The Value of Auditor Assurance in Cryptocurrency Trading

Abstract

This study examines the value of System and Organization Controls 2 (SOC 2) audits to customers. A SOC 2 audit is a voluntary assurance service provided by an independent CPA over a firm's internal controls relevant to information system security. I use cryptocurrency exchanges, a setting where the lack of customer trust can be particularly acute, to examine whether SOC 2 audits increase customer demand. I find a substantial increase in liquidity following the disclosure of initial SOC 2 audit completion: the trading volume of cryptocurrencies listed on audited exchanges increases by more than 60 percent, and the price impact decreases by approximately 40 percent in the three months after SOC 2 audit disclosure. Exploring the channels through which SOC 2 audits provide value to customers, I find that exchanges with high-quality security measures are more likely to initiate SOC 2 audits, and that continued audits ensure that the quality of security measures remains high. Overall, this study provides novel evidence that SOC 2 audits provide value to customers by sending a credible and positive signal of exchange security, and thus significantly increase customer demand.