Institutional interest in digital assets has been growing. The Chicago Mercantile Exchange’s volume of Bitcoin (BTC) options hit a high of $40 million on May 13, 2020. The world’s largest digital currency asset manager, Grayscale, posted record-breaking capital inflow to its GBTC fund in Q1 2020, and Fidelity’s cryptocurrency services division confirmed increased interest from pension funds and family offices.
Due to growing interest from financial institutions examining how to leverage blockchain technology for security issuance, industry and regulators alike have turned their attention to assigning International Securities Identification Numbers for digital assets. This standardization is necessary in order for firms to ensure consistency, gain efficiencies, increase transparency and lower costs.
Definitions and approach
An industry body, responsible for the adoption and implementation of international standards for identifying financial and referential instruments, is in the process of examining a number of various scenarios, in which digital assets could require the assignment of ISINs. Typically, the umbrella term of “digital assets” is broken down into three different use cases — incorporating security tokens, payment tokens and utility tokens. The focus of these particular discussions has been around security tokens because the scope of financial and referential instruments overlaps most with the current remit of the ISIN standard.
Specifically, those participating are in the process of evaluating the following key points:
- Whether there is a need for an ISIN with regards to different but complementary standards, such as the Digital Token Identifier currently being developed by the International Organisation of Standardisation Working Group 3 (ISO/TC 68/SC 8/WG 3).
- What the different scenarios are, in which an ISIN in relation to a digital asset could be issued, including: (1) straightforward security (e.g., a plain vanilla bond) issued via distributed ledger technology; (2) security with an underlying referential instrument, which is a digital asset (e.g., an ETF that tracks Bitcoin); and (3) a digital asset that is used as an underlying referential instrument (e.g., Bitcoin) — thus raising the question of whether an ISIN should be applicable to a referential instrument.
- How different regulatory regimes treat each of the different scenarios listed above in terms of both existing and forthcoming regulations.
Those involved in the discussions represent a cross-section of the financial industry and have come together under the auspices of the Association of National Numbering Agencies, whose overarching goal is to support a transparent, compliant and efficient financial markets structure. The outcome of these examinations will be used to build the rationale for recommendations on the assignment of ISINs within each scenario, using a technology-agnostic approach.
While digital assets are currently only a fraction of the traditional space within the financial services industry, this work is considered significant, given that new asset classes have a tendency to evolve quite quickly. Stakeholders in traditional financial markets benefit from the provision of international standards to identify, classify and describe financial and referential instruments that help in the process of providing accurate and reliable data for suitable investment and trading decisions. Similarly, participants in the digital token ecosystem will need accurate, reliable and quality data attributes to make appropriate investment and trading decisions.
Now is the time, therefore, to prepare the groundwork in order to ensure consistency and uniformity of the data around these digital assets. The outcome of these industry discussions will be an important part of the journey to provide tools that will be most useful to the industry as a whole.