Traditionally, we’ll start by explaining what’s happening. After the collapse of cryptocurrency exchange FTX, user confidence in centralised platforms declined. To get it back, exchanges have taken to publishing confirmations of their own reserves. In other words, they want to confirm that they have enough coins to meet the demand for cryptocurrency withdrawals. Which means users will be able to get their own cryptocurrencies in any conditions.

Bitcoin reserves of the cryptocurrency exchange Binance as of the end of November

While such statistics make the industry more transparent, many have not appreciated the idea in its current execution. In particular, users want to see exchanges’ liabilities – that is, what it owes to other companies. Yet the liquid assets of the FTX cryptocurrency exchange were around $900 million, while the liabilities amounted to $9 billion. In fact, this is what caused the liquidity hole in the first place.

Binance is not showing its liabilities yet. That is, and although we can see the platform's confirmed reserves, this does not guarantee anything.

As a better example of transparency, we can look at the already familiar WOO X crypto exchange. The day before, it launched a similar platform that discloses the company’s commitments. Most importantly, much of this data can be verified on the blockchain, and is automatically updated every 15 minutes. You can read the information on the platform’s page.

Transparency page of cryptocurrency exchange WOO X

Next, the platform’s staff plan to use Merkle’s tree algorithm – this will ensure that all user balances in place are taken into account when specifying reserves. It will also be followed by an audit from a popular company, which will confirm the correctness of the calculation mechanism.

WOO X cryptocurrency exchange assets on transparency page

As we have already noted, Binance does not disclose its commitments. On top of that, a popular auditor has now withdrawn its cooperation with the cryptocurrency exchange – at least temporarily.

What’s going on with Binance?

Binance representatives commented on what happened in an address to journalists of the news outlet Decrypt.

Mazars management has announced that the firm will temporarily suspend all of its cryptocurrency clients. This includes Crypto.com, KuCoin and Binance. Unfortunately, this means that we will not be able to work with Mazars at this time.

As a reminder, Mazars representatives earlier checked the Bitcoin holdings of cryptocurrency exchange Binance. They confirmed that the platform's collateral for commitments to users is 101 percent. Accordingly, customers can withdraw all their coins without any problems. The message about the availability of reserves looked like this.

Confirmation of Bitcoin reserves of cryptocurrency exchange Binance from the auditors

Binance will continue to “strive for transparency”, with the exchange’s management still being criticised for its methods of proving its financial stability. For example, Kraken founder Jesse Powell has previously said that Binance should have disclosed its liabilities first, before it could be compared to the company’s reserves.

After the termination of cooperation with Mazars, Binance will look for a new auditor. Here’s how the exchange’s representatives commented.

We have approached several large firms, including the Big Four, but at the moment they are unwilling to approve proof of reserves for a private cryptocurrency company. So we are still looking for an auditor who will be willing to award the contract.

Hourly chart of the BNB exchange rate

Last week, Mazars published an estimate of Binance’s reserves, reporting that as of 22 November its net customer deposit collateral ratio of 575,742 BTC was 101 per cent. However, the link to the report on the company’s website is now no longer working.

Mazars also assessed the reserves of the Kucoin and Crypto.com exchanges, confirming they were fully collateralised. All of these reports have also been removed from the company’s website. As a result, the relevant pages display an error.

Deleted Binance exchange Bitcoin reserves audit page

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Meanwhile, cryptocurrency exchange FTX, which went bankrupt last month, has filed a new petition with the court to approve buyout proceedings against the company’s four independent solvent subsidiaries. FTX representatives in the lawsuit are trying to initiate the sale of individual company structures so that the exchange can at least cover its debts to customers and creditors.

Binance CEO Changpen Zhao

Under the law, bankrupt companies have to get court approval if the sale of the assets of entities whose activities go beyond their business is contemplated. FTX wants to sell the exchange-affiliated firms Embed Technologies, LedgerX LLC, FTX Japan and FTX Europe within the next two months. The court is set to consider the application on 11 January 2023, with the deadline for objections being 29 December 2022.

Lawyers for FTX claim they already have “dozens of offers” from those wishing to acquire the aforementioned firms. However, the deals cannot be approved without formal approval from a judge.

Well, a little more detail on exactly who FTX is selling. The first firm on the list is Embed Technologies, which operates a clearing and custodial platform for brokers, dealers and financial institutions. It is also controlled by regulators FINRA and SEC. Embed Technologies has until 18 January 2023 to complete trading.

The second item on the list is the LedgerX exchange, which is regulated by the CFTC. FTX representatives expect to sell their stake in LedgerX by the January 25, 2023 deadline. The other two entities, FTX Japan and FTX Europe, are regional subsidiaries of the bankrupt cryptocurrency exchange in Singapore, Japan and Switzerland. They have until 1 February 2023 to conclude deals.

If the court approves FTX’s lawyers’ bid and the above entities can be sold to interested buyers, additional funds will be available to compensate creditors and customers of the exchange.

We believe that the auditor's rejection of its own results is a bad sign and a blow to the reputation of the trading platforms. However, these are just the first steps for more transparency from crypto exchanges, and they are unlikely to be perfect right away. Therefore, we can assume that with time, the situation will still get better and the availability of trading platform reserves will not be questioned by traders.

Follow the developments in our millionaires’ crypto-chat. There we also talk about other important topics that concern the crypto world.