Investors have been cautioned by top Securities and Exchange Commission (SEC) official Paul Munter to be “extremely careful” when relying on a cryptocurrency company’s “proof-of-reserves” audit.
In an interview with The Wall Street Journal on December 22, Paul Munter, the acting top accountant of the SEC, said, “We’re telling investors to be extremely skeptical of some of the promises that are being made by crypto firms.”
Since the demise of the cryptocurrency exchange FTX, a number of crypto companies have requested “proof-of-reserves” audits in an effort to allay worries about the stability of their own exchange.
The outcomes of these audits, according to Munter, aren’t always indicative of the company’s financial health.
“Investors should not place too much confidence in the mere fact a company says it’s got a proof-of-reserves from an audit firm.”
He continued by saying that these proof-of-reserve filings “lack” the information necessary for stakeholders to assess the company’s ability to cover its obligations.
Munter also recently gave a speech at the Association of International Certified Professional Accountants Conference in Washington, D.C. on December 12, when he allegedly vented his dissatisfaction about the structure of cryptocurrency organizations, which is always changing.
Munter told WSJ that the SEC may submit a situation to the division of enforcement for further consideration if it discovers “troublesome” fact patterns.
John Reed Stark, the former director of the SEC’s Internet Enforcement, raised a “red flag” earlier this month over Binance’s proof-of-reserve report on Twitter on December 11.
He said that the proof of reserve report from Binance didn’t address the efficacy of internal financial controls, nor did it provide an opinion or assurance conclusion, nor did it attest to the accuracy of the figures.
On December 16, it was made public that the French auditing company Mazars Group had shut down the portion of its website devoted to cryptocurrency audits.
The company has partnerships with a number of well-known cryptocurrency exchanges, including Binance, KuCoin, and Crypto.com
A proof-of-reserve audit is still a practical step to examine the financial stability of cryptocurrency exchanges, but it is insufficient on its own, according to Ben Sharon, co-founder of the digital asset management company Illumishare SRG.
Due to the failure of big cryptocurrency companies including Three Capital Arrows, Celsius, and most recently cryptocurrency exchange FTX, investors have lost millions of dollars over the last 12 months.
