What is a Crypto Audit?
While the term “audit” might evoke feelings of security for many investors, its interpretation in the crypto world strays notably from the conventional understanding of an audit.
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Industry veterans like John Reed Stark, with backgrounds in regulatory agencies or global enterprises, voice their skepticism and concern about the over-generalized use of the term in this context. They argue that a majority of crypto ventures, decentralized projects included, haven't undergone a rigorous audit, instead settling for regional financial assessments or safety measures.
Thus, users and investors must discern what examinations often masquerade under the label “audit”:
1. Attestation Report
This report assesses the performance of either an individual, a process, or an entire organization. Although its format might differ depending on the context, it can't fully substitute a detailed audit that delves into the intricate internal relationships within a firm. In the crypto realm, such evaluations are mainly requested by centralized exchanges and stablecoin providers. In the future, due to regulatory pressures and the emergence of global documentation standards, the scope of this process is expected to broaden.
2. Agreed-Upon Procedures (AUP)
This is applied to confirm and analyze a specific fact or event based on the preset requirements of a concerned party. For example, it can reflect the amount of cryptocurrency in a wallet but doesn't provide any related data. A recent AUP highlighted a review conducted on Binance by the global auditor Mazars, aiming to verify the assets in the firm's cold storage. However, such findings often don't provide valuable insights to users: an exchange might temporarily deposit assets in a certain wallet for the audit's duration and then subsequently transfer them out.
3. System and Organization Control (SOC) Reports
These offer insights into third-party service data, granting a comprehensive view of a partner's operational processes. Overall, there are two levels and three kinds of reports: financials (SOC1), security and confidentiality (SOC2), and a public evaluation focusing on security without delving into sensitive details (SOC3). As of now, many crypto initiatives are hesitant about such evaluations, but this stance might shift over time; trust is, after all, a foundational element in business.
4. Smart Contract Audit
These delve into the code, seeking errors, and vulnerabilities, and ensuring the embedded logic performs as intended. However, this examination shouldn't be misconstrued as a full-fledged audit. Universal standards are lacking, and there are no guarantees from auditing entities. Though this review does provide developers, investors, and users with an added layer of assurance when interacting with an app, it's paramount for projects to continually assess the security of their code.
5. Proof of Reserves (PoR)
This assessment verifies the declared assets at specific storage addresses. While it's designed to enhance trust from clients and investors, without a clear picture of a company's obligations, such a confirmation can be superficial. Essentially, it becomes a financial report component that can easily be adjusted to cast a favorable light, devoid of real assurances. As a result, cryptocurrency companies (like Binance, Nexo, Tether, and more) often face scrutiny for labeling these confirmations as “audits.”
Additionally, a wide array of checks exists that don't align with the traditional audit framework. These range from AML/KYC evaluations to reports tailored for regulatory entities such as the SEC, CFTC, and IRS. The inherent unpredictability of cryptocurrency ventures means these checks might not always paint an accurate picture, a concern prevalent even among mainstream businesses. This emphasizes the need for digital asset developers to undertake genuine yearly audits, and for users and investors to demand such rigor.
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