- Data standardization is a critical issue for digital asset funds
- “The need to constantly adapt and develop new data standardizations is ever-present. The exponential growth of decentralized activity over the past two years is an example of the ever-changing nature of the environment in which funds in this space operate.”
Not all crypto markets are created equal.
At least that’s how it looks from the perspective of a fund manager in the field of digital assets. While exchanges can trade the same assets, the way they report those assets can look different.
Some exchanges list bitcoin under the ticker “BTC”, others under the name “XBT”, for example. For the everyday trader, this may not be a big deal. It’s not that hard to figure out which asset is which.
But for those who manage large funds that deal with large amounts of capital and high trading volume, these small differences can create big headaches.
It becomes difficult to keep track of transactions and all related data if you don’t know exactly what the asset is. There must be a way to clear every trade for reporting purposes and this cannot be done manually. This type of organization is commonly referred to as data standardization.
Data standardization from an auditor’s perspective
To learn more about this topic, we asked Patrick Clancy, a veteran digital asset accountant, for his opinion.
He summarized the problem as follows:
“Each platform will spit out its own raw data, organized around the preferences of the platform’s development team. If you are a fund, this needs to be recorded internally or through your fund administration and stored centrally.”
Clancy went into more detail on the challenges associated with integrating all of the different types of crypto transactions into a single data set:
“The standardization of data across all these different exchanges, NFT projects on different chains, defi/liquidity pools, staking and other related on-chain activities really starts with the manager of the fund or trading entity and their support structure. Management’s communication with its service providers was more important than ever since every traded platform / token is or can be different from the output perspective.”
In other words, a lack of standardization can manifest itself in many ways and the problem can appear in many places. This problem requires a systematic approach to ensure the accuracy of trading data captured by funds’ counterparties, including centralized exchanges as well as decentralized protocols and blockchains.
Clancy went on to explain why these features are important for fund managers, which is that they need to be able to report accurate numbers when it comes to things like net asset value (NAV):
“…That along with establishing best practices for operational excellence (efficiency/compliance) and taking notes (like a notebook) for trade events/investment realization activities will be key when attempting to report NAV or performance numbers.”
We also reached out to Christian Randall, senior manager at Cohen & Co., for more information on related topics. He noted that “many of the challenges that exist in the digital asset industry today are similar to those that our company experienced in the managed futures space in the 80’s and 90’s. While there are a variety of challenges for digital assets – general taxonomy of terms, token reference data, diversity in accounting treatment of blockchain activity – many of them stem from unmet data requirements at the blockchain or protocol level and hamper downstream off-chain operations . Blockchain and protocol communities are best placed to address this through community-driven standardization.”
While these issues aren’t exactly new, they’re taking on a new form in the world of blockchain protocols.
Data standardization of digital assets and MG Stover
Overall, it is clear that data standardization is a critical issue for funds in the digital asset space. Fund managers play a key role in providing the books and records that accounting and tax firms rely on, as well as investor-level reporting.
MG Stover began serving digital asset clients in 2014 and has been at the forefront of developing technologies to standardize and ingest data from its clients, exchanges, blockchains and protocols. Constantly addressing the challenges associated with the standardization problem, MG Stover is well positioned to continue to innovate ways to ensure accurate reporting for its customers.
MG Stover partners with other leading companies such as Digital Asset Research to meet their data needs. The company’s extensive experience in this space and its technology-centric approach are key to the data standardization practices it employs.
According to Seth Altman, Senior Director of Blockchain and Digital Assets, “There is always a need to adapt and evolve new data standards. The exponential growth of decentralized activity over the past two years is an example of the ever-changing nature of the environment in which funds in this space operate. We are constantly working with our customers and other service providers in the industry to ensure that the solutions we develop will benefit everyone involved and result in a highly efficient and accurate service.”
Josiah Reich, the firm’s senior director of hedge fund client services, noted that MG Stover works with many institutional money managers who are rapidly developing more sophisticated and streamlined internal processes to capture trading activity for the ledger of records and shadow accounting. He described how a service-based approach combined with industry-leading technology creates a compelling solution for fund managers:
“We work in partnership with each of our customers to ensure there is a continuous flow of information between customers, their trading partners and our internal systems, reducing the risk of data being misinterpreted or misrepresented. Due to the vast differences in funds and strategies, this approach ensures we have a tailored approach, knowledgeable teams who understand our clients’ trading, and technology specifically designed to integrate trading activities with digital assets and data standardization.”
This content is sponsored by MG Stover. To learn more about MG Stover, explore his crypto fund offerings or read Top 3 Trends in Private Funds.
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