What is the objective of a crypto audit under VARA?
The objective is to provide independent assurance that a virtual asset service provider (VASP) complies with VARA licence conditions and applicable laws — covering governance, AML/CFT, custody, operational resilience, information security, transaction integrity, and reporting. The audit should identify control gaps, test operating effectiveness, and produce actionable remediation recommendations mapped to VARA expectations.
What types of audits and frameworks are relevant for crypto firms?
Key audit types and frameworks include:
- Internal audits: ongoing assurance performed by the firm’s own auditors to prepare for inspections.
- External/independent assurance: engagement by an independent auditor or licensed CPA (e.g., SOC 1/SOC 2 attestations).
- Technical audits: smart contract audits, penetration testing, and key-management reviews.
- Compliance audits: AML/CFT program effectiveness and KYC processes.
- Frameworks and standards commonly used: AICPA SOC (SOC 1/SOC 2), ISO 27001, NIST CSF, CIS Controls, and VARA-specific guidance (where published). For financial controls, consider mapping to SOC 1; for operational/security controls, SOC 2 or ISO 27001 are common.
How should we prepare an audit engagement scope for a VARA-regulated client? A3: Steps to define scope:
The steps are as follows:
- Confirm licence class and permitted activities with the client (custody, exchange, brokerage, issuance, asset management).
- Map VARA licence conditions and UAE legal requirements relevant to the client’s operations.
- Identify high-risk domains (custody, reconciliation, AML, smart contracts, third-party services).
- Choose assurance type(s) — readiness assessment, internal audit, SOC 2, or targeted technical reviews.
- Define timeline, deliverables, and evidence requirements; obtain statements of access to systems, logs, nodes, and key personnel.
What is the typical phased audit process you should follow?
Recommended phased approach:
- Engagement Acceptance & Planning
- Perform independence checks and conflict-of-interest screening.
- Agree scope, objectives, timelines, resources, and reporting format.
- Obtain access letters and non-disclosure agreements.
- Scoping & Risk Assessment (Discovery)
- Gather documentation: architecture diagrams, policies, wallets list, access matrices, AML program, vendor contracts, SOC reports, etc.
- Interview key stakeholders (CISO, Head of Custody, Head of Compliance, Ops/Engineering).
- Conduct risk assessment to prioritize audit focus areas.
- Readiness & Gap Assessment (Optional but recommended)
- Map current controls to VARA requirements and chosen frameworks (e.g., SOC 2 Trust Services Criteria).
- Identify control gaps and remediation priorities; produce readiness report.
- Control Design Testing
- Validate control designs (policies, procedures, system configurations).
- Review architecture, key-management models (MPC/HSM/multi-sig), smart contract SDLC, and vendor oversight.
- Control Operating Effectiveness Testing
- Test controls over a period (or perform sample testing for point-in-time).
- Collect evidence: logs, reconciliations, transaction histories, change approvals, signed attestations.
- For SOC Type 2-like work, test over the agreed period.
- Technical Assessments (concurrent)
- Smart contract audits, static/dynamic code analysis, fuzzing, and formal verification where needed.
- Penetration tests, vulnerability scans, and cloud security reviews.
- Forensics and blockchain analytics to validate on-chain balances and suspicious activity detection.
- AML/CFT Sampling & Effectiveness Testing
- Test KYC files, risk-based onboarding, transaction monitoring rules, alert handling, and SAR/STR filing processes.
- Back-test transaction monitoring rules and sample escalation workflows.
- Reconciliations & Proof of Reserves
- Reconcile on-chain addresses to internal ledgers and customer balances.
- Test reconciliation frequency, exception handling, and remediation logs.
- Validate methodology for proof of reserves (address proofs, merkle-tree methods, signed attestations).
- Reporting & Remediation Planning
- Produce a clear audit report with executive summary, scope, findings, risk ratings, and mapped VARA references.
- Provide a prioritized remediation roadmap with owners and timelines.
- Follow-up & Continuous Assurance
- Plan for follow-up testing on remediation items and consider continuous monitoring solutions for future assurance.
How do you map audit procedures to VARA licence conditions?
Practical mapping steps:
- Extract all licence clauses and VARA guidance relevant to operations (custody, AML, incident reporting, resilience).
- Translate each clause into control objectives (e.g., “segregate client assets” -> control objectives for asset classification, accounting, and custody procedures).
- Design tests of design (does the control exist?) and tests of operating effectiveness (does it work?) and identify evidence sources.
- Document traceability tables linking licence clauses -> control objectives -> tests performed -> evidence obtained -> finding status
What roles do SOC 1/SOC 2 and ISO 27001 play in the audit framework?
Role and alignment:
- SOC 2: Used to demonstrate operational security, availability, confidentiality, processing integrity, and privacy — highly relevant for VARA-regulated VASPs. Auditors can map SOC 2 criteria to VARA expectations and design assurance engagements accordingly.
- SOC 1: Relevant when the VASP’s services impact customers’ financial reporting (e.g., custody that affects financial statements).
- ISO 27001: Provides a management system approach to information security and can complement SOC/SOC readiness work by demonstrating mature ISMS processes. Combining these frameworks gives comprehensive coverage: SOC provides attestation evidence; ISO 27001 shows process maturity.
Key Takeaways:
- VARA Compliance & Assurance: Achieve independent verification of VASP license conditions, specifically covering governance, AML/CFT, and custody. The audit process identifies control gaps and provides a prioritized remediation roadmap mapped to regulatory expectations.
- Institutional Trust Frameworks:
- Deep Technical Security: Protect digital assets through specialized smart contract audits, penetration testing, and robust key-management models like MPC or HSM. Forensic blockchain analytics are used concurrently to validate on-chain balances and detect suspicious activity.
- Proof of Reserves & Transparency: Build market credibility by reconciling on-chain addresses to internal ledgers using Proof of Reserves methodologies. Regular testing of reconciliation frequency and exception handling ensures long-term transaction integrity.
At Affiniax Partners, our team specializes in crypto audit and if you are a virtual asset service provider (VASP) we help you stay compliant with VARA licence conditions and regulations.
