Regulators Crack Down On Crypto Company Audits After FTX Scandal

The U.S. Securities and Exchange Commission is increasing scrutiny on firms conducting audits for cryptocurrency exchanges, due to the risk that these reports might be misleading investors about the exchanges’ financial health, the SEC’s acting chief accountant, Paul Munter, told The Wall Street Journal Wednesday.

Many cryptocurrency exchanges are based outside of the United States, such as the now-bankrupt Bahamas-based FTX, thus falling outside of the SEC’s jurisdiction and making enforcement actions less likely, according to the WSJ. By issuing this warning, the SEC is hoping investors are more aware of the risks of investing in cryptocurrency companies while reminding auditors that they are being watched.

“We’re warning investors to be very wary of some of the claims that are being made by crypto companies,” Munter told the WSJ. “Investors should not play too much confidence in the mere fact a company says its got a proof of reserves from an audit firm … [that] is not enough information for an investor to assess whether the company has sufficient assets to cover its liabilities.”

These “proof of reserve” reports are intended to demonstrate that a company has enough funds on hand to pay all investors if they all opted to withdraw at once, the WSJ reported. After FTX’s collapse amid allegations that the firm mishandled billions in customer assets, companies have increasingly turned to these reports in a bid to reassure customers that their assets are safe.

The world’s largest crypto exchange, the Cayman Islands-based Binance, recently unveiled one such audit by the firm Mazars, although the firm did not issue an opinion on the report, and thus did not vouch for the numbers presented, the WSJ reported. A recent report from exchange Crypto.com lacked any numbers at all, citing “confidentiality,” and was also signed by Mazars.

A Crypto.com spokesperson told the WSJ that the company was confident in the report and that a more thorough audit would have been too time-intensive considering investors’ attitude following FTX’s bankruptcy. High profile auditors, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers, collectively known as The Big Four, have generally shunned crypto exchanges, the WSJ reported.

Binance, Crypto.com, Mazars and the SEC did not immediately respond to a Daily Caller News Foundation request for comment.

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