Building Strong Internal Controls and Audit Trails for Crypto Transactions

The rise of cryptocurrency has opened up opportunities for innovation, but also increased the risk for businesses to manage and track transactions. Due to fluctuating markets and an increasing number of digital assets, maintaining internal controls and visibility into transactions is more critical than ever. Whether you are a cryptocurrency investor, a business that accepts digital currencies, or an accountant responsible for cryptocurrency portfolios, tracking digital assets and cash in and out of your business is critical to your operations.

Let’s examine how to establish systems and processes that facilitate easy tracking of wallets, transactions, exchanges, and digital asset movements.

Why It’s Important to Create a Crypto Accounting System 

Having an accounting system for cryptocurrency is not simply a matter of entering some numbers into a spreadsheet. The nature of cryptocurrency transactions, being decentralized and not traditionally intermediated, makes tracking a digital asset’s movement particularly challenging. You need a tracking system that is both transparent and trustworthy.

It is essential to note that when someone refers to crypto, they typically mean the process of transactions being tracked through a blockchain. A blockchain works by ensuring that each transaction is publicly recorded in a block and all the blocks are linked together in a chain. This leads to the second problem that often accompanies crypto: typically, exchanges don’t provide the same level of financial reporting as traditional systems. Therefore, a transparent internal control system becomes critical. Without establishing this internal control system, you could potentially lose track of which assets are being reported and which are not.

The goal is to create a record of every crypto movement it makes. From wallet to wallet, exchange to exchange, and between developer and business accounts. As you begin to incorporate automated tracking systems, tracking every digital asset movement will be transparent, trusted, and accurate.

Tracking Popular Exchanges Is a Must

As digital assets continue to gain popularity, platforms like Coinbase remain essential in trading, holding, and transferring cryptocurrencies. When you’re managing crypto transactions, staying updated with the newest crypto on Coinbase and similar exchanges is critical. New tokens and altcoins may have different regulatory requirements, and it’s essential to monitor their movement across wallets and platforms.

For example, when you acquire a new token on an exchange, it’s important to log that transaction not just as a purchase but also with details about the specific crypto type, the exchange used, and the wallet address. The more granular your data tracking, the easier it will be to reconcile your books and maintain an audit trail that can withstand scrutiny.

Also, as exchanges may have different policies on reporting or fees, having a clear control system can help you avoid errors, misreporting, or even accidental losses. This level of detail is necessary for businesses that need to provide accurate financial reports, whether for tax purposes or to meet the needs of investors.

Building Internal Controls Requires the Right Tools

Choosing the proper tools can be just as important as your controls when designing an internal control system. A few to consider are:

1. Blockchain Explorers

Blockchain explorers are essential tools for tracking transactions made in cryptocurrencies. These tools enable you to view the transaction history of a wallet address, track the status of a transaction, and verify when it was finalized on the blockchain. This helps you determine if a transaction occurred or if you have an area for inquiry.

2. Accounting Software

Leverage accounting software developed for cryptocurrency, such as CoinTracking or CryptoTrader.Tax. These accounting systems will automatically import transaction data from your exchange and wallet, categorize each transaction, and calculate the tax owed based on your location, all for the user. This leads to consistent and accurate record-keeping.

3. Transaction Tracking

It is not practical to track transactions manually. Utilize APIs from exchanges or wallet management services that integrate with your internal control framework to automatically capture all incoming and outgoing transactions. Ensure your internal control framework tracks transactions by wallet address, exchange platform, and the transaction status (pending or complete).

4. Smart Contracts

Smart contracts are also part of your internal control system. Smart contracts are self-executing contracts that ensure transactions occur automatically when specific conditions are met. For example, when someone purchases a good with crypto, you could develop a smart contract that releases the good upon confirmation of payment.

Dealing with Challenges of Reporting Digital Assets

Perhaps the biggest challenge with digital assets is evaluating the reporting, since many traditional businesses already have cross-national lines and consistent financial systems for evaluating crypto assets. Furthermore, crypto and its decentralized features have made auditing processes more challenging.While governments are catching up and issuing some regulations, the patchwork of rules issued globally is often inconsistent across exchanges and countries. Without sufficient internal controls in place, it is easy to make mistakes or errors in reporting, which has led to tax penalties and legal issues.

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