In the Book of Genesis, God created Adam. And one of Adam’s first actions was to name every animal. Whether you understand this story literally or as allegory, the point is the same: it’s a basic human need to name things. Naming things classifies them as not being other things; it allows us to talk about those things, to understand them, and to bring them under their control.
In traditional financial markets, instruments like stocks and bonds, and the counterparties that buy and sell them are assigned names—standardized alphanumeric identifiers that help regulators and risk managers to understand the potential threats inherent in a portfolio, a bank, or an entire financial system.
In the world of cryptocurrencies, however, this standardization does not exist. With crypto currently in existential crisis following the bankruptcy of exchange FTX, some reference data experts say that canonical standards for digital assets could be key to their future legitimacy.
“There’s a good secondary market for digital assets, and they’re not going away any time soon,” says a former chief data officer who has worked at several tier-1 banks.
“As organizations take more and more of these assets into their portfolios, as they use them as hedging tools and investments, they must be able to manage their risk around them. You can only quantify risk once the security is classified. The first step in trying to assess risk is sorting everything out, and identifiers are a way to do that,” they say.
Currently, digital assets like cryptocurrencies are identified by symbols that are used differently from exchange to exchange.
“All the providers use different symbology because there are no standards in crypto,” says Ethan Feldman, co-founder and CTO of Talos Trading. “So even if you’re trading something as simple as Bitcoin, you’re going to see different symbols across the providers. Some are using XBT, for instance, which is the currency code; others are using BTC, which is more canonical. This is a challenge for us every day.”
Talos offers a crypto order and execution management platform for buy-side firms, accessible via GUI or API, that supports the crypto trade lifecycle. To route orders correctly, Talos must be secure in the knowledge that an underlying security referred to by two different codes on two different platforms is, in fact, the same.
The tracking of all these symbols is an ongoing exercise in double- and triple-checking for Talos, Feldman says. To get around it, Talos creates its own standardization by using its own symbology, agnostic of what the crypto exchanges are naming the instruments. “If you’re using our API, you’re going to use BTC to interact with Bitcoin, whether it’s on Kraken or Coinbase. That’s a very vanilla case, though; it gets way more complicated as you get into more complicated assets,” Feldman says.
Cryptocurrencies like Bitcoin and Ethereum can be “forked” into new currencies when their developer community makes a change to the blockchain’s ruleset, or protocol. Bitcoin, for instance, was forked into Bitcoin Cash in 2017, meaning that Bitcoin kept running, but a new currency called Bitcoin Cash began to operate also. Bitcoin Cash was referred to by the BCH symbol. Then in 2018, BCH itself split in two, forking off into BCH and a new currency, Bitcoin Satoshi’s Vision (SV). In 2020, BCH split yet again into BCH ABC (BCHA) and Bitcoin Cash Node (BCN).
Each time one of these forks occurs, Feldman says, it’s not as if there’s one canonical body to decide on what symbols will be used across the industry. All the different exchanges must decide among themselves.
“Some of the exchanges went from using BCH to BCHA and BCHN, and then decided that BCN was the one that won that competition. So they switched it back. And we have to track this and try to understand it,” Feldman says.
This kind of fragmentation presents a real issue for a financial institution’s back office, Feldman says. For instance, when BCN became the symbol for Bitcoin Cash Node, the deposits that investors had in BCH at the time of the fork were duplicated in the new currency. An investor might decide to then sell that asset, which would mean having to report the sale so it could pay tax on the profit.
“It’s important from a reporting standpoint to understand the lifecycle of these forks and assign different identifiers to them,” Feldman says. “They might change on the front office, but from a back-office perspective, they need to carry through.”