Investors have been cautioned by a senior Securities and Exchange Commission (SEC) official to be “very wary” when relying on a cryptocurrency company’s “proof-of-reserves.”
In an interview with The Wall Street Journal on December 22, Paul Munter, the acting chief accountant of the SEC, stated, “We’re warning investors to be very wary of some of the claims that are being made by crypto companies.”
Since the demise of the cryptocurrency exchange FTX, a number of crypto companies have requested “proof-of-reserves” audits in an effort to allay concerns about the stability of their own exchange.
SEC’s Munter says these audits are not indicators of a good financial position
The results 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 reports “lack” the information necessary for stakeholders to assess the company’s ability to cover its liabilities.
Munter also recently gave a speech at the Association of International Certified Professional Accountants Conference in Washington, D.C. on December 12, where he reportedly vented his frustration over the structure of cryptocurrency firms, which is constantly changing.
Munter told WSJ that the SEC may refer a situation to the division of enforcement for additional review 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 regarding Binance’s proof-of-reserve report on Twitter on December 11.
He asserted that the proof of reserve report from Binance didn’t address the effectiveness of internal financial controls, nor did it express 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 section of its website devoted to cryptocurrency audits. The company had partnerships with a number of well-known cryptocurrency exchanges, including Binance, KuCoin, and Crypto.com.
Due to the failure of major cryptocurrency companies like Three Capital Arrows, Celsius, and most recently cryptocurrency exchange FTX, investors have lost millions of dollars over the last 12 months.