Crypto ETFs facilitate the entry of cryptocurrency assets into mainstream investment portfolios but they also introduce complex data management challenges. The acumen required to operationally support this innovation at scale includes both an understanding of traditional financial markets as well as deep technical knowledge of how to manage blockchain financial data.
Blockchain data is different.
The critical role of data management within the digital asset ETF ecosystem should not be underestimated as blockchain data inherently requires unique infrastructure to support it. An easy example is the requirement for more decimal place precision: bitcoin requires eight digits past the decimal place and Ethereum requires 18 digits. Traditional financial systems are typically limited to no more than two to four digits of precision. As a result, blockchain financial data is not compatible with traditional systems and requires a bespoke approach to critical processes such as transaction reconciliations and gain-loss computations. And adding more types of blockchains to an investment portfolio compounds this complexity as each blockchain protocol usually has different constraints needing to be addressed.
Digital assets are also inherently global in nature, trading 24/7 in fractional quantities. Data must be timely, continuously available and precise. The regulatory environment for ETFs, and in particular the significant reporting requirements, necessitate that data providers have mature operational infrastructure and technology risk management in place.
A more detailed summary of key crypto asset data complexities includes:
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The use of non-standard tickers and identifiers – today every marketplace chooses their own ticker symbols and identifiers used to represent tokenized assets. To further add complexity, the manner in which each marketplace handles crypto actions can vary greatly. This requires the use of reference data to standardize, map, and categorize the millions of crypto assets traded across thousands of marketplaces globally.
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Valuation methods – fragmented markets, lack of formally designated principal markets, 24/7 trading (thus lacking a formal “close of day”).
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Trading pairs without fiat – since digital assets are traded in fractional quantities, they can also be traded for one another, i.e. without cash or fiat as part of the trade. This complicates financial reporting which requires to value transactions in local reporting currencies such as the US Dollar.
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Transfers between marketplaces are very common – there are marketplaces or exchanges all over the world that offer trading of different assets and trading pairs, all with varying prices. This is attractive to the traders who understand arbitrage but drastically complicates data management.
Operational Risk Management is more important than ever.
Any data provider supporting an ETF should offer assurances that their 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 like service providers did before crypto existed, but the risks of incomplete or inaccurate data are greater due to the inherent complexities outlined above. The use of these frameworks involves selecting a reputable auditor or a certifying firm, as well as the technical acumen required to support them. Instances of successful SOC or operational controls audits in this space are still rare in 2024.
Lukka, a single provider for all of your crypto data needs.
Lukka, as the leader in crypto asset data management, offers enterprise-grade data solutions tailored to navigate the intricacies of digital asset data. These solutions are designed to meet the standards of the most complex and risk-mature institutions globally, evidenced by Lukka’s adherence to AICPA SOC 1 & 2, ISO 27001 standards and IOSCO Adherence to Financial Benchmarks Principles.
Lukka Reference Data is a foundational product that standardizes, categorizes, and maps over 1 million tokenized assets to thousands of ecosystems entities. We initially built it to enable our enterprise software which now supports thousands of crypto funds and other businesses globally.
Lukka Prime – Lukka’s flagship pricing and valuations data product – stands alone with its innovative methodology for Fair Market Value (FMV) determination of crypto assets, which is in alignment with US GAAP, IFRS, and S.E.C. guidelines. In use by institutions and auditors around the world since 2019, this robust methodology ensures that financial reporting and tax compliance for digital asset ETFs are built on a foundation post-trade data that is auditable and aligned with accounting guidelines, which is essential for the trust and confidence of investors and regulators alike.
Lukka also offers a deep menu of complementary data products such as custom crypto benchmarks, calculation agent services, NAV reporting data, Full Trade Lifecycle Market Data, Fund Admin Support, Blockchain Analytics, Enterprise SaaS Portfolio Management, Compliance & AML Software, Entity Due Diligence, Sanction Screening, and Investigations services.
The market determines what is important.
Invesco, for whom Lukka is the primary benchmark provider for the Invesco Galaxy Bitcoin ETF, says the following about the practical application and value of Lukka’s data management services:
“Invesco’s decision to choose Lukka as a reference rate provider for BTCO was due to their attention to detail and their best-in-class data integrity. Additionally, their reference rate is in accordance with Generally Accepted Accounting Principles (GAAP), which is paramount when creating a Net Asset Value (NAV) for BTCO, the Invesco Galaxy Bitcoin ETF. The combination of the two firms along with Galaxy has created a low-cost ETF that allows for all types of investors access to 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 it can be used for reference rates in creating an acceptable and compliant Net Asset Value (NAV) for their ETF. Other digital asset ETF providers have also recognized Lukka’s pivotal role in the market, using it for both additional benchmarking and post-trade financial reporting.
The future, without a doubt, will involve crypto in more financial products like we now have in ETFs. The ecosystem that has formed around digital assets is constantly innovating and evolving. This creates new opportunities for investors but comes with significant data challenges – Lukka is here to help.