The Sarbanes-Oxley Act: Navigating Compliance for Digital Currency Companies

The Sarbanes-Oxley Act of 2002 (SOX) was enacted in response to major corporate and accounting scandals at the turn of the century. Its core purpose is to protect investors from fraudulent financial reporting by corporations. While SOX applies broadly to all U.S. publicly traded companies, its principles and requirements present unique challenges and considerations for digital currency companies—businesses built around cryptocurrencies, tokens, stablecoins, and related digital assets. As digital currency companies grow, pursue public listings, and become more institutionalized, understanding and implementing SOX-compliant practices is paramount. This article examines SOX’s key provisions, the specific challenges digital currency companies face in compliance, and best practices for navigating this regulatory landscape.

Overview of SOX Requirements

At its core, SOX aims to protect investors from fraudulent accounting practices by mandating strict internal controls and transparency in financial reporting. The two most critical provisions for compliance are Section 302 and Section 404:

Section 302
Requires corporate officers to certify the accuracy of financial statements and the effectiveness of disclosure controls and procedures in quarterly and annual reports.

Section 404
Requires both management and the independent auditors to annually assess and report on the effectiveness of internal control over financial reporting (ICFR).

Other SOX provisions address auditor independence, enhanced financial disclosures, document retention, whistleblower protections, and increased criminal penalties for fraudulent activities.

Distinguishing Between SOX Section 404(a) and 404(b)

While both subsections of Section 404 focus on internal control over financial reporting, there is a key difference in their application and requirements:

Section 404(a)
Requires company management to assess and report on the effectiveness of internal controls over financial reporting in the annual report.

Section 404(b)
Requires an independent external auditor to attest to and report on management’s assessment of internal controls. This requirement applies only to larger public companies, while smaller companies are exempt.

Under the Sarbanes-Oxley Act, Section 404(b) applies to companies classified as accelerated filers and large accelerated filers by the Securities and Exchange Commission (SEC). These thresholds are defined as follows:

Applicability to Digital Currency Companies

SOX compliance is mandatory for companies with shares traded on U.S. exchanges, and typically applies to subsidiaries or affiliates consolidated in their financial statements. As more digital currency companies contemplate or pursue going public through IPOs or SPAC mergers, they must embrace SOX standards. Even private digital currency firms often adopt SOX-like controls in anticipation of future growth, investor demands, or eventual public listing.

Digital currency companies differ fundamentally from traditional financial entities in several ways. Their products and services often rely on decentralized, cryptographically-secured technology; they manage novel asset classes that can be difficult to value or secure; and they operate in a fast-changing, often ambiguous regulatory environment. These factors complicate SOX compliance. However, despite these differences, SOX standards and the thresholds that require to be SOX 404b compliant, apply equally to digital currency companies and traditional financial entities. Once a company reaches the relevant compliance threshold (outlined below), it must adhere to the same 404b requirements. The thresholds are defined as follows:

• Accelerated Filer:
  • Public float of $75 million or more, but less than $700 million.
  • Has been subject to SEC reporting requirements for at least 12 months.
  • Has filed at least one annual report.
• Large Accelerated Filer:
  • Public float of $700 million or more.
• Emerging Growth Companies (EGC):
  • These companies can also be exempt from 404(b) for the first five years after their IPO, provided they meet certain revenue and debt thresholds. 

Public float is the total market value of a company’s outstanding shares held by public investors, as of the last business day of the company’s most recently completed second fiscal quarter.

When a company reaches the public float threshold that requires SOX Section 404(b) compliance (i.e., becomes an accelerated or large accelerated filer), several important actions and changes occur:

• Auditor attestation requirement
• Increased audit scope and cost
• Enhanced documentation and testing
• Transition planning
• Disclosure in SEC filings
• Increased oversight

Unique SOX Challenges for Digital Currency Companies

Internal Controls over Digital Assets

Section 404 requires robust controls over financial reporting and all material assets. For digital currency firms, this means establishing controls over wallets, private keys, and transaction processes to safeguard against theft, loss, or unauthorized transfers. Examples include:

• Multi-signature wallets or hardware security modules (HSMs) for key storage and use.
• Segregation of duties and transaction approval workflows.
• Regular independent audits of wallet balances, including “proof of reserves.”

Real world example: Transaction approvals require multiple personnel, ensuring no single employee has control over initiating and completing transfers—helping mitigate the potential for fraud and errors.

Accurate Valuation and Reporting

The fair value of digital currencies is highly volatile and can be difficult to pin down at reporting dates, particularly for thinly traded or emerging tokens. SOX compliance demands transparent and accurate valuation methodologies, detailed supporting documentation, and controls to reconcile on-chain and off-chain records.

Further, revenue recognition can be complex, especially for companies earning transaction fees, staking rewards, or engaging in lending, decentralized finance, or mining activities. Clear, consistently applied accounting policies are a must.

Real world example: Validating how the net asset value (NAV) for a crypto fund is being calculated, reviewed, and approved. A control is established, validating the source input into the NAV calculation, and that the calculation is reviewed and approved by the right level of management monthly.

IT General Controls (ITGCs)

Much of a digital currency firm’s business is digital and automated, making strong ITGCs essential. These cover access management, change management, data backup, and incident response. For example:

• Only authorized personnel should have access to production systems and wallets.
• Code updates to smart contracts or trading algorithms should require documented testing and review.
• Monitoring for suspicious activities (such as large or unusual transactions) should be automated and reviewed.

Real world example: Updates to critical systems—such as smart contracts, trading algorithms, or wallet infrastructure—undergo formal change management. All code changes require documented testing, peer review, and approval before deployment, helping to minimize errors and malicious modifications.

Transparency and Auditability

Blockchain’s transparency can be a double-edged sword: while transactions are publicly visible, tracing them to real-world financial statements can be complex. SOX requires a clear audit trail for all material transactions. Companies must implement tools and procedures for reconciling blockchain activity with their internal books, often leveraging blockchain analytics, automated reconciliation solutions, and robust documentation.

Real world example: Implementing automated reconciliation solutions that compare blockchain transaction data against internal ledger entries. This ensures that movements of digital assets reflected on the blockchain align with those recorded in the company’s financial records.

Vendor and Third-Party Risk Management

Many digital currency firms rely on third-party custodians, exchanges, or technology providers. SOX requires management to assess and mitigate the risks associated with these relationships. This can involve reviewing Service Organization Control (SOC 1) reports, obtaining independent attestations, or supplementing with additional internal controls and monitoring.

Real world example: Digital Asset managers maintain large pools of digital assets through trusts and funds, often relying on third-party custodians for secure storage and settlement. To comply with SOX requirements obtaining and reviewing Service Organization Control (SOC 1) Type II reports from custodians to provide independent assurance over the custodian’s internal controls relevant to financial reporting.

CBIZ established a SOC benchmarking tool to assist companies in assessing their own SOC program or that of their service providers.

Leading Practices for SOX Compliance

Start Early

Even before going public, build a culture of strong internal controls and documentation. Start to track against the thresholds mentioned above. Many companies underestimate the effort required and scramble to implement processes under tight deadlines.

Establish a Strong Control Environment

Begin with tone at the top: executives and the board must champion compliance and ethics. Implement company-wide policies on risk management, conflict of interest, whistleblower reporting, and document retention.

Map and Document Processes

Carefully document all processes that impact financial reporting, including custody of digital assets, revenue recognition, and expense authorization. Use flowcharts to map transaction flows—from on-chain events to entries in the general ledger.

Regularly Test and Update Controls

Continuous monitoring and periodic testing (often facilitated by internal audit or external consultants) help identify weaknesses and ensure that controls keep pace with business changes and regulatory developments.

Engage Early with Auditors

Involve your external auditors early in designing and reviewing controls. Audit firms with digital asset expertise can help anticipate challenges and smooth the year-end audit process.

Benefits of SOX Compliance Beyond Regulation

While SOX compliance is a legal requirement for public companies, its principles can bring broader benefits for digital currency companies, including:

• Enhanced investor confidence, which can lead to better access to capital.
• Improved risk management and fraud prevention, reducing the risk of catastrophic asset loss or reputational damage.
• Stronger operational discipline, enabling scalability and more predictable growth.

Looking Ahead

As regulators around the world develop new frameworks for digital assets, SOX remains a cornerstone of public company accountability in the U.S. Digital currency companies aiming for mainstream adoption, institutional partnerships, or public listings should see SOX compliance not just as a legal hurdle, but as a mark of trust and maturity.

CBIZ has a robust digital asset industry practice. If your company has questions or is preparing for the SOX journey, we would be happy to understand where you are on the roadmap and guide you to a successful implementation.

Conclusion

The Sarbanes-Oxley Act establishes rigorous standards for internal control, financial reporting, and corporate governance. For digital currency companies, achieving SOX compliance involves adapting these standards to new technologies, asset classes, and risks. Through proactive investment in systems, controls, and expertise, these companies can meet regulatory obligations and build a foundation for sustainable, transparent growth in the digital economy.

Connect with a CBIZ professional today to discuss your SOX compliance needs and get guidance tailored to your digital currency business.