The Importance of Data and Standardization Within Digital Assets
MG Stover custom-tailors fund administration for hedge, private equity, VC and digital asset firms
- Data standardization is a critical issue for funds within the digital asset space
- “The need to continually adapt and develop new data standardization is ever present. The exponential growth in decentralized activity over the past two years is an example of the ever changing nature of the environment that funds in this space operate in.”
Not all crypto markets are created equal.
At least, that’s how it looks from the perspective of a fund manager in the digital asset space. While exchanges may trade the same assets, the way they report those assets can look different.
Some exchanges list bitcoin under the “BTC” ticker while others list it under the “XBT” name, for example. To the everyday trader, this might not seem like a big deal. It’s not that hard to figure out which asset is which.
But for those managing large funds dealing with a lot of capital and a high volume of trades, these minor differences can create a huge headache.
Keeping track of transactions and all related data becomes difficult when you don’t know for certain which asset was involved. There needs to be a way to clarify each trade for reporting purposes, and it can’t be done manually. This type of organization is referred to broadly as data standardization.
Data standardization from an auditor’s point of view
For more on this topic, we reached out to Patrick Clancy, an experienced auditor in the digital assets sector, for his perspective.
He summarized the problem like this:
“Each platform is going to spit out its own raw data, organized with the platform’s dev team’s preferences. If you’re a fund, this needs to be ingested and centrally housed internally or through your fund admin.”
Clancy went into further detail on the challenges associated with integrating all the different types of crypto transactions into a single dataset:
“Standardization of data on all these various exchanges, NFT projects on various 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 their service providers has been more important than ever because each platform / token traded is or can be different from an output perspective.”
In other words, a lack of standardization can manifest in multiple ways, and the problem can present itself at many points. This problem requires a systematic approach to ensure the accuracy of the trading data captured from the 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, namely that they need to be able to report accurate numbers when it comes to things like net asset value (NAV):
“…That coupled with establishing best practices for operational excellence (efficiency/compliance) and notes (like a notebook) for trading events/investment realization activity will be key when trying to report NAV or performance numbers.”
We also reached out to Christian Randall, senior manager with Cohen & Co., for further insight on related matters. He noted that “many of the challenges present in the digital asset industry today are similar to those our firm experienced in the managed futures space during the ‘80s and ‘90s. While there are a variety of digital asset challenges — general taxonomy of terms, token reference data, diversity in accounting treatment of blockchain activity — many of them stem from unmet data needs at the blockchain or protocol level and are impeding downstream, off-chain operations. Blockchain and protocol communities are in the best position to address this through community-driven standardization.”
So while these problems may not exactly be new, they take on a new form in the world of blockchain protocols.
Digital asset data standardization and MG Stover
Overall, it’s clear that data standardization is a critical issue for funds within the digital asset space. Fund administrators serve a central role by providing the books and records that audit and tax firms rely on, as well as investor-level reporting.
MG Stover began servicing digital asset clients in 2014 and has led the way in the development of technology to standardize and ingest data from its clients, exchanges, blockchains and protocols. MG Stover constantly faces the challenges involved in the standardization problem head on and is well positioned to continue developing innovative ways to ensure accurate reporting for its clients.
MG Stover partners with other leading companies, like Digital Asset Research, to help serve their data needs. The firm’s deep experience in the space and its technology-first approach are key to the data standardization practices that it employs.
According to Seth Altman, senior director of blockchain and digital assets, “The need to continually adapt and develop new data standardization is ever present. The exponential growth in decentralized activity over the past two years is an example of the ever-changing nature of the environment that funds in this space operate in. We are constantly collaborating with our clients and other service providers in the industry to ensure that the solutions we develop will benefit all stakeholders 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 is working with many institutional asset managers who are rapidly developing more sophisticated and streamlined internal processes to capture trading activity for investment book of records and shadow accounting. He described how a service-based approach, coupled with the industry leading technology creates a compelling solution for fund managers:
“We work with each of our clients in partnership to ensure that there is a continual flow of information between clients, their trading counterparties, and our internal systems which reduces the risk that data may be misinterpreted or accounted for incorrectly. Because of the vast differences in funds and strategies, this approach ensures that we have a tailored approach, knowledgeable teams that understand our clients’ trading, layered with technology designed specifically for integrating digital asset trading activity and data standardization.”