Michael Burry: Crypto Audits "essentially meaningless"
from FINANCE MARK Hosted by Mark Humphery-Jenner, PhD
Michael Burry has slammed crypto audits as “essentially meaningless”. But, is he correct? In short yes. But the situation is complicated. Crypto audits and proof of reserves have significant issues. They are incomplete. And, they can give people a false sense of security. Key problems involve: * Incompleteness: Crypto audits say little - if anything - about the crypto firm’s debt position. This is a concern. A crypto exchange might well hold customer assets one-for-one. But, customers can still be in a precarious position if the firm has borrowed significant sums. Or, if the firm has a terrible margin trading option (see e.g., FTX). * Auditor reputational risk: The proof of reserves is incomplete. However, some might misinterpret it as being a sign of approval. This is a problem for auditors as they might risk reputational damage by appearing to endorse shaky crypto firms. * Asset values: Asset values can be vague, opaque, and difficult to determine. This creates issues when either the audit firm attempts to indicate that assets balance with liabilities (or people believe they have done so). Auditors might prefer to avoid that risk. * Audit firm concentation: An ironic issue is that crypto auditing is concentrated and is becoming more so. As the Sarbanes-Oxley Act of 2002 highlighted, this can be a problem. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.finomics.au/subscribe
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