Bitfinex scandal reveals need for real audits of crypto exchanges

As we wait to learn more about how much has gone wrong over at Bitfinex, industry analysts and experts are starting to pick apart how the industry needs to move forward. CoinDesk’s Noelle Acheson, a member of their product team and a veteran company analyst, recently wrote an editorial on the issues facing exchanges, and what needs to happen for the industry to mature.

The problem is two-pronged, she explains. Exchanges are unable to secure reputable banks to store their fiat funds in, and they aren’t truly being audited.

On the matter of banking, she notes that even supposedly reputable exchanges, like Bitfinex, can’t land a bank with a solid reputation to store their funds in. This is why they turn to controversial payment processors, like Crypto Capital, who then somehow manage to get hundreds of millions lost or confiscated, resulting in the exchange being in a crunch for money.

It’s also why they can’t rely on fiat and turn to stablecoins. Since the company can’t truly move around fiat funds at the rate that customers make trades because they don’t have banks to store that fiat in, they rely on stablecoins like Tether to pretend they can. The big question then becomes if they have the amount of money they require to back the stablecoin.

That’s where auditing comes in. Acheson notes that although we talk of exchange’s being audited to guarantee they have the funds they need, this is the wrong terminology for what’s actually happening. The most commendable firms have an attestation of their accounts, meaning they get an accountant to confirm they have enough money.

A true audit is much different than an attestation. She writes:

“An audited confirmation would require much more detail, such as is this account used to back said stablecoin? Who has access? How are issuance and redemptions handled? Does the company comply with KYC/AML regulations? An “audit” is technically an assurance that a statement is presented according to established standards. These do not yet cover reserve backing of stablecoins.”

This is where Bitfinex, and most other exchanges, fall short. At one point, they may have had some access to all the funds necessary to back Tether, but they didn’t necessarily have full control of those funds, or all the regulatory controls necessary that a bank otherwise would have guaranteed.

Now that Bitfinex is being looked at hard for this scandal, Acheson feels like regulators will need to step in to protect investors. It’s no longer simply a question of if an exchange has all the money they need to operate, but that the funds they are supposed to have are being handled responsibly.