Hedge fund manager Michael Burry, famous for predicting the 2008 financial crisis, says the problem with auditing cryptocurrency exchanges, like Binance and FTX, is the same as when he started using a new type of credit default swap. “Our auditors were learning on the job“he described, adding that it was “not a matter ofnot a good thing“.
Michael Burry on audits of crypto-currency companies.
Michael Burry, said Friday that proof-of-reserves (POR) audits of crypto-currency exchanges, including Binance and the collapsed FTX exchange, make no sense.
Michael Burry is best known for being the first investor to foresee and profit from the U.S. subprime mortgage crisis, which occurred between 2007 and 2010. He is featured in “The Big Short“, a book by Michael Lewis about the mortgage crisis, which was made into a movie starring Christian Bale.
This is the problem. In 2005 when I started using a new kind of credit default swap, our auditors were learning on the job. That’s not a good thing. Same goes for FTX, Binance, etc. The audit is essentially meaningless. pic.twitter.com/mA3MMvaUTu
– Cassandra B.C. (@michaeljburry) December 16, 2022
Commenting on accounting firm Mazars Group’s discontinuation of reserve proof audits (ROPs) for crypto-currency companies, Burry tweeted:
Here’s the thing. In 2005 when I started using a new type of credit default swap, our auditors were learning on the job. That’s not a good thing. The same is true for FTX, Binance, etc. The audit is essentially meaningless.
Burry’s tweet refers to a Bloomberg article explaining that the French accounting firm has suspended its work on crypto-currency companies due to concerns over intense media scrutiny and indications that markets have not been reassured by the proof-of-condition reports it has issued so far, including for Binance, Crypto.com and Kucoin.
The news follows a review from the CEO of rival crypto-currency exchange Kraken, Jesse Powell, who recently denounced Binance’s ROP audited by Mazars. This week, more than $3 billion in funds were withdrawn from Binance.
I’m sorry but no. This is not PoR. This is either ignorance or intentional misrepresentation.
The merkle tree is just hand wavey bullshit without an auditor to make sure you didn’t include accounts with negative balances. The statement of assets is pointless without liabilities. https://t.co/b5KSr2XKLB
– Jesse Powell (@jespow) November 25, 2022
In an interview with CNBC on Thursday, Binance CEO Changpeng Zhao (CZ) also said that most accounting firms don’t know how to audit crypto-currency exchanges.
The executive was asked why Binance doesn’t use one of the big four accounting firms – Deloitte, EY, KPMG and Pricewaterhousecoopers (PwC) – to audit its accounts, and whether the crypto-currency company was unable to provide files and data so that the auditors would be comfortable giving their stamp of approval. Binance’s boss simply replied:
Many of them don’t even know how to audit crypto exchanges.