Institutional investors have cited the lack of clarity regarding custody as one of the prime reasons why their firms have not dipped their toes into digital asset investments. However, recent research from industry analysis firm Tabb Group had found back-office ill-preparedness for the novel asset class has been a significant gating factor.
“The level of sophistication needed to process and account for crypto and crypto-based assets is far more challenging to commercially process than even the most sophisticated asset classes on traditional back-office institutional trading systems,” wrote the authors of Institutionalizing Crypto: Transaction Accounting and Processing Meets the Blockchain. “Traditional securities processing and accounting systems are not conducive to facilitating blockchain/digital ledger-type assets that can be traded around the globe 24/7/365 across a panoply of execution venues.”
The issues facing the back office are not related to the new asset class being completely electronic since typical assets like equities have been held electronically held since the adoption of stock certificate dematerialization and book-entry recordkeeping, they noted.
The significant challenges are that digital assets often lack standard naming conventions and how their markets have a novel structure, Jake Benson, founder and CEO of Lukka and whose firm sponsored the study, told Markets Media.
“One the biggest problems of getting post-trade data from various venues is that the maturity level of the APIs from where you get the data is very low on average,” he said.
There are no equivalents of CUSIP, ISIN, or SEDOL identifiers, which makes it possible for tokenized securities to share ticker symbols. The Bowhead Health Project’s Anonymized Health Token and shopping engine Ahoolee’s Ahoolee Tokens use the AHT ticker while the Bimiq Exchange Token and NetCoin use the NET ticker, according to the authors.
“The regulated crypto exchanges have more investment and a larger focus on institutional type investors,” said Benson. “But that does not mean that they are the best. Generally speaking, the regulated exchanges have incremental better connectivity, but I would not say it was a night-and-day difference.”
Digital assets also revive the decimal-place issue that many believed was put to bed two decades ago.
“I’m surprised that there are systems that cannot accommodate four decimal points,” said Monic Summerville, head of fintech and European research at Tabb Group and one of the study’s authors. “You need to submit many more in some cases. Didn’t we address that during Y2K?”
Benson added that pricing of some digital assets could have two decimal places or as many as 23.
Beyond the typical regulatory concerns, things get even trickier when overlaying technical issues on to standard accounting practices.
“It is not just the normal AML or KYC regulations that we hear all the time, but tax accounting issues and how that is handled,” said Summerville. “Each jurisdiction treats crypto assets differently.”
As more traditional institutions become aware of these issues, there are an increasing number of specialist offering that address these issues and that target different segments of the workflow, she added. “People are going to take baby steps into crypto. They are going to start by asking ‘What do I need in a system,’ and then work with a system provider.”