Can you fit Cryptocurrencies into Traditional Financial Services Processes?
I’ve been involved in financial data for a long time, and bitcoin and other cryptocurrencies since 2011. Watching the worlds slowly converge over that time, particularly through the last 24 months has been fascinating. Building transparency, efficiency, and certainty in these markets during this convergence has been a major focus and core mission of the company I lead, Tritum Digital Assets.
For big firms, blockchain as a concept had been bandied about for several years at conferences and in the news, arguably without much in the way of meaningful implementations within major financial services companies up to mid-2017. Cryptocurrencies themselves, on the other hand, have been well outside the traditional financial services ecosystem, and mainly referenced with respect to KYC/AML.
With the price rises and falls, and subsequent mainstream attention it has now drawn, everyone has put efforts into integrating cryptocurrencies more significantly into the financial mainstream in one form or another.
Unfortunately, most of these efforts are clearly coming at this from the traditional financial services mindset, and trying to apply that logic and thought process to something which just won’t fit their parameters.
Particularly over the last 18 months, forks and other corporate action-like events such as airdrops have been especially prevalent, and are raising a lot of important concerns.
Corporate actions are some of the lowest level, most ho-hum aspects of finance. Most people don’t give them a second thought…until they are wrong, or late! Dividends, splits, and other events are collected, processed and normalized through what usually is a well oiled machine. Issuers provide their data with a set amount of notice, in a standardized format, to an agreed repository, from which every user collects the data they need.
The cryptocurrency space has none of the above. At least not in a format recognizable to most financial firms who depend on those types of sources to manage their assets! Try suggesting to any back office person in Fidelity or BNY Mellon that they should track inclusions of assets resulting from forks by combing through Reddit, Slack or Telegram channels, or even bitcointalk, and you would be laughed out of the room quickly. As anyone in the crypto space knows, these are the ways you would expect to source that information. Bitcoin’s Cash fork, and the failed 2X fork were massive events and updates were only posted in what I’ll call a casual manner in one or another of these sources.
However, as these worlds continue to overlap, this is becoming a real issue.
I see the market attempting to deal with these with some thoughtfulness in certain cases. In others, either through obliviousness or intentional ambiguity, there are many cases where a total lack of any policies or guidance on what can be very pivotal issues is prevalent.
Take for example exchange-listed Bitcoin investment vehicles, GBTC in the US, and COINXBT in Sweden. In both cases, the funds have provided exposure to Bitcoin since long before major forking activity was prevalent. As a result, in either case, an investor in these funds might well expect they are entitled to every forked coin. Both issuers have set out policies about what they will, and won’t include, and how unit owners would receive their share of any proceeds.
Generally, these are examples have had manageable impact on the trust unit holders only. Though even for them, a lot of this type of information has only been well clarified after the fact, or hastily before one of these events. At the time, there was a lot of uncertainty regarding what would happen.
Later in 2017, with the arrival of futures, and underlying indices on bitcoin, things have gotten significantly more interesting, and complex.
Diving into the CME index methodology, and product page we can see that the underlying exchanges used for the index price composition are Bitstamp, Kraken, GDAX, and itBit. At the time these pages were originally published, there was no mention of what to do in the case of hard forks. Now, a public policy exists as of January 2018.
Between the index and future’s launch in November, and the date of this clarification, there was no clear published answer regarding what would have taken place in the case of a volatile fork situation, such as the one experienced with Bitcoin Cash, where the identity of the “original” and “deviating” chains might be contentious.
Over the summer, the exchanges used for this index’s reference prices put out their own statements regarding which chain they would follow, and in some cases, not support one or the other chain past that point.
Luckily, all went well once the market had settled, but there was real risk that the exchanges, and index administrator, could have had different views on what coin, and thus price, counts towards the price index. Imagine how that could work out when you have billions in derivatives contracts tied to a product which may have key information decided and disclosed this way.
Things are rapidly maturing, and I’m sure we will see this improve significantly in 2019. However, these are the types of questions that many people have glossed over in the rapid gold rush to adopt, integrate, or productize cryptocurrencies in legacy financial services. It is going to be key to make sure that these very unique concepts are well understood, and addressed to ensure real institutional money will be able to confidently join these markets confidently at scale.
The author is a co-founder of Tritum Digital Assets and a former Head of Toronto Stock Exchange parent TMX Group’s Datalinx business, and previously Nasdaq European data sales divisions. John spent over a decade constructing and monetizing financial data products collectively representing hundreds of millions of dollars in annual revenue, such as oversight of the S&P TSX index suite while at TMX.