crypto Investors Against Blindly Trusting ‘Proof-of-Reserve' Audits

Law enforcement authorities in the US are closely tracking developments in crypto industry post FTX collapse.

Written by Radhika Parashar, Edited by Siddharth Suvarna | Updated: 23 December 2022 16:46 IST

US SEC Warns Crypto Investors Against Blindly Trusting ‘Proof-of-Reserve' Audits

Photo Credit: Unsplash/ Ewan Kennedy

The crypto industry lost over $200 billion in the aftermath of the FTX collapse

Highlights

Binance, KuCoin got their proof-of-reserves audited
Paul Munter is the acting chief accountant of the SEC
The FTX crypto exchange filed for bankruptcy last month

Following the collapse of the FTX crypto exchange due to a liquidity crunch, several global crypto firms have conducted the audits of their respective proofs-of-reserves. The aim is to ensure their users that, under any emergency, the exchanges will be able to handle all withdrawals without going bankrupt. Officials from US' Securities and Exchange Commission (SEC) have warned crypto investors, that they must not blindly trust the internal audits of crypto firms.

In recent days, KuCoin, Binance, CryptoCom, and Giottus — among other exchanges got their proofs-of-reserves verified, internally and as well as via third-party authenticators.

In a recent interview, Paul Munter, the acting chief accountant of the SEC said not all firms are even sharing numbers from their audits and hence, should not be taken as reliable sources.

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“Investors should not place too much confidence in the mere fact a company says it's got a proof of reserves from an audit firm. Having such a report is not enough information for an investor to assess whether the company has sufficient assets to cover its liabilities,” a Wall Street Journal report quoted Munter as saying.

Mazars, the auditing firm working with crypto majors like Binance and CryptoCom, temporarily halted all work for clients in the crypto industry on December 16.

While the exact reason for the deed was not revealed, Mazars did deactivate web pages showing audit findings for Binance.

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The law enforcement authorities in the US are closely tracking developments in the crypto industry.

An alarm, for instance, was raised against Binance's proof-of-reserve report earlier this month by John Reed Stark, former chief of the SEC of Internet Enforcement.

Binance's “proof of reserve” report doesn't address effectiveness of internal financial controls, doesn't express an opinion or assurance conclusion and doesn't vouch for the numbers. I worked at SEC Enforcement for 18+ yrs. This is how I define “red flag. https://t.co/6oEqmArjS9
— John Reed Stark (@JohnReedStark) December 11, 2022

OKX, a Seychelles-based cryptocurrency exchange published its second proof-of-reserve report on Friday, December 23. As part of its commitment to get the trust of as many investors as possible, the company has vouched to provide similar reports every month.

The FTX crypto exchange filed for bankruptcy last month, that followed the arrest of its founder and CEO, Sam Bankman Fried, for defrauding customers.

In the aftermath, the overall valuation of the crypto market as per CoinMarketCap.

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Further reading: Cryptocurrency, SEC, Crypto Investors, Proof of Reserve Audits

Radhika Parashar

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Radhika Parashar is a senior correspondent for Gadgets 360. She has been reporting on tech and telecom for the last three years now and will be focussing on writing about all things crypto. Besides this, she is a major sitcom nerd and often replies in Chandler Bing and Michael Scott references. For tips or queries you could reach out to her at RadhikaP@ndtv.com. More