Questions over its auditor’s commitment to crypto recently surfaced as proving what’s on balance sheets is still strangely hard to do

Inside Dubai’s International Financial Center, a dozen investors and crypto traders sat in one of the center’s many auditoriums listening to an advertised presentation with a captivating title:  “Post FTX: how to safely store your digital assets.”

As hundreds of thousands of users lost all of their money invested in the fallen company that recently filed for bankruptcy, many have lost faith in centralized crypto exchanges. 

The speaker was Talal Tabbaa, co-founder and chief executive officer of the Bahraini crypto exchange CoinMena. He stood before a large screen, wearing a white shirt, gray pants with a Patagonia briefcase. He pitched his exchange as a safer and more transparent option than competitors and took a couple of jabs at the largest one: Binance. 

His presentation was a few days before CoinMena’s auditor, BDO, made a worrying announcement, hinting that it may pull out of the crypto sector entirely. 

CoinMena is a new crypto exchange that was founded in 2019. Headquartered in Bahrain, it now serves over 250,000 customers in Bahrain, Qatar, UAE, Oman and Egypt, according to Tabbaa. 

But why would the head of the crypto exchange advise users to store their digital assets elsewhere? 

“This [presentation] is purely informational. I don’t believe one should put all their eggs in one basket,” he said. 

Tabbaa gave an overview of hot wallets like Metamask, and cold wallets, like Trezor and Ledger (hot wallets are connected to the Internet, cold wallets are not). He addressed the basic solution of self-custody on a hot or cold wallet, where the holder of the seed phrase and or the private key is the only one with access to assets. 

“This is similar to my grandmother storing gold in her house,” Tabbaa said. “But storing a hundred dollars worth of gold is different than storing $5 million worth of gold.” 

He said he keeps some of his crypto in cold wallets and argued that this method is still risky because holders can be vulnerable to hacking, coercion, or losing their seed phrase or private key. CoinMena is partnered with California-based BitGo that offers insured and regulated crypto custody services. 

The Question of Custody

“I believe in the alignment of incentives,” he said. When exchanges keep custody of a user’s cryptocurrencies they encourage lending, farming and leveraging, he said. 

“If FTX did not have custody, it could not have done the things that they have done,” he said. He was referring to allegations that FTX commingled its users' funds and allowed its sister company, Alameda Research, to leverage and lose them in risky trades, which contributed to both companies’ insolvency. 

Instead, CoinMena keeps a fraction of the users’ assets in hot wallets to process daily transactions with most funds kept in BitGo’s cold-storage reserves. 

It’s also Islamic Sharia-compliant, which means it does not offer many riskier trading products. “Crypto is already risky,” he said. “There is no need to offer 20x leverage.” 

Tabbaa portrayed the lack of certain sophisticated trading products and derivatives as an advantage. 

“When we were structuring CoinMena’s business, we thought, ‘how can we compete against companies like Binance? They have 400 employees in Dubai and every product imaginable,’” he said. “You don’t know who the owners of Binance are. And you don’t know how they are audited.”  

Binance’s opaque structure has been a center of controversy. Bloomberg reported that its CEO Changpeng Zhao seems to be the majority shareholder of the company, but it is not even a “company” in a traditional sense. A Binance spokesperson did not respond immediately to Decential’s request for comment. 

Tabbaa did not hold back on pointing out, implicitly and explicitly, that, unlike his behemoth competitor, one can know the identity of CoinMena’s owners and managers via a quick Linkedin search. 

A Proof of Reserve

The Q&A session started, and I asked Tabba a couple of questions. 

How does he operate in Egypt while the local authorities enforce up to a 10 Million Egyptian pounds (roughly $400,000) fine on crypto promoters?

“We approached the Egyptian Central Bank, and they clearly mentioned we are not welcomed there,” he said. Yet, the company has a license from the Bahraini Central Bank to onboard Egyptian users. 

“As a profit-oriented company, we took some risks. The Egyptian market is a very lucrative one,” he said. The company won't put a billboard on Cairo streets, but it continues to open accounts for Egyptian customers, inside and abroad, willing to take the risk. 

The other question: Will CoinMena publish its audits publicly? 

I was referring to what Binance and other exchanges have called “proof of reserves.” Following the collapse of FTX, those exchanges issued voluntary audits to ensure their customers were not mishandling their funds. These audits, however, were mostly not transparent or reassuring. 

“The Binance proof of reserve is completely insulting. Have you seen the terms and conditions of Binance auditors?” he said. “Binance is basically telling the auditor what to write.”  

Binance has claimed top firms refused to work with them, which steered them towards performing an “agreed upon procedure” with a smaller financial auditor called Mazars, instead of a traditional audit. 

Tabaa argued that the result was a list of Binance’s supposed assets without any mention of the exchange’s liabilities, deeming it a “useless” balance sheet that does not reveal anything of value about the company’s finances. 

“I have no intention of issuing some BS report to say I am doing my job. This has a very short life span,” Tabbaa said, announcing CoineMena will keep its balance sheet private. 

The Auditors’ Panic 

In the next few days after Tabba’s presentation, several important events unfolded. 

Mazars deleted Binance’s reports from its website and announced it would drop its crypto clients, including crypto.com. 

Shortly after, a spokesperson for BDO’s international network announced that it’s “currently evaluating [their] approach to [the crypto] sector” and the work they offer to their clients. 

Both Mazars and BDO have been subject to criticism. In July, the British Financial Reporting Council admonished them for the “unacceptable” quality of audits.

I reached out to Tabbaa once more for a couple of follow-ups. What is the difference between Mazar’s work with Binance and BDO’s work with CoinMena? 

Tabbaa said that unlike Mazar’s reports for Binance and Crypto.com, BDO offers full audited financial statements that include profits and losses and balance sheets, and the rest of the information listed in regular statements. He pointed out that BDO is CoinMena's external auditor, and both parties are regulated by the Central Bank of Bahrain. 

As for past criticism of BDO, he pointed out that CoinMena does not follow the British Financial Reporting Council but rather follows the guidance of the Central Bank of Bahrain, so their comments on BDO are not taken into consideration. 

“Having said that it is common practice for companies to change their external auditors every 3-5 years, so we'll look to onboard a CBB-regulated auditor then, ideally, one of the big four,” he said, referring to the largest four accounting firms Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers.

He was not alarmed by BDO’s latest remarks.

“I am never concerned about sector-wide comments,” he said. “It shows a lack of understanding of the long-term potential.”