Does the financial services industry need more than one identification standard for digital assets? Can standards for identifying traditional assets even apply for the digital asset market?
Those are the two questions trading, compliance and operations managers at fund management firms, custodians, exchanges, and issuers of digital tokens will soon answer now that they have a choice between two identification codes — FIGIs issued by cryptodata giant Kaiko and ISO-endorsed codes issued by Etrading Software.
The answer to the first question will be known soon when the firms issue the codes for digital assets later this year. The answer to the second question is that standard setting bodies believe they can do so regardless of the novelty of the instrument involved. “So far, the standards for identification codes for traditional financial instruments, such as securities, are being applied to digital assets which are not a perfect fit in all instances,” says Richard Levin, chair of the financial technology and regulation practice for the law firm of Nelson Mullins Riley & Scarborough in Washington DC.
The Milford. Mass-based technology standards consortium Object Management Group (OMG) has just approved Paris-headquartered Kaiko as the certified provider (CP) for identification codes for digital assets, while data giant Bloomberg will continue to serve as the registration authority for the FIGI standard. Based on the OMG’s guidance in 2016 provided in its standard for covering identifiers for financial instruments in general, the CP’s role is to issue codes while the registration authority provides oversight to ensure adherence to the standard and uniqueness of the identifiers across CPs. The OMG’s announcement about its selection of Kaiko came after Kaiko and Bloomberg were rejected by the ISO TC 68/SC8 subcommittee of the International Organization for Standardization (ISO) to issue ID codes for digital assets in favor of London-based Etrading Software. The ISO subcommittee did not elaborate on the reason for its decision which ISO has yet to officially announce. ISO provides a process by which to designate a legal entity– known as a registration authority– to maintain identification standards. Bloomberg would only confirm its status as the RA for FIGIs for digital assets, as approved by the OMG’s Finance Domain Task Force (FDTF), and referred further questions to the OMG.
“The decision to endorse Kaiko as the certified provider to issue ID codes for digital asset, after several presentations, reflects the firm’s strengths in pricing and reference data for digital assets, its financial soundness and its technical ability to maintain the FIGI standard,” says Elisa Kendall, a member of the OMG’s FDTF. Bloomberg’s selection as the registration authority was a given considering its past relationship with the OMG which gave it the green light as the registration authority for FIGIs for other instruments in 2016. The OMG’s FDTF did not issue a request for proposals for a CP for digital asset ID codes, but was approached by Kaiko. In contrast, the ISO subcommittee did make a request for proposals and made the responses given by the only two respondents– the duo of Kaiko and Bloomberg and Etrading Software public. Etrading Software has served as the technology partner for the London-headquartered Derivatives Service Bureau issuing ID codes for OTC derivatives since January 2018. Kaiko has been providing market data collection for cryptocurrencies since 2014 with its raw data order books and aggregated data covering 10,000 currency pairs across 80 exchanges; new markets are added daily, says the firm.
The new ID codes for digital assets, ranging from popular cryptocurrencies to stable coins and payment tokens, comes amidst a flurry of regulatory pronouncements aimed at making institutional investors more comfortable in the new asset class. Now that the US Office of the Comptroller of the Currency has given national banks the green light to act as digital asset custodians, several high profile banks, such as Deutsche Bank and BNY Mellon, say they will expand their reach from traditional assets to cryptocurrencies giving institutional investors more choice in where they can safekeep their assets instead of relying on only cryptoexchanges or state-chartered trust companies.
The codes for digital assets will allow traders and post-trade processing executives, including those at custodians, to more safely identity the tokens they are dealing with rather than having to depend on a hodgepodge of proprietary codes. As a result, many believe that digital assets could gain mainstream acceptance. “The assignment of standard identifiers for digital assets is a signal of the maturation of the market and should make it easier for institutional investors to make investments in digital assets and manage their investments,” says Levin. Traditional financial instruments typically have local codes issued by numbering agencies for the domestic market and international securities identification codes used in the cross-border market. In the US, CUSIP Global Services issues nine -digit alphanumeric codes called CUSIPs for US securities and 12-digit alphanumeric ISINs for the same securities. The FIGIs for digital assets will be 12-digit alphanumeric codes, while the ISO-backed codes issued by Etrading Software will be nine-digit alphanumeric codes.
The difference in the size of the digital asset ID codes will likely not matter to financial firms which can easily accommodate either nine or 12-digit alphanumeric codes. However, other factors might. Of the two accrediting bodies, ISO appears to carry more clout on the basis of its global popularity in the financial services industry as the definitive source of financial instrument standards having given its blessing to ISIN codes. “We believe that ISO provides the best place for the global community to discuss the use of identifiers for regulatory reporting purposes,” says Sassan Danesh, director of Etrading Software. “This is because of ISO’s robust governance processes.”
OMG which approves of standards in multiple domains including finance, is better known among data architecture and technology experts rather than trading and post-trade processing practicioners. However, OMG officials insist that FIGIs should not be counted out of the running as the potential dominant code for digital assets based on two advantages over the codes to be issued by Etrading Software. “FIGIs are freely available and they will identify the exchange or trading platform on which the asset is traded which is useful for pricing and arbitrage strategies,” says Kendall who is also a partner at the New York-headquartered Thematix Partners, a consultancy focused on business architecture, training and ontology development. Kaiko’s Chief Executive Ambre Soubiran confirms there will be no licensing fee for FIGIs for digital assets and Kaiko expects to initially issue about 1,000 FIGIs for the most widely traded spot cryptoasset instruments and pairs beginning in the third quarter of 2021. Based on its previous proposal to ISO, Etrading Software says it will charge for issuing codes for digital assets on a cost-recovery basis indicating the summer of 2021 as the go-live date.
Officials at Etrading Software counter that the ISO-backed code their firm is issuing is superior to the FIGI code, because it is based on the objective immutable characteristics of digital tokens which enables third-party validation of the link between the identifier and the token it represents. “The issuance model allows the identifier to remain immutable and unique even the global consensus on a digital token’s taxonomy were to change over time,” says Danesh pointing to the case of a token initially issued as a stable coin which could down the road be viewed as a private sector e-money offering.
Yet another difference between the two ID standards for digital assets is how corporate actions will be treated. The FIGI code for a digital asset will not change as the result of a corporate action, but Etrading Software would have to issue another ISO-backed code which OMG officials claim will make it more challenging to track pricing and other information about an instrument over its lifetime. Corporate actions for digital asset include hard forks, airdrops, and changes in the name of the token.
Several digital asset custodians contacted by FinOps Report were hesitant to discuss which ID code they preferred to use but one, Onchain Custodian, was vocal in its support for the ISO-backed code. “I don’t think we need two standards for digital assets as the ISO 24165 DTI (digital token identifier) standard, will cover most if not all digital assets,” says Alexandre Kech, chief executive of the Singapore-headquartered digital asset custodian Onchain Custodian. “As is the case with other standards, there will be complementary or alternative standards such as the FIGI that current FIGI users will be happy to use as a primary identifier internally. However, when communicating with external counterparties, I believe the ISO 24165 DTI will be used.” Kech acknowledges that FIGIs provide more granular details that the ISO-backed codes which would be useful for pricing comparisons between trading venues. However, because such granularity is not needed for safekeeping and settlement purposes the ISO-backed code will suffice for custodians. (Kech also serves as head of the ISO W3 committee which referred Etrading Software’s proposal to the ISO subcommittee for voting, but says he is speaking in his role at Onchain Custodian).
While financial firms either trading digital assets, safekeeping them, or processing transactions in digital assets might be willing to accept more than one ID code for digital assets, those issuing digital tokens will have a harder time figuring out whether to apply for a FIGI with Kaiko or an ISO-backed code issued by Etrading Software. For starters, neither firm has a track record in issuing ID codes for digital tokens endorsed by any standards accrediting organization. The decision must then be based on the characteristics of the instrument. That means is it a security, a commodity or form of currency. “The determination must be made based on the laws of each country in which the digital asset is sold or offered,” says Levin in advising issuers to proceed with caution. “If the digital asset is a security it will need to use an identifier that is use in the applicable jurisdiction for securities. If the digital asset is a product that is regulated as a commodity future or commodity swap it will need an identifier that is used for such products.”