TheChek News Flow

Crypto exchange has begun releasing data to shore up confidence following collapse of FTX

Binance recently made a commitment to transparency, but it has a long way to go before it discloses enough meaningful information to give investors confidence in its future, accounting and financial specialists say.

The world’s largest cryptocurrency exchange is seeking to reassure customers about the safety of their holdings after the collapse of FTX. Binance’s position means its success or failure will weigh heavily on the entire crypto market.

“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.”

Asset manager’s real estate and credit vehicles have been hit by wave of redemption requests

Blackstone has warned of the risk of delays to the launch of a new private equity fund designed for wealthy individuals, as it copes with heavy investor withdrawals at two other funds in real estate and credit aimed at a similar clientele.

The New York-based investment manager has been preparing to open a fund called the Blackstone Private Equity Strategies Fund, or BXPE, that would become its flagship strategy for rich individuals to participate in its private equity business. Blackstone has historically catered to institutional clients such as pension funds.

Blackstone has in recent days informed wealthy investors and their financial advisers that it may wait for fundraising conditions and financial markets to improve before launching BXPE, according to people familiar with the matter. Clients of Blackstone’s other “retail” products told the Financial Times they had expected the fund to be launched by early 2023.

The potential delay comes days after the group limited withdrawals from its $69bn Blackstone Real Estate Income Trust after a spate of redemption requests from its wealthy individual investors. In 2021 Blackstone launched a similar product designed for credit investments that has also received redemptions.

The curbs on withdrawals from the real estate fund have raised concerns over its future growth and hit Blackstone’s share price. Blackstone declined to comment.

Blackstone has also informed clients that it will not be raising new capital for vehicles known as Blackstone Total Alternative Solutions funds, which were designed nearly a decade ago when it initially sought to attract assets from wealthy individuals.

The BTAS funds have a 10-year life and are raised annually. Blackstone instead plans to direct interested clients to BXPE, designed to be a perpetual vehicle that does not return capital at the end of a fund’s life. BXPE clients would commit their capital when they initially invest instead of having it called on a deal by deal basis.

Since the years just after the financial crisis, Blackstone founder Stephen Schwarzman has been seeking ways to make the buyout business available to a broader swath of investors beyond the pensions, endowments and sovereign wealth funds that have traditionally been the firm’s clients.

BXPE is being set up to invest in corporate buyouts and equity-oriented strategies including late-stage venture investments, musical royalties and the purchase of stakes in other private equity firms or their funds.

The fund is poised to be Blackstone’s most complex product yet. Unlike Breit and Bcred, the sister credit fund, which both generate a significant portion of their returns from regular cash distributions to investors, BXPE will not pay dividends.

Investors will earn their returns from episodic and unpredictable asset sales, or the complex and often subjective mark-up or writedown of the quarterly net asset value of its holdings.

That structure may run into issues if investors begin to withdraw their money when markets fall or financial conditions become stressed, said Kevin Kneafsey, a senior investment strategist at Allspring Global Investments.

“The mechanism is going to run into a problem when people are taking money out and there needs to be a valuation of the underlying assets,” said Kneafsey, who noted that if Blackstone were to value the portfolio too low it could fuel redemptions. If the assets are valued too high, the investors redeeming from the fund at the inflated prices would “effectively be taking money from the people who aren’t redeeming”, he added.

“The valuations of BXPE’s assets may differ from liquidation values that could be realised in the event that BXPE were forced to sell assets,” the BXPE prospectus warns.

Since last spring investors have been withdrawing from Breit at an increasing rate, hitting limits Blackstone established to safeguard against the risk of being forced into a fire sale of illiquid real estate properties to meet redemptions.

Breit allows for 2 per cent of total assets to be redeemed by clients each month, with a maximum of 5 per cent allowed in a calendar quarter. This quarter, both Breit and Bcred have hit their redemption caps, though withdrawals have not been limited for the latter.

BXPE will allow investors to commit on a monthly basis, but only allow withdrawals each quarter up to a 5 per cent cap. BXPE will invest up to 80 cent of its assets in equity-oriented strategies and up to 20 per cent in debt securities, according to filings.

When it launches, BXPE will compete against products managed by competitors including Partners Group, Hamilton Lane and StepStone Group.

Executives at these funds conceded that Breit’s recent withdrawal limits and more volatility may slow new commitments from wealthy investors. But they expressed confidence in the market’s long-term prospects.

Bob Long, chief executive of StepStone Private Wealth, told the FT that equity-oriented funds may not suffer the same redemption risks as Breit because there are no obvious ways to get public market exposure to private equity strategies, unlike in real estate or credit where investors have access to scores of publicly listed vehicles.

Renewable energy forecast to become largest source of electricity generation as soon as 2025

Solar power is undergoing a boom as the energy crisis drives a shift to renewable energy following the war in Ukraine and is expected to surpass coal power by 2027, the International Energy Agency has forecast.

Renewable energy overall will become the largest source of global electricity generation by early 2025, the IEA said, and the world will add twice as much renewable capacity from 2022 to 2027 as in the previous five years.

Not only were countries driving “the expansion of new renewables” to achieve climate goals, but energy security and the need to “diversify” renewables supply chains away from China had become increasingly important, IEA executive director Fatih Birol said in an interview.

“There is a strong competition between the largest economies of the world to have a pole position when it comes to the next chapter of the industry sector,” he said, whether in solar, wind power, batteries or electric vehicles.

The rush to replace the oil and gas that is no longer coming from Russia, and to build domestic renewables sectors, has led to a push for industry incentives and subsidies.

The US is forging ahead with its landmark climate package, the $369bn Inflation Reduction Act, which includes incentives for solar manufacturing through $10bn allocated for tax credits for clean energy overall and $27bn set aside in a “green bank” to support clean energy projects in communities.

Between 2022 and 2027, global renewable power capacity will increase by 2,400 gigawatts, an amount equal to China’s power capacity today, the IEA estimated in its latest annual report on renewable energy. This is 30 per cent higher than the IEA had forecast a year ago.

The US and India are expected to lead diversification of the solar manufacturing supply chain, the IEA said, reducing China’s dominance. Solar investment by the two countries is expected to reach almost $25bn between 2022 and 2027, a sevenfold increase from the past five years.

China, however, will remain a “dominant player”, the IEA said, with its market share estimated at around 75 per cent in 2027 compared with 90 per cent today.

The IEA warned in June that China’s hold on the solar panel supply chain could slow the global shift to cleaner energy. The country will account for almost half of newly added renewable power in the years to 2027, helped by policies included in China’s latest five-year plan, the agency said this week.

The solar boom is expected to pick up pace in the next two years. Iberdrola, a leading European renewable energy company, planned to “more than double our global solar capacity to 10.6 gigawatts by the end of 2025”, said Xabier Viteri Solaun, director of the sustainable energy business.

Solar projects can be developed and built more quickly than other renewable sources, he added, and the company is “seeing an increase in solar capacity being added to new and existing wind farms”.

Even faster growth can occur if European countries make it easier to obtain permits for new projects, improve incentives for rooftop solar installations and offer better terms in renewable energy auctions, the IEA noted.

Despite the encouraging overall trends, the European wind industry was suffering a “major challenge”, Birol said. The combination of Chinese and US competition and soaring raw material and supply costs is creating financial stress.

Birol also repeated warnings about the replacement of fossil fuels from Russia with new oil and gas projects. Supply should come from existing fields, he said, while steps should be taken to drive down demand.

“The invasion of Ukraine by Russia should not be a justification for large scale fossil fuel investments,” he said, as these would not only put “climate targets at risk” but end up as stranded assets.

However, even with the IEA’s “accelerated” scenario — where renewable capacity grows more quickly than in the main case due to policies and other measures that are not currently in the works — the world will fall short of what is needed to limit global warming.

Temperatures have already risen by at least 1.1C since the late 1800s. Under the Paris accord, almost 200 countries agreed to cut emissions enough to keep the rise to well below 2C, and ideally 1.5C.

Renewable energy growth “would significantly narrow the gap” to the pathway, bringing the total capacity to 2,950GW by 2027, the IEA said. But this would still leave a gap of 800GW to reach net zero greenhouse gas emissions by 2050.