Meeting the FTC’s "Reasonable Security" Bar: Why Web3SOC and MDR Are Essential
A Wake-Up Call for DeFi Security
In previous years, the industry learned that good intentions are rarely enough to stop a determined attacker. In August 2022, a prominent cross-chain protocol lost over $180 million to hackers following the deployment of an inadequately tested smart contract. While the project had advertised itself as a security-first organization, regulators later found that specific fundamental safeguards were missing.
In a first-of-its-kind response, the U.S. Federal Trade Commission (FTC) stepped in with a proposed order requiring the operator to implement a comprehensive information security program and submit to independent security assessments. This enforcement action signals a major turning point for the industry. As decentralized finance goes mainstream, projects handling consumer assets will be held to the same standard of “reasonable security measures” as traditional financial institutions. The urgent question facing the industry is how to operationalize those security expectations within the unique context of DeFi.
The Gap Between Traditional Standards and DeFi Practices
Decentralized finance now supports institutional-scale activity with significant capital and users flowing through on-chain systems. Unfortunately, the frameworks used to evaluate and manage risk have not kept pace. Traditional finance relies on mature security standards and audits like SOC 2, ISO 27001, or the FTC’s Safeguards Rule. In contrast, the DeFi ecosystem currently lacks a unified security standard.
Many protocols operate in uncharted territory by repurposing legacy IT checklists or improvising controls from scratch despite fundamental differences in blockchain architectures. The result is fragmentation and friction. Security is often assessed in isolation, best practices vary widely, and teams have little visibility into how investors, partners, and regulators will judge their security posture.
This gap leaves projects unsure of what “reasonable security” actually means for them. In practice, many teams focus on one-off code audits or basic tests but miss broader programmatic measures. Important processes such as formal risk assessments, secure development life cycles, continuous monitoring, and incident response planning may be ad hoc or entirely absent. Without clear standards or guidance, even well-intentioned teams can fail to implement essential controls. Recent regulatory complaints have highlighted that projects often lack secure coding practices, defined processes for handling vulnerability reports, and adequate incident response capabilities. These shortcomings remain unfortunately common in DeFi startups, creating a chasm between traditional security expectations and the current operational reality of many Web3 projects.
Regulatory Expectations Are Rising
This recent enforcement action has made it clear that regulators are becoming sophisticated regarding crypto technology and expect robust safeguards. Under the proposed settlement, the operator was required to implement an extensive security program addressing the specific failures that led to the hack.
In effect, the FTC is requiring the company to do what any regulated bank or fintech would do. This includes designating qualified security leadership, systematically assessing risks, controlling access with measures like multi-factor authentication, testing code and systems before deployment, monitoring for attacks around the clock, and preparing for incidents with a documented response plan. These are hallmarks of the FTC’s Safeguards Rule, a law that mandates reasonable administrative, technical, and physical protections for customer data. By applying them to a DeFi case, regulators are affirming that crypto platforms must meet comparable standards despite their decentralized nature.
For DeFi teams, this is a wake-up call. It is no longer sufficient to trust in audits or hope for the best. Projects must be able to demonstrate an ongoing and auditable security program that covers people, process, and technology. They should expect greater scrutiny of their secure software development practices, testing rigor, and responsiveness to vulnerabilities. The bar for operational maturity in security is being raised across the industry.
Defining “Reasonable Security” for DeFi
Translating traditional frameworks like NIST or ISO into the on-chain world requires specific adaptations. A reasonable Web3 security program generally includes several key components.
Governance and Accountability is the foundation. This requires a formal information security program led by a qualified individual or team with executive accountability. There must be clear policies in place and a security lead responsible for enforcing them.
Risk Assessment involves regularly identifying and evaluating both technical and economic risks unique to the protocol. This includes maintaining a risk register of smart contract vulnerabilities, oracle dependencies, governance attack vectors, and other threats specific to decentralized systems. Proactive assessment ensures teams address foreseeable risks before they become incidents.
Access and Key Management is critical for protecting administratively sensitive systems. This covers everything from smart contract owner keys to cloud dashboards. Projects must implement strict access controls, including role-based permissions and multi-factor authentication for anyone with authority over user assets or critical settings.
Secure Development Lifecycle ensures security is baked into the development pipeline. This involves following defined secure coding and deployment practices, peer code reviews, approval gates, and comprehensive pre-deployment testing. It also requires a documented process for receiving, triaging, and remediating third-party vulnerability reports.
Continuous Monitoring and Testing means deploying ongoing surveillance and evaluation of security controls. In practice, this requires 24/7 threat monitoring using on-chain analytics and off-chain telemetry to detect unusual activity in real time. It also includes periodic penetration testing and bug bounty programs to regularly probe for weaknesses.
Incident Response Planning entails establishing and drilling a robust plan tailored to DeFi scenarios. Teams need playbooks for handling breaches or exploits that define how to contain on-chain attacks, investigate threats, and communicate with stakeholders. Regular drills ensure that when a real incident hits, the team can react swiftly to contain the issue.
Together, these measures form an integrated defense-in-depth strategy. Importantly, they generate auditable evidence such as policies, logs, code reviews, and incident reports. This evidence proves an organization is following through on its security commitments and is exactly what regulators and institutional partners look for when gauging trust.
Enter Web3SOC: The DeFi Institutional Diligence Standard
Achieving this level of maturity can sound daunting for lean Web3 startups. This is where Web3SOC becomes essential. Web3SOC is a new framework developed collaboratively by leaders across DeFi, security, and finance to provide a structured standard for assessing organizational maturity in decentralized finance. It functions as an institutional due diligence standard for DeFi tailored to the realities of on-chain systems.
Web3SOC defines four core domains of maturity for crypto organizations:
- Operational: This domain evaluates the project’s governance structures, decision-making processes, change management, and key management. It looks at whether day-to-day operations are sound and transparent.
- Financial: This assesses economic design and resilience, including treasury management, collateralization mechanisms, and exposure to market or counterparty risk. This ensures the project can withstand economic shocks.
- Security: This reviews technical security posture beyond one-time code audits. It covers ongoing security practices, infrastructure hardening, monitoring systems, and incident response readiness.
- Regulatory: This considers compliance and legal readiness, such as KYC/AML policies where applicable, transparency of disclosures, and how the project’s structure aligns with regulatory frameworks.
By assessing an organization across these dimensions, Web3SOC provides a holistic view of its preparedness for long-term institutional engagement. It gives institutions a common language to compare risk profiles on an even playing field while offering DeFi teams a clear roadmap for improvement. Web3SOC bridges the trust gap by making security and operational expectations explicit and verifiable.
Get in touch to learn how Web3SOC can enhance and speed up your institutional due diligence process.
Why Now: The Case for Web3SOC and Continuous MDR
Several converging trends make this the right time for frameworks like Web3SOC and for embracing continuous security operations such as Managed Detection & Response (MDR).
First, the stakes in DeFi are higher than ever. Major exploits have revealed that even marquee projects often lack real-time threat detection, taking days or weeks to discover breaches. Such delays are unacceptable when massive amounts of user funds are at risk. MDR services designed for crypto environments provide around-the-clock monitoring and swift investigation of anomalies. By shortening detection and response times from days to minutes, MDR dramatically reduces the impact of attacks.
Second, institutional adoption of digital assets is accelerating. Banks, fintechs, and custodians operate under stringent risk management expectations. They need reassurance that any DeFi protocol they engage with meets high standards for security, reliability, and compliance. Web3SOC addresses this need by providing a clear benchmark of readiness, streamlining due diligence for institutions and allowing DeFi projects to prove their trustworthiness.
Finally, the regulatory climate means the cost of neglecting security is greater than ever. Regulators are holding crypto companies to account for security lapses and demanding restitution for harmed users. By getting ahead of the curve with a robust framework and continuous monitoring, forward-thinking projects can mitigate immediate risks and future-proof themselves against regulatory surprises.
Building Trust through Standards and Readiness
The path to sustainable growth in decentralized finance lies in aligning innovation with robust security and governance practices. Recent hacks and regulatory interventions are symptoms of a maturation process that every emerging industry undergoes. For DeFi, this means embracing higher standards and proving we can safeguard the assets and trust placed in our systems.
Frameworks like Web3SOC provide the blueprint for that maturity by translating decades of cybersecurity wisdom into the decentralized context. At the same time, 24/7 managed detection and response capabilities ensure that teams can react swiftly to minimize damage when preventative measures falter.
Now is the time for the industry to coalesce around shared security standards and invest in operational resilience. By adopting frameworks such as Web3SOC and integrating MDR services, DeFi organizations move from a reactive posture to a proactive and institutional-grade security stance. This shift not only reduces the likelihood of hacks but also fosters an environment where innovation can flourish responsibly. With the right tools and standards in place, we can operationalize reasonable security and carry DeFi into its next phase as a safe and trusted component of the global financial ecosystem.