SEC Issues Warning to Investors over Cryptocurrency Firms’ Audits

Recently SEC published its official statement advising investors to be careful of investing in cryptocurrencies. SEC is also still determining the transparency of the audits being conducted by cryptocurrencies.

Following the fall of FTX, regulators are hunting down cryptocurrencies and crypto platforms across the globe. In particular, SEC is skeptical of crypto companies’ proof of reserve protocol.

In his recent interview with Bloomberg, the acting Chief accountant of SEC, Paul Munter, said it is time for investors to be careful “about some of the statements being made by crypto companies.”

He also said that most of these audits need more technical grounds that are concerned not only with SEC and other regulations.

Most recently, FTX has collapsed as it failed to address the key regulatory implication in its audit. Another lawsuit between SEC and Ripple exchange is in its final stage.

He also discussed Binance, the world’s leading cryptocurrency exchange, by examining the current rumors about the Binance exchange.

It is also a fact that the recent insolvency of FTX, one of the world’s biggest platforms, has severely dented the trust of cryptocurrency investors in the decentralized platforms.

In order to gain that interest, these centralized platforms are now adopting the proof of reserves protocol.

The aim behind this adoption is to ensure investors that their digital assets are safe and being used with 100% transparency.

What is Proof of Reserve Protocol (POR)?

Proof of Reserve (POR) is a digital terminology; it refers to the independent inquiry conducted by centralized crypto exchanges.

This inquiry aims to show the investors that their funds are being held in wallets under their names.

This helps crypto exchanges and the overall market to achieve the highest level of transparency. But in regulators’ eyes, more than POR is needed to ensure that investors’ money is safe.

Experts have always been skeptical of POR because it does not show the entire picture of the company’s financial matters, such as the full balance sheet, like assets, liabilities, and debts.

This means the half information provided by the POR needs to be sufficient for investors to be aware of the company’s financial health.

Munter also added that SEC is very seriously and thoroughly watching what narrative crypto exchanges are selling through their audits. Moreover, he also said that SEC has recently sent warnings to many audit firms.

Most Recently Binance’s Audit Report Has Been Lambasted by Industry Veterans

Binance, the world’s largest cryptocurrency exchange by daily trade volume, published its POR audit report on 7th December.

The reports claimed that its Bitcoin reserve funds have a collateralization ratio of 101%. Showing that it has more than the needed Bitcoin reserves to back all the BTCs deposited by the customers.

This means Binance’s own BTC reserves are higher than the customers’ BTC reserves.

These claims were soon denied by some of the leading crypto experts and branded as a ‘red flag.’ Some experts have also said this is not enough to satisfy worried investors.

Douglas Carmichael, the accounting professor, and Paul Munter both have said that the POR report does not provide enough information to help investors.

They also said that half information could be more damaging rather than beneficial. Moreover, it does not provide credible proof of whether the company has the capacity to cover all of its liabilities.

Experts have clearly said that these sorts of audits are irrelevant, incomplete, and outdated. Investors must not believe what POR audit reports are claiming, as these reports are highly misleading.

Moreover, following Binance’s audit report controversy, a leading audit firm Mazars, which audited Binance’s POR report, has parted ways with Binance.

The leading firm has said that from now on, it will not conduct crypto audits. This means some of the leading cryptocurrency exchanges such as Binance, Coinbase, KuCoin, and Crypto. Com is looking for new audit firms.

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