SEC to Crypto Investors: Be Wary of ‘Proof of Reserves’

Crypto investors might not be getting a complete picture from cryptocurrency company audits.

That’s according to the Securities and Exchange Commission (SEC), which is especially worried about “proof of reserves” statements, The Wall Street Journal (WSJ) reported Thursday (Dec. 21).

“We’re warning investors to be very wary of some of the claims that are being made by crypto companies,” Paul Munter, acting chief accountant for the SEC said, per the report.

Munter told the WSJ that “proof of reserves” reports are designed to demonstrate that the crypto firm has enough assets to cover its customers’ funds.

“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 said, according to the report. Providing such a report “is not enough information for an investor to assess whether the company has sufficient assets to cover its liabilities.”

Munter added that the SEC is examining how crypto firms portray their audits, warning audit firms to be cautious.

“We are increasing our understanding of what’s going on in the marketplace,” he said. “If we find fact patterns that we think are troublesome, we will consider a referral to the division of enforcement.”

His comments come as cryptocurrency companies are working to reassure investors in the wake of the FTX collapse by establishing new oversights and hiring auditors. The increased scrutiny from regulators, however, has led one auditing firm — Mazars — to put its cryptocurrency work on hold.

The decision last week by the South African firm came after the company got pushback on its work for crypto giant Binance, with some in the industry making the same sort of observations Munter did about proof of reserves reports.

As PYMNTS wrote earlier this week, crypto investors and industry investors want to see proof that Binance, the largest crypto platform in the world, is cut from a different cloth than FTX, whose implosion has rocked the industry.

“The leading cryptocurrency exchange and its founder and CEO, Changpeng Zhao, who played a key role in setting off the death spiral of the FTX enterprise, are now themselves facing increasing scrutiny over the opacity of Binance’s operations and the solvency of its crypto holdings,” PYMNTS reported, noting that the efforts “to restore public trust have so far been challenging”

Investors have pulled billions of dollars from the exchange, and the company’s BNB token price recently fell to its lowest level since July.

In a memo provided to PYMNTS, Zhao indicated he expects the next several months to be “bumpy,” but the company will emerge stronger.

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