Since the unexpected bankruptcy of the FTX cryptocurrency exchange on November 11, the crypto world has been trying to play the game of transparency.
The company collapsed in a matter of days due to massive withdrawals from its clients after being valued at $32 billion in February.
How is this possible, investors and regulators ask?
In an effort to gain the trust of the general public, FTX’s rivals, which are mostly unregulated, have been trying to play the game of transparency in recent days. This includes publishing so-called proof-of-reserves reports.
The goal is to prove that for every customer and investor held in the form of a cryptocurrency, they have an equivalent dollar in reserve in another asset, in case the customers want their money back. The idea is to also show that they are not misusing clients’ assets, which is something FTX has been accused of.
Binance, the world’s largest cryptocurrency exchange by volume, and Crypto.com recently released so-called proof-of-reserves reports, audited by the prestigious Mazars Group firm, formerly Donald Trump’s accounting firm.
Binance’s reports were mocked on social media for showing that the information contained therein was carefully selected by the company. Instead of the transparency expected by the general public, the group had chosen to publish the information that suited them.
Just a few days after the publication of this audit, Mazars announced on December 16 that it would cut ties with all crypto firms.
Mazars said in an emailed statement that it has “paused its activity related to providing proof of reserve reports for entities in the cryptocurrency sector due to concerns about how these reports are understood by the public.”
The company said its Proof of Reserves reports are “conducted in accordance with reporting standards relevant to an agreed procedure report.”
“They do not constitute assurance or an audit opinion on the subject matter. Instead, they report limited findings based on the agreed upon procedures performed in the subject matter at a historical time,” the statement continued.
Crypto vs CDS
For legendary investor Michael Burry, that’s the problem. For him, one should not believe any audit published by Binance, FTX and other crypto companies. He explains that what happens with cryptocurrencies reminds him of what happened with Credit Default Swap: CDS auditors didn’t fully understand these products, so they couldn’t really assess the risk.
This is the case with the cryptocurrency industry today, says Burry. Therefore, anything they can say on the subject is of little value. It’s no use, said Burry.
“Here’s the problem,” Bury, the founder of Scion Asset Management, said, referring to a Bloomberg article that said Mazars is stopping all work with crypto companies. “When I started using a new kind of credit default swap in 2005, our auditors were learning on the job. That’s not a good thing. The same goes for FTX, Binance, etc.”
He added: “The audit is essentially pointless.”
Burry, whose often cryptic posts are taken as gospel by many individual investors on social networks, gave no further details. His comments are another blow to the crypto industry, whose credibility has completely collapsed since FTX’s bankruptcy. Four days before the bankruptcy, founder Sam Bankman-Fried claimed that the FTX assets were “fine”.
The 2008 financial crisis, one of the greatest financial debacles in history, made Michael Burry a legend.
It made him one of the examples to follow in defying standard practice in financial circles. The 2015 movie “The Big Short” describes how the investor, who had no specific expertise in finance and real estate, came to understand that the industry had become a sandcastle, with financiers and bankers creating exotic products based on of mortgages granted to financially vulnerable households and borrowers with poor creditworthiness.
He therefore decided to bet on the collapse of the subprime mortgage market, hence the name ‘Big Short’. History has proved him right.