The Digital Token Identifiers Foundation (DTIF) was recently launched to provide standardised reference data for digital assets. The foundation provides ISO standard identifiers using open data principles. In a DerivSource Explainer Q&A, Denis Dounaev, DTI product owner at E-Trading Software discusses why the digital assets industry needs this new identifier and how it helps firms reduce their operational and regulatory risk.
Q: What exactly is a DTI and what is the role of the DTIF?
A: DTI stands for digital token identifier, and these are created in accordance with ISO standard 24165. DTIs complement other identifiers like International Securities Identification Numbers (ISIN), Unique Product Identifiers (UPI) and Legal Entity Identifiers (LEI).
Digital tokens are any product that exists in the digital space, such as stable currencies, electronic money, and anything built on distributed ledger technology (DLT) such as blockchain. The DTI uniquely identifies in-scope tokens or currencies using publicly available information. The result is a unique identifier that is mapped to a particular token and that can be verified by anyone else. For example, rather than quoting Bitcoin, firms will quote the identifier that relates uniquely to Bitcoin. In the cryptocurrencies space, there are multiple currencies that are referred to as Bitcoin, but most are in fact spin offs or forks from the high-value original.
The DTIF is a non-profit division of E-Trading Software that looks after the DTI implementation and engagement with working groups. It is free to register a token and receive a DTI but there may be a fee introduced later for the issuers of tokens.
Q: Why are standards necessary for this space and what benefits will they bring to market participants?
A: Within the existing infrastructure, financial institutions use ISIN and Market Identifier Codes (MIC) to know what the instrument is and where it was traded. However, digital tokens introduce a third dimension—the DLT ledger where that instrument was created, traded or settled.
Say, for example, an EIB bond was issued through traditional channels but settled through Ethereum, one of the public blockchains. The use of a blockchain creates additional risks and complexity depending on which blockchain or DLT is used, how it is governed and managed, and what technology underpins it. If a firm has a financial instrument issued on multiple DLTs, it is important to know which DLT was used to understand the risks fully.
DTIs operate on three levels. First, a unique DTI is attached to each DLT or blockchain, including the private ones run by banks. On top of that layer, tokens are issued, and these tokens are listed within that ledger and receive their own unique DTI. There is a third level that the standard calls a functionally fungible group, which means multiple tokens across multiple DLTs can be grouped together based on tokenised asset.
The ISIN and DTI are closely related, where DTI looks at the identification of the DLT and the token, while the ISIN picks up the identification of the asset. There is nothing in the ISIN that relates to the DLT, and the DTI does not contain the characteristics of the instrument. The two identifiers work in tandem to provide participants with information about the risk, and to allow regulators to know what is happening on which blockchain.
Q: How do DTIs help with risk management?
A: Different DLTs could pose different operational risks. For example, bank A operates DLT A and bank B operates DLT B. Both have advantages and disadvantages—one may have higher settlement costs, or one may run its architecture in the US and the other in China. Users can create tokens on different DLTs based on the cost, but there are operational considerations as well. Participants need to know which DLT they are using and to be able to distinguish them if necessary.
Another area of risk is market manipulation. Public, permissionless DLTs are very susceptible to market manipulation because they are by nature very distributed and there is usually no master node that validates transactions. Participants can insert their own transactions in the middle of the block and do front running or other things that are illegal in financial markets. For this reason, financial institutions are likely not using public DLTs, at least not for trading. These risks will vary depending on the DLT, and how it is managed and operated.
The financial industry is already using digital tokens and there was a significant demand for this kind of standard reference data identifier to help them understand their risks and to bring digital asset trading operations in line with other asset classes.
Q: How do DTIs operate?
A: The DTI is a technical standard. It applies to something that already exists in the digital world. It refers to a particular token on a particular DLT.
It offers a consistent identifier across multiple DLTs. There are more than 50 ledgers offering smart contracts or equivalent, and the reference data are inconsistent—some like Ethereum have 60+ characters, while others have only a few. The DTI brings everything together and offers a consistent way of mapping tokens to ledgers.
Users come to the DTIF to request a DTI for the token they created. There is close coordination between the DTIF and the Association of National Numbering Agencies (ANNA), which issues ISINs, and clear communication to minimise the number of requests users need to issue to various organisations. Once issued, the DTI will stay mapped to that instrument and ISIN. There would only be a change to the DTI if there was an update to the underlying instrument.
Some 830 tokens have been set up and are running and the DTIF is continuously adding new tokens to the registry. The registry is live, and users can interact with or download the entire registry.
Q: What are the main challenges for the financial industry, market participants and the Foundation?
A: Financial institutions have been exploring how to use DLTs in the financial industry. There are many risks that need to be managed, not least of which the potential collapse of a DLT. Regulators are beginning to sink their teeth into the digital assets industry. The European Securities and Markets Authority (ESMA) is looking at how to regulate the industry and the DLT pilot will start applying March 2023. The fast evolution of this space presents a challenge for both regulators and market participants.
DTIs aim to help firms overcome these challenges. The DTIF is ready to work with banks and exchanges as they submit the registration of digital tokens to the registry. The challenge may be to keep up with the pace of innovation and adjusting the standard to potential future changes—for example if the market moves on from the blockchain to something else. The Foundation can add additional data elements in that case to make sure it keeps up with requirements of the market.
Q: What key milestones people should people be aware of?
A: Besides the ESMA pilot in March 2023, another regulation to look out for is the European Commission’s upcoming Markets in Crypto-Assets Regulation (MiCA), which will apply to many assets that are not currently regulated. This regulation was approved in 2020 and is set to be implemented by 2024.
The DTIF website has more information on how the standard is applied, the implementation guide, and a growing list of more than 830 tokens that have already been set up. Users can apply to take part in an ongoing product advisory committee. The technology advisory committee will be set up in 2023 and there will be a call for participation to look at the technical aspects of the standard implementation.
Q: What common misconceptions would you like to address?
A: People assume Bitcoins are like regular financial instruments, but they are nothing like what people are familiar with. There is no issuer—Bitcoins are created and mined by nodes somewhere, and there is no standard that defines what it is. There are hundreds of “Bitcoins” on the different blockchains and the Bitcoin you buy from one seller may be nothing like the Bitcoin you buy from another. There may be a valid reason for this, but it is surprising how little standardisation there is in the definition.
Compared with an asset class like equities, crypto is so different—in terms of settlement, custody, risks. It is a different beast—buyers effectively own nothing, just a piece of code that says they own something. It is exciting but it is a fundamental change to how financial instruments are usually issued.
To find out more about the DTIF please go here: https://dtif.org/
