Keeping Track: The need for a Digital Token Identifier
First published by TABB Forums.
We are currently overseeing a period of intensified demand and unprecedented institutional appetite for trading in cryptocurrencies. A recent Fidelity Digital Assets survey shows that almost 80% of institutional investors found something appealing about digital assets. As the importance of cryptoassets increases, the industry faces challenges, both in terms of institutional demand to help deal with structural technical challenges, and from regulators lacking the ability to know what is actually being traded. As a result, there is a growing need for a standard frame of reference so that buyers, sellers and regulators have confidence they are actually talking about the same digital token.
Problems of fragmentation
As things exist today, the cryptoasset market consists of cryptocurrencies like Bitcoin, as well as a vast array of other product types including security tokens and utility tokens. Whilst on one hand this list of cryptoassets continues to grow, on the other hand there is no standard method of identifying one digital token from another. For instance, a cryptocurrency such as Bitcoin can have multiple different identifiers such as BTC and XBT. If the same token is referenced by different investors using differing identifiers, this makes it extremely difficult to aggregate the trading activities of the token across all the various exchanges and trading venues.
Further, there is no agreement on how to categorise cryptoassets, which poses a problem for authorities trying to build a regulatory regime around identifiers. If one party assumes an asset is a security token, while the other thinks it’s an e-money token, the transaction might not match up. The same problem could happen with so-called hybrid crypto-assets which for example might start out as a security token but at some point may morph into an e-money token.
Benefits of standardisation
These instances of fragmentation can easily be solved, however, by an introduction of a standardised identifier. Standardisation would help large banks and institutional investors process cryptoasset transactions without having to significantly rework their existing systems and processes. Because of the scale at which they operate, a digital token identifier would help large investment management companies enter into cryptomarkets because their back office transactions would be much easier to process.
In addition, central banks and regulators have a desire to make cryptomarkets more stable, transparent and safer, for a wide range of current and future participants. These initiatives include:
- The Financial Action Task Force on Money Laundering (FATF)’s 5th Anti-Money Laundering Directive (5AMLD) considers certain cryptocurrency businesses as “obliged entities” which need to implement the same registration and reporting requirements as traditional financial institutions (including Know-Your-Customer (KYC), Customer Due Diligence (CDD) and Suspicious Activity Reporting (SAR)). Yet FATF procedures are not well suited to capture cryptocurrencies because they do not specify how a cryptoasset should be identified systematically, which in turn means it is not possible to build a global machine-based surveillance infrastructure for cryptocurrency transactions. Given the large volumes of transactions flowing through market infrastructures, lack of machine-based surveillance will prevent any meaningful tracking from taking place;
- In September 2020, ESMA adopted a digital finance package aimed at creating a new bespoke regulatory regime for previously unregulated cryptoassets and a pilot regime for market infrastructures that enable trading of cryptoassets. However, both of these initiatives will require a mechanism to uniquely identify the cryptoasset;
- HM Treasury is consulting on its regulatory approach to cryptoassets with an initial focus on regulating stablecoins, enabling the creation of an ecosystem of wallet providers, custodians and DLT-based financial market infrastructures. The ability to uniquely identify the cryptoasset is therefore necessary to allow effective communication between the various parts of such an ecosystem and with the regulators;
- The Financial Stability Board (FSB) published a report on supervision of global stablecoins in October 2020 which sets out ten recommendations, including one that advises authorities to have the necessary tools to comprehensively regulate stablecoins and provide international standards in coordination with standards bodies. Again, the ability to uniquely identify global stablecoins across all jurisdictions is necessary to allow effective identification of global systemic risk.
ISO’s standardisation of digital tokens
Since early 2018, ISO has been examining the possibilities of defining a standard identifier for crypto-assets. In May 2020, ISO publicly proposed a new ISO 24165 Digital Token Identifier (DTI) standard, designed to be vendor-neutral, open, freely available, and global.
Originally, the relevant ISO working group (TC68 SC8 WG3) had intended to establish the identification needs for digital currencies and whether an existing framework, such as the ISO 4217 Currency Code standard, could be leveraged. It was then determined during the first stages of discussion that identification for digital assets did not fit the existing definition or scope of the ISO 4217 Currency Code standard, and development was required for an identification registry based on the specific characteristics of digital assets. From this determination, work evolved to focus on the development of a Digital Token Identifier based on objective, verifiable and immutable characteristics of the digital asset.
The ISO standard allows for DTIs to be provided under a Registration Authority (RA) tasked with the implementation of the standard and the issuance of the identifiers. After conducting an RFP process, ISO has recommended Etrading Software Limited to be the exclusive global Registration Authority (RA) for issuing DTIs. The first DTIs are expected to be available in the second half of 2021, covering the most popular digital tokens such as bitcoin.
Expansion based on trust
Overall, there is an urgent need from investors and regulators of digital tokens alike for a trusted ISO identifier that is machine-readable and freely available. Data standards maintained by ISO, a world-renowned and well-respected international standards body, essentially drive up quality by providing a precise definition of each data element, thereby removing ambiguity and allowing consistent interpretation by all parties. Ultimately, standardisation of digital tokens is expected to be one of the key enablers linking private sector innovation with public body governance as cryptoasset markets and products continue to evolve and expand.