The biggest reason is litigation risk. People rely on auditors to confirm the books and records of the company, and when they miss something substantial they can incur liability. Think about how difficult their job is to audit a largely unregulated, extraordinarily technical exchange vs a more traditional custodian…
Auditing a trust company, which doesn’t hold customer assets on their balance sheet –
Customer account: 100 BTC, 1,250 ETH, $1,500,000 in cash.
Trust company vault: 100 BTC, 1,250 ETH, $1,500,000 in cash.
Audit done. Market integrity assured.
Auditing a money transmitter “licensed” crypto exchange that holds customer assets as liabilities on its balance sheet –
Customer liabilities: 100 BTC, 1,250 ETH, $1,500,000 in cash.
Exchange assets on balance sheet: 2 BTC, 0 ETH, $346,123.47 in cash, 10,000 HBAR staked on Hedera, 375,000 USDT lent out to an OTC desk, various futures contracts bought on OKEX, investments in multiple private crypto businesses, and a loan to the CEO for a beach house in Malibu.
- Do those assets equal liabilities in terms of value? Who knows…maybe they do. Though it’s tricky as without question the founder and key engineers of the exchange are smarter with crypto technology than anyone employed at the CPA firm, and a bit of engineering wizardy can easily disguise things.
- Do those assets accurately portray what customers think is happening with their assets? No, of course not.
Now, the auditors job is to verify financials. If regulations don’t prevent money transmitters from doing things with peoples assets then the audit firm is not required by GAAP to raise the alarm with the public, with customers, with regulators or with law enforcement. “Not my job”.
And they are right, it’s not their job. However that doesn’t stop them from being named in class action litigation, nor from serious reputational damage. Even if they win they’ll have spent huge sums of money on lawyers, countless hours of partner time in depositions and responding to interrogatories, and be seriously distracted from their core business.
So the partners get together, decide these handful of young company accounts aren’t worth risking the brand, time or money of the firm and so fire them as customers.
Thus the fallout continues in this sector, both directly and in the vendors servicing it. We need regulation, especially on custody of assets.
Easy solution, exchanges and other money transmitters should not be permitted to hold customer assets. Period.
Disclaimer: as always, these are just my musings…my thoughts and observations as someone who is deeply involved in both crypto and banking. That said, I am in no way making a recommendation that anyone invest or divest in anything, ever. Only rely on the advice of your licensed investment, legal, and accounting professionals. These matters are extremely complex and something as short as my blog is just to reflect my opinions, not a complete analysis of any of the events or situations I discuss. So only make decisions after consulting with the professionals you employ.