• The U.S. Securities and Exchange Commission is increasing its scrutiny of audits of cryptocurrency companies, warning investors not to place too much confidence in proof-of-reserve reports.
• The SEC is warning both investors and audit firms that if it finds troublesome „fact patterns,“ the watchdog will consider a referral to the division of enforcement.
• This development is significant as questions have been swirling regarding Binance, which released a report of its proof of reserves but withdrew it two days later when the auditing firm it had hired, Mazars, announced it was no longer working with crypto firms.
The U.S. Securities and Exchange Commission (SEC) is taking a closer look at the audits of cryptocurrency companies, aiming to warn investors who may be placing too much trust in proof-of-reserve reports. In a recent Wall Street Journal report, Paul Munter, the SEC’s acting chief accountant, said that 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.“ He added that having such a report „is not enough information for an investor to assess whether the company has sufficient assets to cover its liabilities.“
The increased scrutiny from the SEC comes in the wake of the collapse of FTX, which caused a ripple effect as nine crypto exchanges across the world announced they would publish transparency reports or Merkle tree proof of reserves to reassure investors. A Merkle tree is a cryptographic data structure that allows users to verify the stability of their holdings on exchanges, while still maintaining privacy.
The SEC has made it clear that if it finds any troubling „fact patterns,“ it will consider referring the case to the division of enforcement. This development is particularly significant as questions have been raised regarding Binance, the largest crypto exchange by trading volume. Binance had released a report of its proof of reserves but withdrew it two days later when the auditing firm it had hired, Mazars, announced it was no longer working with crypto firms.
Binance has reportedly been searching for another audit firm to work with, but the Big Four (Deloitte, EY, KPMG and PwC) are unwilling to conduct a proof of reserves for a private crypto company. The SEC’s increased scrutiny of cryptocurrency companies is a reminder to investors that when it comes to investing, caution and due diligence is key. A proof-of-reserve report is not a guarantee of a company’s financial health, and the SEC is making it clear that investors should be aware of this.