The FIX Trading Community says a lack of standards will hamper the acceptance of tokenization.
Tokenized assets need better standardization, say officials at the FIX Trading Community — an industry association that manages the FIX protocol for electronic trading — and they are doing something about it in response to a call for input from the Financial Conduct Authority (FCA), a U.K. regulator, and the Bank of England.
“The business cases for tokenization are both compelling and well advanced, particularly in the areas of post-trade and collateral management,” says Jim Kaye, executive director for the FIX Trading Community, in a prepared statement. “However, lack of common data standards, along with issues around workflows and reconciliation, will continue to hamper adoption unless the industry works together to address them.”
Grygo is the chief content officer for FTF & FTF News.
The initial call was focused on U.K. markets, but the FIX Digital Asset and Technology Committee is stressing that the need for tokenization standards is a global issue, Kaye says. The committee consists of market operators, sell-side firms, buy-side firms and vendors from around the globe. The common global barrier to adoption of tokenized solutions is not with the technology itself, but with workflow and data standards concerns.
To help lay the groundwork for new standards, the FIX Trading Community has just published what it calls “a concise, practical overview of blockchain technology and tokenization,” which is customized for its members: https://fixtrading.org/packages/blockchain-basics/
And, in 2022, the FIX Trading Community published “Recommended Practices for Digital Asset Trading,” which can be found here: https://shorturl.at/XNXNw
“FIX’s work is focused on developing further standards to support the hybrid environment that is likely to exist into the medium term. One area of particular concern is how data is encrypted in digital asset transactions – currently there is no agreed encryption standard, creating the potential for customer and other sensitive data to be exposed,” according to officials.
“Other areas that must be solved before tokenization can offer safe, efficient alternatives to traditional instruments and methodologies include:
- Chain-to-chain connectivity — The ability to move a digital asset between different blockchain environments;
- Common instrument identifiers — A consistent digital ID that travels with an asset across chains;
- Connectivity standards for exchanges, custodians, and digital asset platforms — these are currently inconsistent and largely bilateral;
- Settlement instruction standards — There are currently no agreed standards for sending or receiving settlement instructions in the digital asset context;
- Wallet and legal entity schemas — Common approaches to wallet addressing and the mapping of wallet addresses to legal entities; and
- Event taxonomy — Consistent representation of corporate actions, coupon payments, and other asset servicing events across platforms.”
In the announcement, Kaye notes that the suggested solutions will need not only agreement among market participants but also among regulators, “to prevent regulatory arbitrage” by firms. “Collaboration on this issue is absolutely fundamental,” he says. “FIX is well advanced on many fronts, and we welcome other market participants to join the conversation.”
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