Crypto ETF Operations Requires Advanced Blockchain Data Expertise

Wave it straight

Crypto ETFs facilitate the introduction of cryptocurrency assets into mainstream investment portfolios but also present complex data management challenges. The intelligence required to operationally support this innovation at scale includes both an understanding of traditional financial markets and deep technical knowledge of how to manage blockchain financial data.

Blockchain data is different.

The critical role of data governance in the digital asset ETF ecosystem should not be underestimated, as blockchain data inherently requires a unique infrastructure to support it. An easy example is the requirement for greater decimal precision: Bitcoin requires eight digits beyond the decimal point, and Ethereum requires 18 digits. Traditional financial systems are generally limited to precision of no more than two to four digits. As a result, blockchain financial data is not compatible with traditional systems and requires a specialized approach to critical processes such as transaction reconciliations and win-loss calculations. Adding more types of blockchain to an investment portfolio further increases this complexity; because each blockchain protocol usually has different constraints that need to be addressed.

Digital assets are global in nature and traded in fractional amounts 24/7. Data must be timely, continuously available and accurate. The regulatory environment for ETFs, and in particular the significant reporting requirements, requires data providers to have mature operational infrastructure and technology risk management.

A more detailed summary of key crypto asset data complexities includes:

Use of non-standard tokens and identifiers – today each market chooses its own ticker tokens and identifiers used to represent tokenized assets. To add further complexity, the way each marketplace handles crypto transactions can vary greatly. This requires using reference data to standardize, map and classify millions of crypto assets traded on thousands of marketplaces globally.

Valuation methods – fragmented markets, lack of formally designated primary markets, 24/7 trading (hence no official “close of the day”).

Non-fiat trading pairs – since digital assets are bought and sold in fractional amounts, they can also be traded against each other without cash or fiat as part of the trade. This complicates financial reporting, which requires transactions to be evaluated in local reporting currencies such as the US Dollar.

Transfers between marketplaces are very common; There are marketplaces or exchanges all over the world that offer trading of different assets and trading pairs at different prices. This is attractive to arbitrage-savvy investors but greatly complicates data management.

The story continues

Operational Risk Management is more important than ever.

Any data provider supporting an ETF must offer assurance that its data is reliable, accurate and precise. Existing operations and technology risk frameworks such as AICPA SOC frameworks, International Organization for Standardization certifications, and others should be used just as service providers did before crypto existed, but the risks of missing or inaccurate data are greater due to the inherent complexities mentioned. above. The use of these frameworks includes selecting a reputable auditor or certification firm as well as the technical acumen required to support them. Examples of successful SOC or operational control audits in this area are still rare in 2024.

Lukka is the one-stop provider for all your crypto data needs.

Lukka, a leader in crypto asset data management, offers enterprise-grade data solutions specifically designed to navigate the complexities of digital asset data. These solutions are designed to meet the standards of the most complex and risk-mature institutions worldwide, evidenced by Lukka’s Adherence to AICPA SOC 1 and 2, ISO 27001 standards and IOSCO Financial Benchmarking Principles.

Lukka Reference Data is a core product that standardizes, categorizes, and matches over 1 million tokenized assets to thousands of ecosystem assets. We originally developed this to enable our enterprise software, which now supports thousands of crypto funds and other businesses around the world.

Lukka Prime, Lukka’s flagship pricing and valuation data product, stands alone with its innovative methodology compliant with US GAAP, IFRS and SEC guidelines for determining the Fair Market Value (FMV) of crypto assets. Used by institutions and auditors around the world since 2019, this powerful methodology ensures that financial reporting and tax compliance for digital asset ETFs are based on a foundation of post-trade data that is auditable and compliant with accounting guidelines essential for trust. confidence of investors and regulators.

Lukka also offers a deep menu of complementary data products such as custom crypto benchmarks, settlement broker services, NAV reporting data, Full Trade Lifecycle Market Data, Fund Manager Support, Blockchain Analytics, Enterprise SaaS Portfolio Management, Compliance and AML Software, Asset Due Diligence, and more. . , Sanctions Screening and Investigation services.

The market determines what is important.

Invesco, for which Lukka is the primary benchmark provider of the Invesco Galaxy Bitcoin ETF, has this to say about the practical application and value of Lukka’s data management services:

“Invesco’s decision to select Lukka as the reference rate provider for BTCO was driven by their attention to detail and best-in-class data integrity. Additionally, the reference rates comply with Generally Accepted Accounting Principles (GAAP), which is crucial when establishing Net Asset Value (NAV) for BTCO, Invesco Galaxy Bitcoin ETF. The combination of the two firms with Galaxy has created a low-cost ETF that allows investors of all types to access bitcoin.” – Eric Pollackov, Global Head of ETF Capital Markets at Invesco.

Mr. Pollakov’s statement highlights the critical nature of GAAP-compliant data and how they can be used as reference ratios in establishing an acceptable and compliant Net Asset Value (NAV) for their ETFs. Other digital asset ETF providers have also recognized Lukka’s important role in the market and use it for both additional benchmarking and post-trade financial reporting.

The future will undoubtedly include crypto in more financial products like what we currently have in ETFs. The ecosystem formed around digital assets is constantly renewing and evolving. This creates new opportunities for investors but also presents significant data challenges; Lukka is here to help.

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