Institutional Investors Are Getting Deeper into Digital Assets. But with More Money in the Space, Security Risks Grow

Understanding on-chain & off-chain audits for institutional investments helps investors protect assets, meet regulations, and avoid fraud.

The world of cryptocurrency has seen a massive influx of institutional investors, especially in 2025, marking a turning point in the integration of digital assets into the mainstream financial landscape. As this integration deepens, the importance of both on-chain and off-chain audits cannot be overstated.

These audits serve as a fundamental safeguard, ensuring that the institutions engaging in crypto investments are equipped to navigate the unique landscape of digital assets, protect their assets, and meet the regulatory requirements imposed upon them.

Institutions, in comparison to individual investors, typically handle significantly larger sums of money. This difference in scale is crucial. While individual investors might be able to stomach a smaller-scale error in judgment, a single mistake by an institution could have devastating consequences, potentially wiping out billions of dollars in an instant.

Institutions are also subject to a higher level of scrutiny, especially in terms of compliance with anti-money laundering (AML) regulations. This scrutiny is even more intense when an institution is operating in a less-regulated domain like crypto, making it imperative that they demonstrate adherence to the law.

The Structure of On-Chain and Off-Chain Audits

On-chain audits concentrate on examining blockchain-based systems. They involve scanning transactions and smart contracts for any anomalies or signs of malicious activity. These audits are performed by professionals certified in cryptocurrency, such as the Certified Cryptocurrency Auditor™ (CCA), attesting to the solidity of the investment platforms and ensuring they adhere to the strictest compliance measures.

Without these certifications and specialized knowledge, institutions could be exposing themselves to vulnerabilities that could be easily detected by a professional with the right expertise.

In the realm of on-chain audits, the focus is on three key pillars:

* **Security:** Detecting any vulnerabilities in smart contracts or instances of funds being stolen from wallets.

* **Compliance:** Assessing whether the crypto company is adhering to AML regulations and other legal frameworks.

* **Trust:** Examining the reputation of the crypto firm and the level of confidence investors have in its activities.

The Importance of On-Chain Audits

The need for on-chain audits is becoming increasingly urgent as North Korean hackers, in particular, have targeted crypto platforms with an alarming frequency. In 2024 alone, these hackers managed to steal $1.34 billion from crypto platforms, a figure that represents 61% of all the funds stolen from such platforms throughout the year.

A significant portion of these stolen funds were due to vulnerabilities in smart contracts, a factor that on-chain audits are uniquely positioned to highlight and rectify.

In contrast to on-chain audits which focus on blockchain-based systems, off-chain audits delve into systems external to the blockchain. This includes examining exchanges, the status of hot and cold wallets, and an institution’s internal security policies.

Despite the growing awareness of on-chain security, these other areas are just as vulnerable, if not more so, than blockchain-based systems. For instance, a recent case involved Bitfinex being hacked, with the stolen Bitcoin taking years to track due to a lack of continuous monitoring and rapid reporting after the initial theft.

Finally, after persistent efforts by chain analytics firm Chainalysis, in cooperation with Bitfinex and a professional services firm, a significant portion of the stolen funds were recovered.

By 2025, the recovered Bitcoin from the Bitfinex hack alone amounted to approximately $3.6 billion, showcasing the potential scale of the losses that can be prevented with continuous off-chain auditing.

The Role of Crypto Forensics

In both on-chain and off-chain audits, crypto forensics plays a crucial role. Using advanced analysis tools, crypto forensics can track suspicious activity, a capability that is becoming increasingly important as institutions, especially those in decentralized finance (DeFi), are engaging in new financial instruments and platforms.

A striking example is the recent case of Celsius Network, a DeFi lending firm that went bankrupt in mid-2022. Before the collapse, executives at Celsius secretly moved over $300 million in Bitcoin to an exchange, intending to deceive investors and regulators with falsified reports.

However, crypto forensic tools managed to expose these transactions, leading to criminal charges against the executives for siphoning funds from investors and lying to both customers and regulators. This case vividly illustrates how forensic audits can protect investors from fraud and deception, especially in the less-regulated realm of DeFi.

Institutions, especially in the West, are keenly aware of the need to balance transparency with customer privacy. This tension is particularly relevant in the context of anti-money laundering (AML) regulations.

Institutions need to be able to demonstrate compliance with these regulations, but they also value the privacy of their customers' financial data. To navigate this balance, a promising technology is Zero-Knowledge Proofs (ZKPs).

ZKPs allow institutions to prove financial transactions meet AML standards without revealing any personal or private details about the customer or the nature of the