Among the many controls and processes put in place to protect consumers and clients of professional services vendors, the service organization control (SOC) report stands as one of the most important.
SOC reporting is designed to govern the services a company provides and confirm the organization is taking the necessary measures to safeguard sensitive data. Different SOC reports focus on specific areas of scrutiny, but in general, the audit process tells users of a service or product that the company in question meets global standards for compliance.
At a time when the volume and velocity of enterprise data gathering and analytics has never been greater, and with companies under intense scrutiny to act in a compliant way, SOC reporting is a necessity. So how does SOC reporting relate to crypto?
In this article, we'll introduce the different types of SOC reporting available today, explore their criteria and outcomes, and explain what SOC audits and reporting mean for cryptocurrency exchanges and the security of their users.
TL;DR
Service organization control (SOC) reporting validates the effectiveness of a company's processes for managing its services and protecting client data. It involves audits completed by a third-party accounting organization.
Three types of SOC reporting exist: SOC 1, SOC 2, and SOC 3. SOC 1 and 2 comprise Type 1 and Type 2 reports, while SOC 3 includes only a Type 2 report.
SOC reporting isn't typically a legal requirement, but is recommended and expected in certain industries that handle large volumes of sensitive data, including financial services and healthcare.
In crypto as in other industries, SOC reporting can build trust among clients and prospective clients, guide an audited company to improve their processes, and support their risk management practices.
SOC reporting explained
The SOC reporting framework was developed by the globally-recognized American Institute of Certified Public Accountants and requires a third-party audit of a company. This audit involves a comprehensive review of a company's policies, procedures, and controls across or at a defined time period, scrutinizing its ability to protect sensitive data or adequately provide services impacting financial reporting — depending on the report.
Three different reports are available — SOC 1, SOC 2, and SOC 3. SOC 1 and SOC 2 reports include both a Type 1 and Type 2 report, while SOC 3 has only a Type 2 report. There's more on these types below. Whichever report's required, it must be issued under the SSAE 18 (statement on standards for attestation engagements) 18 standards. Put simply, SSAE 18 defines the scope and depth of SOC reporting, to help make sure the outcomes are as effective and useful as possible.
While the three types of SOC report ultimately return similar assurances, their differences mean companies should carefully consider each to decide which is most relevant to their organization.
The differences between SOC 1, SOC 2, and SOC 3 reporting
A SOC 1 report explores how a company's internal checks and measures impact the financial reporting of its clients. That's why this type of reporting is common for providers of professional services — it focuses on how the audited company's operations affect a third party that hires them. The SOC 1 report explores a broad range of factors impacting a client's financial reporting process, including any software-as-a-service used, physical access to relevant systems, data center services, and more. The SOC 1 Type 1 report refers to an audit that takes place at a fixed moment in type, while the Type 2 report is an audit of controls across a consecutive time period.
The SOC 2 report, meanwhile, looks at how effectively a company's internal controls meet its service commitments across the five trust services criteria, and relates specifically to the protection of customer data. The five areas are:
Security
Privacy
Confidentiality
Service availability
Processing integrity
Where the SOC 1 report invites companies to define their own objectives, the SOC 2 report has a fixed assessment criteria that all companies are scrutinized against.
SOC 3 reports are similar to SOC 2 reports. The key differences between the two are their depth and transparency. A SOC 3 report follows the same SSAE 18 standard but only includes a Type 2 report. SOC 3 Type 2 reports also don't include an auditor's opinion, the point of view of management, and an in-depth review of the security controls in place. What's more, SOC3 reports can be shared publicly, while SOC2 reports are only intended for specific audiences. SOC3 reports are a lighter version of the attested SOC2 report. They're often used for marketing to prospective clients because they provide a concise validation of a company's audited controls.
How does SOC reporting protect corporate clients and service users?
SOC reports can push companies to improve their services and internal controls, which translates to better outcomes for their customers and more robust protection of their data. For example, the audit process could uncover ways to improve internal processes by removing bottlenecks or simplifying complicated systems.
Meanwhile, because becoming SOC-compliant is attractive to prospective clients, it helps to create competition in the market which, theoretically, raises the performance of all market players. And, making SOC compliance the goal internally can potentially help to create a stronger culture of security within the audited company, which possibly further improves outcomes for clients and service users.
Why do crypto exchanges perform SOC reporting?
Simply because crypto exchanges handle massive amounts of sensitive financial data on potentially millions of people, and also work closely with institutional clients to support their needs. This could include the trading of cryptocurrencies, providing liquidity to platforms, or the listing of project tokens. As such, the motivations for crypto exchanges to become SOC-compliant are similar to those of other companies in the financial sector.
More specifically, many crypto exchanges may choose to perform SOC reporting for the following reasons.
Protect customers
The process of becoming SOC-compliant requires exchanges to work towards robust internal controls and processes, and then maintain them. What's more, the audit will actively seek out areas for improvement. The combination of self-reflection and third-party scrutiny can guide exchanges in making improvements to protect consumers.
That could lead to the introduction of additional security features on a platform, the hiring of additional personnel dedicated to security, or even spark a total overhaul of processes and procedures — all with customer security in mind.
Manage risk
Linked to the point above on protecting customers, SOC reporting can support a company's risk management by helping identify risks to IT security and mitigate them before a breach occurs. The report itself can then be used as impartial, third-party validation of the exchange's success in protecting clients and their data.
Build trust
Rather than tell clients how secure their processes and systems are, exchanges can demonstrate it with a SOC report. That can be influential in building trust among existing and potential clients, as it provides evidence of the commitment made to protect data and consistently meet best-practice standards. This is one of the reasons why OKX pursued and achieved the SOC 2 Type 2 audit in September 2023, and successfully completed our SOC 1 Type 2 audit during July 2024.
Improve competitiveness
The ability to show SOC-compliance and the commitment and competence needed to achieve it could be an attractive selling point when speaking to potential clients. As such, many companies see SOC reporting as an important tool in staying competitive among players who may also have — or be pursuing — an audit of their own. In crypto, the importance of robust security can never be overstated. Many clients and customers will look first at the measures taken by a platform to protect their data and funds, making achievements such as SOC auditing influential in attracting customers.
The final word
Many would agree that organizations holding sensitive customer data or influencing the financial reporting of another entity are obligated to act with integrity and maintain water-tight systems and processes. SOC audits can help to confirm that high standards of compliance are being met across an organization, communicating to potential clients that adequate processes are in place to protect their data and funds.
Beyond this validation, SOC reporting can also be influential in guiding companies to improve their processes, as the audit involved can help reveal gaps in processes and identify new methods of protecting clients and their data. Although the kind of scrutiny performed through SOC reporting is valuable to many different organizations, the volatility and unpredictability of crypto make the task especially worthwhile for exchanges.
If you're a trader who's interested in learning more about crypto security, check out our guides to cryptocurrency custody and spotting scams.
FAQs
In general, SOC reporting gives assurances over the internal controls of a company that manages data or influences the financial reporting of other companies. Three types of SOC reports exist, and although each serves a similar purpose, there are important differences to understand.The SOC Type 1 report evaluates a company's internal controls and how they impact their clients' financial reporting. Meanwhile, the SOC Type 2 report evaluates a company's success in achieving five trust services criteria of security, privacy, confidentiality, service availability, and processing integrity, making it a more comprehensive form of reporting. The SOC Type 3 report is a more concise iteration of the SOC 2 report and is intended for a public audience, meaning it's commonly used for marketing purposes.
SOC reporting isn't typically a legal requirement, but it is recommended and in some cases expected among companies that handle sensitive data. That includes companies in financial services, insurance, and healthcare, for example. Many service vendors may also see SOC reporting as an essential requirement for them to be competitive, even if it's not a legal necessity.
SOC audits are completed by a third-party certified public accountant firm (CPA). These firms are typically audited accounting firms with specialist expertise beyond basic bookkeeping, payroll processing, and the preparation of financial statements.
As the name suggests, SOC reporting is typically intended for service organizations. This includes companies that handle financial or non-financial information from clients that impacts the client's financial reporting. Companies from industries including financial services, healthcare, IT, telecommunications, and ecommerce all benefit from SOC reporting because of the large volumes of sensitive data they typically handle.
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