Industry mulls identifier schema for digital assets

In the Book of Genesis, God created Adam. And one of Adam’s first actions was to name every animal. Whether you understand this story literally or as allegory, the point is the same: it’s a basic human need to name things. Naming things classifies them as not being other things; it allows us to talk about those things, to understand them, and to bring them under their control.

In traditional financial markets, instruments like stocks and bonds, and the counterparties that buy and sell them are assigned names—standardized alphanumeric identifiers that help regulators and risk managers to understand the potential threats inherent in a portfolio, a bank, or an entire financial system.

In the world of cryptocurrencies, however, this standardization does not exist. With crypto currently in existential crisis following the bankruptcy of exchange FTX, some reference data experts say that canonical standards for digital assets could be key to their future legitimacy.

“There’s a good secondary market for digital assets, and they’re not going away any time soon,” says a former chief data officer who has worked at several tier-1 banks.

“As organizations take more and more of these assets into their portfolios, as they use them as hedging tools and investments, they must be able to manage their risk around them. You can only quantify risk once the security is classified. The first step in trying to assess risk is sorting everything out, and identifiers are a way to do that,” they say.

Currently, digital assets like cryptocurrencies are identified by symbols that are used differently from exchange to exchange.

“All the providers use different symbology because there are no standards in crypto,” says Ethan Feldman, co-founder and CTO of Talos Trading. “So even if you’re trading something as simple as Bitcoin, you’re going to see different symbols across the providers. Some are using XBT, for instance, which is the currency code; others are using BTC, which is more canonical. This is a challenge for us every day.”

Talos offers a crypto order and execution management platform for buy-side firms, accessible via GUI or API, that supports the crypto trade lifecycle. To route orders correctly, Talos must be secure in the knowledge that an underlying security referred to by two different codes on two different platforms is, in fact, the same.

Cusips and Red codes and Isins—the whole game is how to bring them together so you can put it up against something you care about, like your portfolio or the risk of an entire bank. It’s about bringing a bunch of data together, not just one instrument
Brad Levy, Symphony

The tracking of all these symbols is an ongoing exercise in double- and triple-checking for Talos, Feldman says. To get around it, Talos creates its own standardization by using its own symbology, agnostic of what the crypto exchanges are naming the instruments. “If you’re using our API, you’re going to use BTC to interact with Bitcoin, whether it’s on Kraken or Coinbase. That’s a very vanilla case, though; it gets way more complicated as you get into more complicated assets,” Feldman says.

Cryptocurrencies like Bitcoin and Ethereum can be “forked” into new currencies when their developer community makes a change to the blockchain’s ruleset, or protocol. Bitcoin, for instance, was forked into Bitcoin Cash in 2017, meaning that Bitcoin kept running, but a new currency called Bitcoin Cash began to operate also. Bitcoin Cash was referred to by the BCH symbol. Then in 2018, BCH itself split in two, forking off into BCH and a new currency, Bitcoin Satoshi’s Vision (SV). In 2020, BCH split yet again into BCH ABC (BCHA) and Bitcoin Cash Node (BCN).

Each time one of these forks occurs, Feldman says, it’s not as if there’s one canonical body to decide on what symbols will be used across the industry. All the different exchanges must decide among themselves.

“Some of the exchanges went from using BCH to BCHA and BCHN, and then decided that BCN was the one that won that competition. So they switched it back. And we have to track this and try to understand it,” Feldman says.

This kind of fragmentation presents a real issue for a financial institution’s back office, Feldman says. For instance, when BCN became the symbol for Bitcoin Cash Node, the deposits that investors had in BCH at the time of the fork were duplicated in the new currency. An investor might decide to then sell that asset, which would mean having to report the sale so it could pay tax on the profit.

“It’s important from a reporting standpoint to understand the lifecycle of these forks and assign different identifiers to them,” Feldman says. “They might change on the front office, but from a back-office perspective, they need to carry through.”

The use case for digital asset reference data is clear. But creating identifiers is not a straightforward task in competitive, global markets. When EU securities market regulation was refined post-financial crisis, regulators looked for more reference data to be able to map entities to transactions and trades. The EU authorities stuck to ISO standards and named the Isin as the preferred code, despite objections from Bloomberg, which had put forward a competing standard, the Financial Instrument Global Identifier.

The Association of National Numbering Agencies (Anna), the Isin administrator, then had to painstakingly develop the code, which had hitherto identified relatively simple instruments, to be fitted for complex, boutique over-the-counter derivatives.

The debate at the time—Isin vs Figi—was contentious, with Figi supporters claiming that the ISO standard code was not up to scratch. The selection of a recognized standard would probably not have occurred had an authority not forced the decision.

Regulators are, of course, concerned about crypto. Chair Gary Gensler has presided over a Securities and Exchange Commission that has fined many a crypto exchange; the SEC is looking to become the primary regulator of these markets in the US. In the EU, the European Commission put out a digital finance package in 2020, aimed at supporting the development of digital assets while mitigating its risks. Part of this package is the DLT Pilot regime, which aims to develop trading and settlement of these instruments.

It’s not just about consensus. Symphony CEO Brad Levy knows all too well that not only do identifiers take time, money, and effort to produce, but their users hate paying for them.

Levy was at Goldman Sachs in the early aughts, where he helped to build the Reference Entity Data (Red) code for credit default swaps.

“We created a reference entity database of reference entities and reference obligations, the entities in the obligations that would be delivered in a default. It was an important standardization,” he says.

“It’s important to know the thing you own—if it’s a bond, the terms of it, or the deliverables under a CDS.”

It took a lot of work, Levy adds. “And we paid lots of money for law firms and to do the scrubbing and to maintain the data.”

Markit bought the Red codes in 2004 and licensed them to Wall Street. They became an important identifier as the CDS market matured. S&P acquired IHS Markit in 2021 and now owns the Red codes, which are still important for CDS trade confirmation and clearing, and can be mapped to other reference data, like Legal Entity Identifiers.

This is really the point of reference data, Levy says: it’s not just about being able to understand one instrument. Understanding risk is also about how that instrument interacts with counterparties and owners and other instruments.

“Cusips and Red codes and Isins—the whole game is how to bring them together so you can put it up against something you care about, like your portfolio or the risk of an entire bank. It’s about bringing a bunch of data together, not just one instrument,” Levy says.

Goldman and Markit thought they had a right to charge for such a valuable piece or work, he says. But he acknowledges that market participants don’t enjoy having to pay for reference data. Imagine a chocolate drink that has a barcode on it. You might not object to paying for the drink, but you would resent having to pay for the barcode.

Also, reference data’s usefulness often becomes apparent only after a disaster, Levy says. It’s a bit like life insurance: you might resent your monthly contribution to the fund, and you never get to enjoy the payout, as you’re dead.

Levy says he believes a global utility will be chosen to issue identifiers of digital assets. And in fact, the Anna is working on making the Isin fit for identifying digital assets, much as it did for OTC derivatives. In 2019, the association said it was forming a technology taskforce on digital assets to examine how this might be achieved.

One could think of digital assets as occurring in two groups, says Anna managing director Stephan Dreyer. First, there are traditional financial instruments—stocks, bonds, funds and so on—that market participants are tokenizing and issuing on blockchain/DLT to find operational efficiency and improve settlement time, he says.

Dreyer says these kinds of digital assets don’t present much of a challenge for Anna, as the association applies a technology-agnostic principle to issuance, meaning that whatever the technology used to issue a security, the classification system behind the Isin remains the same.

“But then there’s this other bucket of assets—new things that are potentially a new asset class: things like Bitcoin, Dogecoin or stable coins, and even potentially NFTs. What do we do with them?” Dreyer says.

The taskforce has identified these assets as what it classes as referential instruments—instruments that tell you the value of other instruments. “You could have a fund, for example, with crypto assets in it, and then you could have an index on crypto and use it to gauge the value of another financial instrument,” Dreyer says.

That was the starting point for the group’s work. Because the ISO 6166 standard that governs the Isin covers referential instruments and not just financial instruments, the taskforce concluded that it could assign Isins to them.

The question now is how. With traditional securities, Anna works on a federated model, where national numbering agencies in each jurisdiction issue Isins based on where the security was issued. “That’s an element that is not easily defined nor very transparent in those types of crypto assets,” Dreyer says.

For that reason, the Anna working group is aiming to develop some kind of centralized allocation model, similar to what its Derivatives Service Bureau does for the OTC derivatives industry.

“But it’s still very much a work in progress, trying to define where that will happen and what is the vehicle that we use to make it happen,” he says. “We will be very excited when we can talk about more specifics of that in the course of the next year.”

The Anna is also working with Etrading Software, a technology provider and the exclusive registration authority for the ISO standard for the Digital Token Identifier (DTI). Etrading launched a registry to issue DTI last year. Isin and DTI are potentially complementary for digital asset reporting.

In a report on the EU’s DLT Pilot, the European Securities and Markets Authority includes some thoughts on how a reporting regime for digital assets would work, including what identifiers would be used. Esma recommends that local authorities in the EU require DTI, and that DTI could be linked with Isins for use cases that required a traditional financial instrument to be linked with its tokenized version.

This could be useful in the event of a fork, for example, Esma says. An instrument on the DLT before the fork would keep its original Isin but take on a new DTI to reflect the new protocol. Linked Isins and DTIs could also enhance interoperability between different blockchains, allowing users to map Isins to a list of digital tokens, thereby helping to track the history of transactions made in different ledgers.

Anna managing director Emma Kalliomaki says market participants are concerned about bridging the gap between traditional players and emerging ones.

“Standards play an important role in that because, ultimately, authorities want to know what it is you’re trading. Does it fall within the classification and definition of traditional asset classes, irrespective of what platform or technology is being used?” she says.

Also, some don’t want to commit themselves to any one platform or ledger.

“There are discussions taking place on how they engage with these multi-chains: Are there any standards around the technology itself to mitigate some of that fragmentation?” Kalliomaki says.

As the crypto economy weathers another cold snap in a series of seemingly annual crypto winters, mitigation is a primary focus as of late, thanks in part to FTX. Despite the repeated downturns, however, sources agree that an identifier model would not only make risk management and regulatory reporting more feasible for practitioners, but it would lend legitimacy to an asset class that is, and continues to be, a contender with a staunch refusal to shrink or fade.

As Kalliomaki says: “I don’t see digital assets going away, but there is a lot of work to do to get them functional in a cohesive ecosystem like what exists in other asset classes today.”

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