By Ryan Pierce, Consultant and Co-chair of FIX Digital Asset Working Group
The FIX Trading Community empowers individuals and firms to collaborate and ensure the work of the community is complete, robust, and fit for purpose, for the entire industry. This has been achieved by FIX Protocol being supportive of nearly every conventional class of financial instrument, so it only follows that FIX should also support digital asset trading.
Just as FIX has reduced costs for the traditional financial industry, a FIX standard for digital assets would significantly reduce the technical friction and cost for traditional financial industry participants to interact with newer crypto exchanges. Pre-trade efficiencies in market data and quoting, and post-trade efficiencies in trade reporting and settlement would be possible, serving market data vendors, buy-side institutions, and custodians. Regulators could more easily track the new digital asset landscape if they could leverage the same reporting infrastructure employed within traditional asset classes.
The FIX Digital Asset Working Group (DAWG) is well positioned to advance this goal. FIX Trading Community began its life in 1992 as an equities protocol, but since then has expanded to include equity options, fixed income, forex, listed derivatives, and a wide range of OTC products. FIX already has a modular data model for assets and parties, and a rich message catalog for transaction workflows, including orders and executions, market data, reference data, and trade reporting.
In 2018, the DAWG began a gap analysis process to produce a recommended practice guidelines document for trading digital assets between Buy-Side and Sell-Side firms, with the intention that an Exchange recommended practice guidelines document would follow. While Distributed Ledger Technology and blockchain may be groundbreaking, very little in the FIX Protocol actually needs to change to support digital assets.
- Crypto exchanges can trade digital assets priced in terms of fiat currency (e.g. Bitcoin vs. USD), however they can also trade digital assets priced in terms of other digital assets. (e.g. Bitcoin vs. Ether) Even though digital assets do not meet the definition of a “currency”, FIX can still represent these trades similar to forex spot transactions.
- Participants may need to identify their crypto wallets for settlement purposes. This may need simple extensions to the FIX data model for parties.
- Crypto exchanges need identifiers. Fortunately, the ISO 10383 Market Identification Code (MIC) standard exists, and crypto exchanges are eligible to apply for MIC codes.
- Digital assets need a security type. Creating a taxonomy for digital assets is a highly complicated problem. Assets may be currency-like and intended for payment, security tokens, utility tokens, or some other novel use case. Asset issuers can disagree with regulators over the categorization of their assets, the users can disagree amongst themselves, and regulators don’t always agree with each other, or may decline to take a position. The easiest solution is to punt the issue. Create a single FIX security type for “Digital Asset” and watch what other standards, such as the ISO 10962 Classification for Financial Instrument (CFI), do.
- Digital assets need unique, unambiguous identifiers.
This last issue presents the single largest obstacle for standardized trading. Most traditional assets have a known issuer, who may list them on an exchange. Exchanges then assign ticker symbols, and national numbering agencies assign an ISIN utilizing the ISO 6166 standard. But Bitcoin, with a market capitalization of over $180 billion, was created by the anonymous Satoshi Nakamoto. It has no authoritative governing body; miners govern it based on their relative computing power and the software version they run. Anyone can “hard fork” Bitcoin to create a new digital asset, and people can disagree over which fork is the real Bitcoin. This radical decentralization creates challenges for digital asset identification. Meanwhile, exchanges frequently disagree on digital asset ticker symbols. Is Bitcoin “BTC” or “XBT”? This creates a headache for anyone in the financial industry needing authoritative reference data.
FIX Trading Community is a liaison member of ISO, the International Standards Organization. ISO tried tackling this issue in 2016 by investigating whether Bitcoin and other cryptocurrencies should receive an ISO 4217 currency code. (Existing currency codes include USD, GBP, EUR, etc.) The answer, unsurprisingly, was no. The ISO TC 68/SC 8/WG 3 working group was formed and tasked with creating a second-tier registry for cryptocurrencies. FIX appointed me as an expert member of WG3 in June, 2018, and I took an active role in the architecture, authoring, and editing of its draft standard.
ISO WG3 quickly realized that it needed to expand its scope from cryptocurrencies to the more general category of digital assets. It chose to focus only on those that are fungible, hence could be traded in a two-sided market. Non-fungible digital assets, such as a digital deed for a specific parcel of real estate, could easily become too numerous, so they are excluded from scope. WG3 proposed creating a registry, assigning a Digital Token Identifier (DTI) that is a unique, random, and fixed-length.
WG3 completed the work of drafting language for ISO 24165 in December 2019. Because digital assets may lack a defined issuing authority (such as a board of directors who authorize stock issuance), WG3 chose to focus on the token representation of the asset, using objective technical attributes of the blockchain itself to tie an assigned DTI to a digital token. Considerable effort was invested to develop a process to differentiate digital tokens created as a result of blockchain forks.
The ISO registry will assign a DTI linked to the unique technical attributes. Anyone can submit a request to register a digital asset, such as an exchange, custodian, regulator, or investor; the applicant need not be the issuer. Issuance of a DTI just confirms that the token exists; it does not confer legitimacy, nor does it identify an issuer or tie the token to a specific digital asset.
SC8 recently published an RFP to select a firm to act as the Registration Authority that will administer the DTI registry; responses are due June 30. Assuming successful vendor selection and balloting, the target for DTI registry operation is mid-2021.
The DTI will close this last remaining gap, allowing FIX to publish a comprehensive guide for using FIX to trade digital assets.
The FIX Trading Community open source Project CONGA is a demonstration project of a fully functional exchange running JSON or SBE over the FIXP session layer over Websockets, which could immediately be adopted by existing and new markets. (https://github.com/FIXTradingCommunity/conga
If you would like to get involved in the FIX Digital Asset working group or FIX Trading Community, please contact fix@fixtrading.org.
