If equities, bonds, and OTC derivatives have identification codes why shouldn’t digital assets?
That’s the premise Etrading Software and the team of Bloomberg and Kaiko are betting on by recently throwing their hats in the ring to provide ID codes as the new registration authority for digital token identifiers (DTIs) expected to go live sometime next year. The decision on which of the two contenders will nab the role is now in the hands of two committees of the standards-setting body International Organization for Standardization (ISO) which provides a process by which to designate a legal entity — known as registration authority– to maintain identification standards. The ISO WG3 committee led by Alexandre Kech, the chief executive of digital asset custodian Onchain Custodian in Singapore, will evaluate the two proposals before sending off its assessment to the ISO TC68/SC8 subcommittee for reference data. A supermajority– 2/3rds vote– from the ISO TC68/SC8 subcommittee is needed before the winning proposal can be passed to ISO for acceptance. The WG3 consists of 39 representatives from ISO member countries and liaison organizations. The TC68/SC8 subcommittee is made up of 28 participating members, 90 observing members and 25 liaisons; the national bodies of the 28 participating members will discuss the national votes in their national standardization committees.
Identification codes for securities are typically issued by national numbering agencies and used by traders and post-trade processing executives to agree on what security is being traded, cleared and settled in a particular transaction. Securities are assigned a local identification code and an international identification code, which are then stored in security databases for future investment and trading analysis as well as ng analysis and regulatory audits. Each security code can be tied to a particular asset. That’s not the case with digital assets, because some tokens can bear the same short code representing different assets while different codes can represent the same cryptocurrency. Bitcoin, for instance, can be identified as BTC or XBT. “We currently use commonly accepted codes such as BIC or ETH which works for the moment as we are handling a couple of dozen assets,” says Kech. “However, it will quickly become a problem as the number of digital tokens increases and the tokenization of assets spreads.” In also commenting on the ramifications of multiple identifiers for the same product Kristin Boggiano, the president and co-founder of CrossTower, a Jersey City, New Jersey-based digital asset exchange operator, recalls her previous tenures trading in the OTC derivatives industry saying, “I struggled with this [lack of standardized identifiers] in the credit default swap market, where product confusion led to erroneous hedging, significant financial losses and lawsuits.”
The new nine-digit alphanumeric DTIs would be used to track financial transactions of the same token, which would be uniquely identified based on a series of data elements. “The new IDs, which apply to cryptocurrencies as well as security and payment tokens, are meant to eliminate any confusion or mistakes over whether traders and post-trade processing departments are talking about the same instrument when trading or processing transactions,” says Kech whose group designed the requirements for the DTI registration authority (DTI RA). “Because digital assets may lack a defined issuing authority WG3 chose to focus on the token representation of the asset using technical attributes of the blockchain itself to tie an assigned DTI to a digital token” writes Ryan Pierce, a consultant and co-chair of the FIX Digital Asset Working Group in a June 2020 article. Pierce represents the FIX Trading Community, the non-profit industry standards organization promoting the FIX message protocol, on the WG3 committee.
For native tokens, the mandatory data fields to be assigned a DTI include the genesis bloc hash algorithm, the genesis block UTC timestamp, the digital token long name, the digital token external identifiers type, digital token eternal identifiers value, digital token reference implementation URL, and the digital token unit identifier. For forks, which will also be given new IDs codes, the reference data must include the fork block reference, the fork block hash, and the fork block hash algorithm. Forks occur when the user base of developers decides that something fundamental about a cryptocurrency needs to change. Forks, which modify the rules of a blockchain, occur when the user base of developers decide that something fundamental about a cryptocurrency needs to change. The change is typically prompted by a major hack, such as occurred with Ethereum, or a fundamental difference within the community such as the case with Bitcoin and Bitcoin Cash. “Anyone can submit a request to register a digital asset, such as an exchange, custodian, regulator, or investor,” writes Pierce in his article. “The applicant need not be the issuer. Issuance of a DTI confirms that the token exists; it does not identify an issuer or tie the token to a specific digital asset.”
Several numbering agencies such as the US’ CUSIP Global Services, the London Stock Exchange, Switzerland’s SIX and Germany’s WM Daten already issue ID codes for some digital assets, but there are significant differences between the current codes and the new DTIs. “Those codes don’t identify the ledger on which the crypto asset was issued in a verifiable irrefutable manner nor do they provide its attributes, which are important to cryptoasset custodians, digital token exchanges, data aggregators, service providers and regulators,” explains Jim Northey, director of the ISO TC68 committee of financial services. In response to emailed questions from FinOps Report, a spokesman for CGS in New York, highlights the distinction between the new DTIs and the codes issued by CGS for tokenized asset offerings traded on Templum Market’s alternative trading platform saying “These digital securities go through the same request and assignment process as non-digital securities. They just happen to trade on Templum’s blockchain-based platform. The new DTI standard is for an entirely different asset class, digital tokens (including cryptocurrencies) that may lack many of the features associated with securities such as issuer, jurisdiction and valid appropriate offering document.” In late June, the LSE announced that it had assigned local SEDOL ID codes to 169 digital currencies, digital platforms, and security tokens working with crypto pricing and data provider Digital Assets Research to determine the scope of coverage. The LSE would not comment on the difference between its SEDOLs and the new DTIs in identifying digital assets.
The London-headquartered, Etrading Software and the duo of Bloomberg in New York and Paris-headquartered Kaiko are understandably the only contenders for the role of DTI RA, because they may be the only ones who can afford not to make a profit from issuing DTIs. The DTI RA must operate on an at-cost recovery basis and given there is no way to predict for certain how many codes will be issued, any contender for the role of registration authority is taking a financial gamble it can break even. Etrading Software and the team of Bloomberg-Kaiko won’t have to build a new system from scratch, but can tweak current platforms issuing other ID codes. CGS and the LSE decline to say why they didn’t bid for the job of DTI RA given their extensive experience as numbering agencies for traditional securities and new experience with some digital assets.
Etrading Software’s technology platform serves as the engine issuing international securities identification codes for OTC derivatives on behalf of the Derivatives Service Bureau of the Association of National Numbering Agencies (ANNA), the trade group representing national numbering agencies. Etrading Software’s proposed governance model for the DTI RA sounds a bit like that for the DSB. Bloomberg issues Financial Instrument Global Identifiers (FIGIs) and legal entity identifiers, while Kaiko’s strength lies in market data collection for cryptocurrencies since 2014. In its proposal with Bloomberg, Kaiko says that its raw data, order books, and aggregated data cover over 10,000 currency pairs across 80 exchanges with new markets added daily. Historical data can be delivered via .csv files through the firm’s datafeed or through the firm’s REST API. Kaiko also provides real-time trade order book and aggregated data through an REST API or live trade data through a WebSocket.
FinOps Report has condensed some key selling points from each proposal verbatim to help readers understand how each contender will run its DTI RA. Etrading Software, Bloomberg, and Kaiko declined to comment for this article. (Anyone interested in reading the full copy of each proposal can contact FinOps Report’s editor at Chris.Kentouris@hotmail.com).
Etrading Software: Build up to commence on Q/4 2020 with go live on July 1, 2021. The DTI RA will preseed the database with the top 100 tokens. After initial seeding 500 tokens a year to be issued in the first few years then ramping up substantially. If there is sufficient interest, then Etrading Software will establish a federated system on the basis that registration agencies must commit fully to to the ISO requirements and commitments that Etrading Software has made as part of this submission. For initial go-live Etrading Software will establish an industry-based Product Advisory Committee. Etrading Software will also establish an industry-based Technology Advisory Committee. We can confirm the following organizations have agreed to participate in such a taskforce [Editor’s note: to identify synergies in the assignment of the respective identifier for digital tokens] (1) Association of National Numbering Agencies (2) International Token Standardization Association.
There are two clusters to manage access through GUI and REST API. The website is based on the Apache Tomcat HTTP webserver. Additional gateways e.g. FIX gateway will be implemented if there is sufficient demand. In addition we will consider utilizing the Handle System which provides a general-purpose global name service enabling secure name resolution over the Internet as one component in building a technology stack that facilitates the creation of a number of registration agencies for issuing DTI on a federated basis. The website will support the DTI assignment process through a sequence of web pages that will guide the user through the process and ensure the required data elements are captured at the start of the DTI application process. The DTI database will be synchronously replicated in the active region, but manually replicated to other geographic regions to avoid corrupt data being sync’d across all data stores. The data centers where our systems are hosted will be geographically separated.
Bloomberg-Kaiko: The Registry and website will be managed through a centrally based system operated by Bloomberg on industry-accepted infrastructure. The centralized registry which we are proposing will be hosted on Amazon Prime Services primarily in the United States. Kaiko, the registration agent, will be responsible for the update and continued management of data accessible through the user interface. This includes management of all applications through the webform and requested updates and modifications to the database. Bloomberg will be responsible for all scanning, penetration testing, file integrity monitoring, and intrusion detection for their Amazon instances and applications. Bloomberg will retain control and ownership of content and will perform backups. Bloomberg will take responsibility to replicate content across regions, likely the US and Europe as needed.
The DTI application will initially fill out a webform that is sent directly to Kako’s email monitored by the entire Kaiko team. The lead from the team will review the application within 24 hours and each out to the applicant should there be a problem. If the application process passes then the DTI will be generated by the automatic tool and checked to ensure the number is unique. Finally, the DTI will be registered, the website updated and the applicant notified of its success. We do not anticipate the need for distributed registration agencies at this time. However, if this were to occur, a first-in, first-out principle would be applied such that whichever request was received first with complete and verifiable data would be the request to receive a DTI.
Of the two proposals, the one from Etrading Software sounds more reassuring that the firm can deliver on its commitment as the DTI RA based on the fact that it has already completed a demo that includes public gateways — Tomcat and Static webpages; storage service– DB Mongo; data integrity and permission service– CNRI/CORDA; publish and subscribe- Apache KafKa; search engine — SRDL [may be replaced by Elastic Search]; configuration and synchronization service– Apache Zookeeper; monitoring tool for the DTI service technical support — configurations and deployment services– Terraforms and Ansible; DNS name resolution– AWS Route 53; and Naggios and Zabbix; configurations and deployment services — Terraforms and Ansible; DNS name resolution–AWS Route 53– and Directory Service– AWS Directory Service. However, Bloomberg should not be counted of the race as its FIGIs have won support among large Wall Street players, numerous exchanges and some regulators. Bloomberg’s affiliation with the Paris-headquartered Kaiko, as a cryptocurrency pricing and data expert, could also give it a competitive edge over Etrading Software which might otherwise be a shoe-in for the job of DTI RA based on its successful launch of the DSB which started operations right before January 2018 when the reporting requirements of the second incarnation of the Markets in Financial Instruments Directive kicked in. As reported by FinOps Report in 2017 Bloomberg lost out on winning ISO’s blessings for its FIGIs to be considered a numbering standard after requesting the US Accredited Standards X9 Committee, a participating member of the TC 68 committee, ask the TC68 committee to withdraw the ballot from voting. Initially known as the Bloomberg Global Identifier, the FIGI has been adopted as a global identification standard by the Object Management Group, a Needham, Mass.-headquartered body known for the development of technology standards.
It’s anyone’s guess who will nab the job as DTI RA as each candidate has plenty of fans. A telephone survey of thirty middle and back office operations managers at fund management firms, brokers and bank across the globe conducted by FinOps Report showed an even split of endorsements for either contender with the team of Bloomberg-Kaiko favored in the US and Etrading Software favored abroad. Regardless of the winner, the decision to give digital asset ID codes similar to traditional securities could certainly help the crypto market move one step closer to institutionalization. “Standardized digital token identifiers would help the fragmented digital asset markets mature by increasing liquidity, trust and product innovation,” says CrossTower’s Boggiano. “Standardization would also facilitate the ability to collect and analyze data.” In his article, Pierce also points to the potential for standardized digital asset identifiers to promote institutional trading. Once the DTI RA is created, he says, the FIX Digital Asset Working Group will publish a comprehensive guide for using the FIX message protocol to trade digital assets.