ETS’s Simon Wiltshire explains how reference data standards can accelerate crypto adoption by TradFi.
First published in TABB forum.
If you’ve ever tried to access a smart contract on one of the newer blockchains you might be familiar with the following scenario. I needed some stable coins to take advantage of an attractive DeFi offer on a recently launched level 2. I could have bridged some of the token over from a more established blockchain but I didn’t want the risk and it may have incurred a heavy transaction cost.
After searching the internet, I found a small exchange that supported my target coin across multiple blockchains and so I bought the token and grabbed the offer but, as you can imagine, the process was rather nerve-wracking – have I got the right token? Is it in the right ecosystem? Does my wallet support it? I can go through a token verification process but in the crypto-wild west you’re never 100% certain. And as traditional financial institutions move into the world of crypto-assets, those institutions will be asking the same questions – but on a much larger scale.
These are exciting times for crypto: new tokens, exchanges and protocols are being launched on a seemingly daily basis. We see more and more people viewing digital assets as a viable investment opportunity. At the time of writing, the prices may not be heading in the right direction but the long-term trend is upwards. The traditional finance industry (TradFi) sees the opportunity and is dipping its collective toes into some inviting crypto waters – with all the big players (both buy-side and sell-side) responding to customer demand for access to these new assets.
However, while the crypto environment is analogous to the TradFi world, some significant differences will impact an institution’s ability to take advantage of these opportunities without considerable effort, cost and disruption. For example, while a digital token may be tradeable on several exchanges, it may also be tradeable across different Digital Ledger Technologies (DLTs) or blockchains. The capability to bridge from one DLT to another exists, but equivalent tokens on different DLTs are not guaranteed to be identical, and so need to be treated as individual tokens within a multi-chain family.
One of the fundamental issues faced by the traditional institutions is that of accurate and efficient communication: both intra- and inter-organisation. To integrate any new asset into the existing systems and processes, the participants need to establish an agreed understanding of the products being traded – how they are identified and classified? How do we measure their risk and performance? How do we know we are settling the right product? Without answers to these questions, there is a possibility of miscommunication and ambiguity, which will inevitably lead to errors and losses – especially in a decentralised environment in which on-chain settlement is subject to probabilistic finality, and an objective identification of the chosen asset can be opaque.
The financial industry has already solved these issues for traditional assets such as equities, bonds and derivatives. Still, those solutions evolved over many years, and even now, the reference data landscape is, in some respects, imperfect. But now, with crypto, the industry has an opportunity to look at this emerging asset class with fresh eyes, and there is an opportunity to design a flexible suite of reference data products that use existing data structures as a starting point, but reflect the distinctive nature of the new world.
The following paragraphs set out a three-step vision for a global, open-source, standards-based reference data framework – starting with higher priority assets such as native tokens and stable coins before moving onto alt-coins, DeFi and NFTs. And although it does not aim to solve all crypto issues, the result aims to build a solid foundation for the growth of digital asset adoption by financial institutions.
Step 1: Identification
The process of creating a strategy for crypto reference data starts with the accurate identification of the required digital asset. As with the traditional world, different functions have different requirements – what do I want to trade? Are we matched? What are we settling? In the traditional world, each of the workflows involved in the trading and settlement of assets may use a specific identifier suited to each particular task, and this model should be extended to the crypto environment but expanded to ensure that it is possible for the user to identify the DLT.
So, the following multi-layer hierarchy of identification for crypto-assets would allow each function to identify an asset at the most appropriate level of granularity and readability:
- DLT ID – identifies the specific blockchain on which a token is implemented to support a more precise definition of a chosen smart contract.
- Parent ID – identifies the fungible family of equivalent tokens (across multiple DLTs) for use in cross-chain position keeping, regulatory reporting or as the basis of a consolidated tape where a specific DLT is not a required element.
- Contract ID – identifies the individual token on a specific DLT. This is equivalent to the ISIN/MIC/Currency combination for an equity but is based on the specific DLT on which the token resides. This ID can be used for confirmation, matching and settlement where precise token/DLT identification is required. It also allows the consumer to view equivalent digital assets on multiple DLTs (each with a different ID) to find the DLT that best suits their investment requirements.
- Trading Symbol – provides a unique human-readable equivalent for the Parent ID that can be supplemented with an Exchange ID: this is analogous to the traditional Ticker Symbol (or proprietary equivalent) and (when linked to the Parent ID) provides a quick and easy method of identification.
To put the above family of identifiers in place, it will be necessary to work with ISO to evolve an appropriate specification for the above identifiers. Still, it should be possible to front-run some of the definitions and progress the other steps in parallel.
Step 2: Categorisation
With the above suite of IDs forming a solid foundation for efficient and accurate crypto-communication, the next step would be for the industry to agree on a common method of classification for digital assets. Many classification methods and taxonomies have been put forward (from academic and commercial sources), but none have established themselves as the de facto standard for the industry. The TradFi world requires a simple, standards-based classification system for crypto assets that reflects the needs of the financial world. For ease of adoption, this classification should be based on the principles of the CFI (ISO 10962) – with six attributes in a tree structure – where each tier describes the key characteristics of the token. For example, its utility, underlying asset type, fungibility, legal claim, and its decentralisation etc.
A widely adopted classification code can become a powerful tool for all players within the crypto environment – determining reporting obligations, risk categorisation, price performance assessment and more. One possible outcome might be the creation of a regulatory matrix showing the categories of digital assets that were subject to a particular regulation with a specific jurisdiction.
Step 3: Reference Data
The final piece of the proposed framework is to maintain and publish a comprehensive database of reference material for DLTs and tokens that would allow the industry to assess their characteristics and behaviours. This would best be achieved through the definition and management of an open-source, electronic “prospectus” that would allow an issuer to define the elements of a token that might inform investment risk and performance – the underlying “asset”, the DLT(s) on which it is implemented, the extended token family, the issuing company or organisation, token distribution etc.
The machine-readable prospectus would be submitted by the token issuer – accepting responsibility for the accuracy of the contents – and would be actively maintained and open to challenge by other industry participants. And by linking the reference data to the ID suite (from Step 1) and the standard classification (from Step 2), the user will be able to perform a deep dive on the investment potential of any token or family of tokens.
How we get there
The above proposal lays out a roadmap for the provision of a suite of open-source reference data solutions for the emerging crypto asset class:
• A family of token and DLT identifiers
• A classification methodology
• An electronic “prospectus”
Each of these steps can be tackled in parallel, on the basis of token priority and can be supported by the Digital Token Identifier (DTI) – which is a recently released ID built on the ISO 24165 standard with the objective identification of tokens and blockchains at its core.
ISO 24165 (DTI) is the digital asset standard developed by the ISO committee responsible for other globally adopted standards such as the ISIN, UPI, LEI and CFI. The DTI is expected to be mandated for regulatory reporting of crypto-asset trades under multiple global jurisdictions. Issuers of digital tokens, crypto exchanges and other market participants who adopt the DTI now, will be creating the necessary building blocks to be regulatory compliant while also providing communication benefits throughout the trading lifecycle.
The DTI is issued and maintained by the Digital Token Identifier Foundation (DTIF) – a non-profit division of Etrading Software that aims to increase transparency in the crypto world through the creation of a core reference data set based on open data principles and available as a public good.
If you wish to find out more about the DTI and how it can help your digital journey then take a look at the DTIF website (www.dtif.org) or get in touch at email@example.com.
In conclusion, with a collaborative approach and the solid foundation provided by standards such as the DTI, it clear that the industry has an opportunity to define a powerful set of building blocks that can smooth the path towards the adoption of crypto-assets by the traditional financial institutions.