Building Strong Internal Controls and Audit Trails for Crypto Transactions

“Stronger controls and safer crypto – building a crypto where every transaction is transparent and every risk is minimized has never been so important”.

You may ask – why? The Crypto crime has hit $24.2 billion in 2023 – according to Chainalysis, the illegal crypto transaction volume has increased significantly. 

For crypto, risks are magnified – transactions move faster, volumes are high(APIs) and every misplaced trade can mess up your books. 

Building a strong unified system that holds data centrally while maintaining consistent valuation and avoiding duplication is important. 

Keep reading this article to explore building strong internal controls and audit trails for crypto transactions. 

Why It’s Important to Create a Crypto Accounting System 

Crypto accounting can’t work with traditional cash-accounting methods. Digital assets are volatile and often spread across multiple exchanges and wallets. In which creating a crypto accounting system becomes important. 

Industry Insight 
According to BPM, poor controls can lead to prolonged audits – increasing fraud risk and reporting inaccuracies. 

Above this, in custody, auditors need to not just verify assets, but also control over private keys and allocation of duties. 

Without proper systems, you will always be at risk of having financial losses. 

Tracking Popular Exchanges Is a Must

Most companies trade or hold crypto on major exchanges like the newest crypto on Coinbase, Binance or Kraken. And for the reason that every platform uses varying data formats, APIs and reconciliation mechanisms, not having a uniform track of those creates blind spots. 

Imagine juggling multiple bank statements from different countries without a uniform ledger – reconciling them will be messy and time consuming. 

In crypto, transactions move faster, resulting in risks being magnified. This mandates tracking exchanges, whether it is for tax purposes or other reasons. 

Building Internal Controls Requires the Right Tools

Building internal controls isn’t about just policies, it’s about working with the right tool that ensures visibility, accuracy and required control over every transaction. 

With the right platform and tracking system, you can convert messy data into a clean and auditable one. Without a solid tech stack, even the best processes fall apart. 

Let’s explore the major required tools:

1. Blockchain Explorers
   Blockchain explorers allow finance teams to track on-chain transactions, validate wallet movements and validate the transaction timestamps.  

   As a public ledger, blockchain acts like a universal ‘bank statement’ for crypto. A single but strong source of truth that can’t be tampered with.

2. Accounting Software
   Crypto-aware accounting platforms by default sync with exchanges and wallets, log the pending transactions and maintain immutable audit logs.   

   These tools help you to classify transactions, track costs and create reports – making month ends smoother and efficient

3. Transaction Tracking
   These tools help to tag and categorize transactions, for example: gas and revenue. It helps to understand the separation of duties within a look. 

   Every move is timestamped, devoted to a user and logged – a foundational rule of strong internal controls.
   

4. Smart Contracts
   Smart contracts can enforce checks automatically. And because smart contracts themselves are recorded on-chain, they provide a built-in audit trail. Their logic can even be tested for security before deployment. 

Case Study

A Web3 startup was struggling with slow reconciliations and missing audit logs. After switching to a crypto accounting tool with multi-sig controls and automated syncing, their month end close dropped from 2 weeks to 3 days and auditors finally got clean transactions. 

Dealing with Challenges of Reporting Digital Assets

Reporting crypto is not that simple and straightforward – valuations change instantly, small transactions pile up and gas fees can hurt cost basis. Verifying balances across wallets is also tough, especially when data and auditing processes are incomplete. 

Internal teams should understand some regulations, how blockchain works, to review risks and organizations require clear documentation to meet reporting standards. 

Conclusion

In crypto, the freedom of operating without a middleman comes with some real risks. To stay safe and transparent, organizations need solid internal controls and clear audit trails that share where the transaction exactly goes. 

Using the right tools keeps assets. And with regulations getting tighter and tighter every year, having a strong crypto accounting setup isn’t just smart anymore. It’s the new reality.

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