With Proof of Reserves, Binance Reassure Customers and the cryptocurrency community
Cryptographic proofs enabled by blockchain technology promote financial transaction transparency on cryptocurrency exchanges. By developing a legitimate framework for evaluating cryptocurrency custodians, Proof of Reserves (PoR) further improves this transparency. Even while it’s a step in the right direction, PoR still needs to be improved if the ecosystem is to become more open and reliable. A PoR audit looks to make sure that custodians are holding all of the money belonging to their clients. To demonstrate to depositors and the general public that their deposits match their balances, custodial businesses in cryptocurrencies utilize PoR audits. To rule out the potential of reserve data being fabricated, these audits are carried out by impartial third parties.
PoR is crucial for a number of reasons. First of all, it gives customers the ability to confirm that the balances they have on, say, a cryptocurrency exchange have complete asset backing. Second, it encourages companies to adhere to transparency requirements, which makes it more difficult for them to engage in dubious or unlawful financial behavior. PoR should ideally be advantageous to both users and enterprises. By reducing security threats and guarding against dangerous players, it safeguards users. Additionally, it aids companies in retaining customers by enhancing their credibility.
The auditor uses cryptography to confirm the inclusion of each account’s balance during PoR verification. This process involves a few crucial steps. The auditor starts by taking a picture of all account balances. The fund data is then transformed into a Merkle tree, which is used to organize massive amounts of data for easier processing. Data about user balances is hashed into a “leaf.” Then, a collection of these “leaves” is hashed to create a “branch,” and a collection of “branch” is hashed to create a “root.” The auditor can then check the user address’s ownership using a variety of techniques. For instance, an auditor on Binance has three options for determining ownership. When this information is extracted using the process described by the auditors have also confirmed the trade.
Based on a snapshot analysis by accounting firm Mazars, cryptocurrency exchange Binance Holdings Ltd. published its first proof of reserves on Wednesday. According to the study, the exchange has enough cryptocurrency holdings to cover all of its platform liabilities. In order to reassure consumers that Binance’s assets and liabilities match, it takes a snapshot of the company’s bitcoin holdings at a certain point in time. After conducting its examination on November 22, Mazars reported that it had confirmed that Binance’s assets were collateralized, present on the blockchain, and under the company’s management. It discovered that Binance owned more assets than liabilities combined.
The study also notes the limitations of Mazars’ work, which fell short of a true financial statement audit that would have revealed the company’s financial stability and its capacity to carry on business in the next weeks and months. In its report, the company stated, “As a result, we do not give an opinion or an assurance conclusion.” “We might have discovered other issues that would have been notified if we had carried out extra procedures.”
The report was sent to Binance Capital Management Co. from a Mazars partner in South Africa. Ltd. and a British Virgin Islands-based management firm. In order to finish its work for Binance, Mazars said that it adhered to the attestation criteria established by the International Auditing and Assurance Standards Board. The failure of the cryptocurrency exchange FTX has triggered demands for greater transparency in the sector. On December 5, cryptocurrency exchange KuCoin said that Mazars had been hired to carry out a similar proof of reserves check of its own holdings. Global norm-makers have not yet established regulations for crypto accounting.