SOX Compliance and Digital Asset ETFs

Key Takeaways:

• As digital asset ETFs gain regulatory traction, investment management firms may face SOX compliance requirements—even if the firm itself is not publicly traded—driven by SEC registration and exchange listing obligations.
• Digital asset ETFs introduce unique SOX challenges, including fair value volatility, reliance on blockchain-based processes, and heightened third-party risk, which require thoughtful internal control design and documentation.
• A proactive, SOX-aligned control framework—supported by strong governance and effective oversight of third-party fund administrators—can strengthen investor confidence and position firms for long-term regulatory readiness.

Digital asset exchange-traded funds (ETFs), like traditional ETFs, are investment vehicles that provide exposure to the underlying assets without requiring investors to directly hold those assets. For digital asset ETFs, the underlying exposures are typically cryptocurrencies such as Bitcoin and Ethereum, as well as companies and technologies associated with blockchain ecosystems.

Digital Asset ETFs typically fall into three primary categories:

• Spot ETFs, which track the price of a specific digital asset such as bitcoin. These provide investors with exposure to the asset without having to buy, store, or manage the asset directly.
• Futures-based ETFs, which use futures contracts to replicate exposure and performance of digital assets.
• Equity-based ETFs, which invest in companies operating within the digital asset ecosystem, including crypto exchanges and blockchain developers.

Digital assets continue to gain traction as an investable asset class in recent years, driven by increased industry interest and expanding regulatory frameworks. Some key developments contributing to this growth include regulatory clarity following the approval of spot bitcoin ETFs in early 2024, the proposed CLARITY ACT, and the passage of the GENIUS Act.  

As the regulatory landscape continues to evolve, non-public investment management firms that issue digital asset ETFs may be required to comply with the Sarbanes-Oxley Act of 2002 (SOX). Designed to protect investors, SOX is a U.S. federal law that established a framework for management accountability by enhancing the internal controls, accuracy, reliability, and transparency of corporate disclosures and financial reporting for publicly traded entities.

Although SOX applies directly to publicly traded companies, its requirements extend to investment management firms when a digital asset ETF is registered with the U.S. Securities and Exchange Commission (SEC) and is listed on a U.S. exchange, such as the New York Stock Exchange. In these cases, the investment management firm personnel responsible for issuing the ETF’s financial statements, even if the firm itself is not publicly traded, must establish and maintain effective internal controls over financial reporting for the digital asset ETF.

As digital asset ETFs gain greater adoption, there is an increasing number of filings with the SEC each month, reflecting a broader trend toward more advanced and varied crypto-related financial products. Digital Asset ETFs face unique SOX compliance challenges due to the nature of blockchain technology and evolving regulatory expectations such as extreme price fluctuations, and evolving valuation methodologies can complicate fair value measurements and financial reporting processes.

To build a SOX compliant internal control framework, investment management firms should follow a structured approach that aligns with the requirements of Section 404. The process begins with the firm building a strong control foundation through a clear understanding and documenting the control environment. This is done through identifying key financial reporting processes, defining relevant risk and control objectives, and mapping controls to financial statement assertions. The key financial reporting process and controls should be documented in detailed narratives, flowcharts, and control matrices that describe how controls operate.

Digital Asset ETFs often utilize third-party fund administrators to support critical operations and compliance functions. These services may include fund formation and structuring, net asset value calculation, fund accounting, investor services, regulatory reporting and audit support. Given their role in financial reporting, it is essential that third-party fund administrators maintain strong internal controls and provide a System and Organization Controls (SOC) report.

SOC reports are a critical component of SOX compliance, as they help management evaluate the internal controls and operating effectiveness of third-party service providers. Investment management firms must review the reports carefully, identify relevant user control considerations, and confirm they have processes in place to address complementary controls. Even when third-party administrators execute controls or prepare documentation, the management company retains responsibility for reviewing, validating, and ultimately owning the financial reporting outputs for SOX compliance.

In a rapidly transforming financial ecosystem, SOX compliance is more than a legal obligation—it is a strategic imperative and viewed as best practice for governance, risk management, and investor confidence. For investment management firms, including those that are not publicly traded, proactive alignment with SOX and SEC expectations can strengthen internal discipline and position organizations to operate more securely, transparently, and sustainably, as digital assets markets continue to expand.