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Binance Auditors Admit to SEC its Hard to Prove Exchange is ‘Fully Collateralized’

Published September 19, 2023 11:41 AM
James Morales
Published September 19, 2023 11:41 AM
Key Takeaways
  • Binance has responded to the SEC’s requests for documents.
  • The response reveals that Binance auditors said it was hard to prove deposits are fully collateralized.
  • Magistrate has asked the opposing parties to agree to more tailored requests for information.

Binance US has responded to the US Securities and Exchange Commission’s (SEC) request for documents as part of its lawsuit against the crypto exchange.

Claiming the SEC’s requests are “too broad and burdensome,” Binance has suggested additional meetings with the regulator to explore document sharing with a narrower focus. In its counterproposal, Binance also highlights auditors’ difficulties in ensuring full collateralization at specific times.

Binance Responds to SEC Evidence Requests

In court documents  filed on September 15, Binance detailed objections to 39 requests for evidence made by the SEC as part of its lawsuit against the firm. 

Arguing that the requests were “vague, ambiguous [and] overbroad,” Binance has objected that the requests are disproportionate to the needs of the SEC’s investigation.

Instead, it argued that a smaller, more specific subset of documents related to the alleged offenses should suffice. 

Against the SEC’s requests, Binance cited the need for trade secrecy and attorney-client privilege. It also objected to the requests on the grounds that they “impose an undue burden” on the company by requiring it to compile information not currently in its possession.

Auditors Say It’s Hard to Prove Binance is Fully Collateralized

Binance’s recently filed response reveals that the SEC’s Request for Production No. 27 called for Binance to hand over all “auditors’ assessment of internal control deficiencies related to the custody and control of Customer Assets.”

Among such audits, the request referred to the existence of an Armanino audit which found that Binance’s custody structure “makes it very difficult to ensure the Company is fully collateralized at specific points in time.” 

It’s easy to see why the SEC included such a request; the referenced Armanino audit gets to the heart of many of its allegations against Binance.

For example, the SEC has accused Binance US of failing to properly segregate US customer deposits from those involved in the exchange’s global operations. 

In its charges , the Commission alleged that Binance misled investors with regard to “where and with whom investor funds and crypto assets were custodied.”

Judge Responds Favorably to Binance’s Objections

In a court hearing  addressing Binance’s objections to the SEC’s requests, federal Magistrate Judge Zia Faruqui said he wasn’t “inclined to allow the inspection at this time.” 

Instead, he suggested that the regulator should make more specific requests and interview additional witnesses to gather the required information.

Matthew Martens, Binance.US’s attorney, mentioned during the hearing that the company had complied with every “specific request” from the SEC. However, he emphasized that they would not respond to what he deemed as unreasonable document requests from the government.

Doubts Persist Over Binance’s Proof-of-Reserves

Binance and its CEO Changpeng Zhao have always insisted that the exchange overcollateralizes customer deposits. 

In order to reassure users that it holds assets worth more than 100% of what customers are owed, Binance has even stepped up efforts to increase transparency in its reserve policy.

However, moves to demonstrate its proof-of-reserves have done little to assuage the concerns of Binance’s critics.

For instance, while the company only details  reserves for 31 cryptocurrencies, Binance lists over 350 tokens on its platform. 

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