Binance Is Trying to Calm Investors, but Its Finances Remain a Mystery

“It’s important for us to show users that the coffers are not bare, like at FTX,” said Binance’s chief strategy officer,

Patrick Hillmann.

Over the past month, Binance has publicized details about its crypto wallet addresses. It has hired an outside accounting firm to prepare a “proof of reserve report” covering a portion of its assets and liabilities, including a small set of financial data. And it has promised more information will be forthcoming.

“When we say proof of reserves, we are specifically referring to those assets that we hold in custody for users,” Binance says on its website. “This means that we are showing evidence and proof that Binance has funds that cover all of our users assets 1:1, as well as some reserves.” 

Investors still shouldn’t be satisfied with the report, said Douglas Carmichael, an accounting professor at Baruch College in New York and former chief auditor of the U.S. Public Company Accounting Oversight Board. “I can’t imagine it answers all the questions an investor would have about the sufficiency of collateralization,” Mr. Carmichael said. “That’s the main thing it seems to speak to.” The report said its purpose was to show customers that the assets covered in the report “are collateralized, exist on the blockchain(s) and are under the control of Binance.”

Binance, which is private, isn’t required to produce audited financial statements, and it hasn’t released anything that would provide a comprehensive overview of its financial condition or liquidity. Nor has it indicated plans to do so.

The reserve report, released Wednesday, is a five-page letter from a partner at the South African affiliate of the global accounting firm Mazars. It contained three numbers. The letter wasn’t an audit report, didn’t address the effectiveness of the company’s internal financial-reporting controls, and said Mazars did “not express an opinion or an assurance conclusion,” meaning it wasn’t vouching for the numbers. 

Mazars said it performed its work using “agreed-upon procedures” requested by Binance and that “we make no representation regarding the appropriateness” of the procedures. 

The letter was addressed to a Binance entity called Binance Capital Management Co. Ltd., which is based in the British Virgin Islands, though it wasn’t clear if the assets it counted were held by that unit. The report didn’t show total assets or total liabilities. Rather, its scope was limited only to bitcoin assets and bitcoin liabilities. Binance said it would begin releasing information about other crypto tokens in the coming weeks.

In an interview, Binance’s Mr. Hillmann said the Mazars letter covered all the bitcoin assets and bitcoin liabilities for the company’s Binance.com exchange—although the Mazars letter itself didn’t say this. Mr. Hillmann also said the Mazars letter didn’t cover any assets or liabilities at Binance’s U.S. operations. “This is the first step in what’s going to be a much longer process,” he said.

The Mazars partner who wrote the letter, Wiehann Olivier, declined to comment.

The few numbers in the report raised fresh questions about the ability of Binance to meet its financial obligations to customers. 

On the last page of the Mazars letter was a brief section called “report details,” which consisted of the three numbers, each denominated in bitcoin. One number was labeled “customer liability report balance” and showed a balance of 597,602 bitcoins. Another number, labeled “asset balance report,” showed a balance of 582,486 bitcoins. 

The upshot is that the total bitcoin liabilities cited in the Mazars letter were 3% greater than the bitcoin assets that were included within the scope of the report as of the reporting date, which was Nov. 22. In other words, Binance didn’t meet its 1:1 ratio of reserves to customer assets. In U.S. dollar terms, based on bitcoin’s price at the time, the liabilities would have been about $9.68 billion, while the assets would have been $9.43 billion, or about $245 million smaller, according to calculations by The Wall Street Journal.

The third number painted a different picture. That number was labeled “net liability balance (excluding in-scope assets lent to customers)” and showed a liability figure that had been adjusted downward by about 21,860 bitcoins to 575,742 bitcoins. Binance noted that it lets customers borrow crypto assets through loans or margin accounts.

On this adjusted basis, the Mazars report showed, the liabilities were 1% less than the assets, leading Mazars to state that “Binance was 101% collateralized” when using that methodology. At the same time, Mazars also wrote that “Binance was 97% collateralized” when using the larger liabilities number for the calculation.

Binance spokeswoman Jessica Jung said the difference of 21,860 bitcoins was “made up of BTC loans made to customers through the Binance loan program” and that “the collateral for said loans are not in BTC, but in other currencies.” If Binance hadn’t provided these bitcoin loans, she said, then “we would be 101% collateralized.” The reasons for the adjustment appear to be tied to the scope of the Mazars report, which focused only on bitcoin so it didn’t count collateral in other currencies. 

Binance announced its new “proof of reserves system” in a Nov. 25 news release that referred to the numbers as “audit results.” Mr. Carmichael, the former PCAOB chief auditor, said: “It is a gross misrepresentation to call this an audit.”

During the interview, Mr. Hillmann also at times referred to the work performed by Mazars as an “audit.” Asked about the appropriateness of Binance’s use of the term “audit” in the news release and elsewhere, Mr. Hillmann said: “We’re talking about a review of our assets in custody.” He also said: “I would just say we’re parroting others’ descriptions of this as an independent audit.”

Other basic information about Binance is lacking. Mr. Hillmann said he couldn’t provide the name of Binance’s ultimate parent company because Binance over the past year and a half has been in the process of a broad corporate reorganization. He confirmed that Binance’s founder and chief executive,

Changpeng Zhao,

is the majority owner of the Binance.com exchange and Binance’s U.S. operations.

Hal Schroeder, a former Financial Accounting Standards Board member and investment manager who teaches accounting at Rutgers University, said the Mazars report means little without any information about the quality of Binance’s internal controls, such as its systems for keeping accurate books and records.

“We don’t know how good Binance’s systems are to liquidate assets to cover any margin loans,” he said. “And we know in the U.S., even with all the good systems, banks have occasionally been caught off-guard. In light of what we’ve seen in the Bahamas, I don’t want to conclude that all the systems are that good.” He was referring to FTX, which had its headquarters in Nassau.

What would happen if Binance had a shortfall? The company in a Nov. 9 news release pointed to an “emergency insurance fund” it said it established in 2018, called the “secure asset fund for users,” or SAFU for short. The company said, “We’ve topped the SAFU balance back to” $1 billion. 

Binance said the fund consisted of a combination of bitcoin and two tokens created by the company—one called Binance USD and another called BNB. Binance hasn’t released financial statements for the fund showing its assets and liabilities, but it says on its website “the value of the fund will fluctuate based on the market.”

Write to Jonathan Weil at jonathan.weil@wsj.com