Interviewed By Foo Boon Ping
Stephan Dreyer, managing director of the Association of National Numbering Agencies, talked about the role of the global body in developing a common identifier standard for the emerging class of crypto and digital assets to be issued and traded in regulated exchanges.
In this conversation, Stephan Dreyer, managing director of the Association of National Numbering Agencies, talked about the role of the global body in developing a common identifier standard for the emerging class of crypto and digital assets in order to lower the cost and complexity of issuance for all participants in regulated venues.
Dreyer explained the different ISO-standard identifiers, including ISIN, the International Securities Identification Number, for most types of financial instruments, and the process involved in allocating the codes.
He pointed out that with the evolving regulatory landscape, getting an ISIN is beneficial not only for traditional assets but for crypto and tokenised assets as well. He also highlighted the need for interoperability between the organisations that are responsible for developing and maintaining the different standards.
The following key points were discussed:
The following is the transcript of the interview:
Foo Boon Ping (FBP): Good afternoon and welcome to The Asian Banker TABLive session and today we have with us Stephan Dreyer, the managing director of the Association of National Numbering Agencies (ANNA) and he is here to talk about the identifier for digital assets and crypto tokens, an area that has been getting a lot of attention with the rapid rise in interest in cryptocurrencies, such as bitcoin that we’ve seen hitting a historical high. Now we are seeing a lot of interest from even mainstream global banks that are setting up crypto trading access to their customers and increasing institutional interest in this space as well. And this is where ANNA, the Association of National Numbering Agency come into the topic in terms of having a common identifier for this emerging class of investment assets, so to speak. Stephan, it’s so great to have you join us and tell us in terms of the numbering process for investment instruments and financial instruments today, what role does it play?
Stephan Dreyer (SD): Yes, sure. So let’s talk a little bit about the International Securities Identification Number (ISIN), which is the registration authority and when we look at security, investment assets, numbering and identification, these are important to understand a little bit about ANNA. So, ANNA’s a global association of 128 member and partner numbering agencies that’s covering over 200 jurisdictions, and those are organisations which represent the key market infrastructure. Things like exchanges, central securities depositories (CSDs), central banks, regulators, financial service data vendors. It’s quite all-encompassing there and ANNA’s the registration authority for the ISIN standard as well as with the FISN, Financial Instrument Short Name. It’s actually the NNAs who are responsible for the allocation of ISIN and ISIN codes. They do this for financial and referential instruments in traditional form. Those requests usually come from issuers or agents of the issuers and the NNA or the national numbering agency has established know your client (KYC) processes where they will look at the legal documentation of the security in order to identify and do the assignment of the respective codes. The ISIN records are sent to the service bureau, which consolidates all of that information and then makes it available to the market.
FBP: What is the process and the requirement involved in assigning ISIN to a security and investment asset?
SD: For traditional assets that has a prospectus, so depending on the type of instrument that's being issued so there's legal documentation. Usually, issuers or syndicate banks are the type of agents who make the request for the ISIN code to provide a series of legal documentation for the numbering agency to review.
FBP: ISIN is one of the standards that is being considered for digital assets identifier. There are other standards as well. You mentioned there is also the digital token identifier and I understand, there are others as well, such as the financial instrument global identifier, the international token identifier numbers. Now these different standards, how do they work with each other? Is there a need to have different identifiers? How does that add to the trading space?
Common language of financial transactions
SD: There is definitely a need for standards. It's really up to market participants to identify which identifier standard best serves their need, in terms of the digital token identifier. So that's something that was developed as a standard over the course of the last year within International Organization for Standardization (ISO) focusing very specifically on the location of the token on a distributed ledger technology (DLT) or blockchain. And if you look at the different types of standards, they all do something a little bit different. ISIN focuses very much on the economics of the asset: so describing who is the issuer, are there voting rights, what is the type of instrument maturity, any kind of interest payment, whereas the DTI focuses very much more on the actual location of an asset that has been tokenised.
FBP: Tell us a little bit about ISIN. ISIN is an ISO standard, it is an International Organization for Standardization a kind of an approved standard?
SD: Yes. So the ISIN is the ISO 6166 standard for financial and referential instruments. It's a 12 character, alphanumeric with a specific prefix, which identifies the jurisdiction from which that asset is relevant. Then we also have ANNA’S registration authority for the Financial Instrument Short Name, which is the ISO 18774 standard and that is a human readable text description of a financial instrument, and it may be important to mention that in this process of allocating ISINs, the numbering agencies are also responsible for the allocation of the Classification of Financial Instrument (CFI) code, which is a six character alpha code, and gives very specific information about the attributes of the instrument. All three of these work together right now for clear identification and classification of any particular asset.
FBP: Currently, in terms of the issuance of digital assets, a lot of them are happening in the DeFi space. How much of it has actually happened during the regulated market infrastructure space?
SD: We have seen examples of some securities being issued already. More recently, you had a big issuance from the European Investment Bank, the Ethereum issuance. I think a lot of it is almost a sandbox-kind of experiment. While they are bringing these instruments to market, it’s not as widespread because the actual whole digital asset ecosystem isn’t fully in place yet.
FBP: And getting ISIN as an identifier, that will benefit market participants, especially with digital assets, trying to get more institutional interest and support.
SD: Yes, absolutely. The benefit of the numbering digital assets is very much the same as for traditional assets. The tokenisation process is really about using a different type of technology to bring an asset to market. So the issuance process, settlement process, post trade processes, it’s about that efficiency very much from a sell side perspective. But when you look at the organisations, having standards in standardised identifiers help with the market efficiency, the interoperability quality of data. So having a really standardised reference data helps to reduce costs for all that are involved and the complexity for the organisation. We would expect that because these are investable assets that the regulatory reporting requirements when an asset is tokenised would very much be the same as for traditional asset.
FBP: So, you’re an umbrella organisation that work with national numbering organisations that issue the number. Are you regulated? And if so, how are you regulated?
SD: Not as an association, we're not. So our members, depending on their function within their specific jurisdictions may be regulated but ANNA itself as an association is not.
FBP: So the national bodies are regulated, not ANNA as an association. What’s the objective and authority of ANNA’s Taskforce 22? What would we be looking at specifically for the digital assets identifier?
Identifying digital assets
SD: The taskforce, which by the way has commenced its work or has completed its work I should say, started in October of 2019 with the purpose of assessing the role that ISIN could play in the identification of digital crypto assets. The taskforce looked at this for probably about nine months, looking at very specific examples that we had already been seeing evidence of securities that have been issued on some type of blockchain or DLT in a tokenised format. The goal was really to come up with specific recommendations as to the role that ISIN can play in that. This underscores, and as a way, support transparency, compliance and efficient financial market structures by using this ISIN standard work to be of most use to the industry. The taskforce did come up with a set of recommendations, which had been subsequently endorsed by the ANNA board of directors. The recommendations essentially highlighted that ISIN should be allocated for financial instruments as well as referential instruments. There was a subsequent recommendation for the establishment of a permanent working group within ANNA to continue to look at the evolution of the digital asset ecosystem, the regulatory landscape, technological advances, but more importantly then to look at the implementation of these recommendations. That working group started its work on the back of the taskforce recommendations. The key objective in terms of the implementation of the recommendations was the very thorough review of what we refer to as the ISIN guidelines. If you think of the ISO 6166 standard for ISIN, it basically defines the standard, but the ISIN guidelines are docked public documents, which is produced by ANNA and its members, that describes the actual process of the allocation of how that standard is applied.
FBP: How has it been progressing in terms of adoption? Is it ready to be adopted? Or are there still finetuning work that needs to be done?
SD: So parts of it have been so one of the key elements of the ISIN guidelines is that when the working group proposes its amendments, these have to be approved and adopted by the ANNA members. That will happen at a general meeting via resolution. We've had one series of that, which was at the November general meeting where the initial set of recommendations was adopted. Further amendments have been proposed and have been reviewed and are being put forward for adoption at the upcoming ANNA general meeting in June. That basically covers all of the security token aspects of the ISIN guidelines on any type of stock, bond, fund, that would be tokenised. The next step is looking at the ISIN guidelines and understanding what the rule set should be for referential instruments. Here you're looking at more things like cryptocurrencies, which may not in themselves be the actual investable asset, but may be an instrument which is used as a reference for another financial instrument. An example could be a structured product, which has bitcoin as an underlying. So here, then we're talking about the ISIN allocation for Bitcoin, for example.
FBP: The composition of the task force, how do they represent the traditional financial markets that is the emerging crypto asset ecosystem? Would they comprise many of more traditional market participants? Would they also have DeFi participants like crypto exchanges? No alternative trading platforms and crypto custodian? Are they a special part of the ecosystem?
SD: They're definitely part of the ecosystem. The ANNA taskforces and working groups are comprised of member participants. We have our members who nominate or elect people to participate in the taskforce working groups. Our membership covers a wide range of organisations, which represent the key market infrastructures. There's not a direct representation, I'd say, to your question of let's say crypto custodians or digital exchanges. But if you look at some of the exchanges, some of the traditional exchanges have set up separate digital exchanges. So there is an indirect representation in that way. And you have CSDs that are also looking at custody of digital assets and looking to expand their services. So I'd say yes to answer your question, there is representation, but maybe not from some of the specialised players. We do very actively do outreach to other associations and organisations and look for areas of collaboration in that way.
FBP: Tell us, in terms of the adoption of market participants of tokenised assets, whether you're tokenising traditional financial instruments with new blockchain technology and contrast that with some years back where we have all these interest that is driving up ICOs. How is it different from then and now that tokenised assets are being introduced in more formal exchanges?
SD: There is definitely evidence of growing numbers. If you've looked A lot of very large issuers of security tokens and the European Investment Bank (EIB) issuance more specifically, that helps to build credibility into that process. The adoption from an investment perspective,
that's something that still needs to be seen because markets have achieved a certain level of efficiency thus far. The participants want to ensure that they can continue to achieve that. Right now, you've got a parallel systems happening, whether you're dealing with traditional assets on the one side and tokenised assets on the other side, it’s about bringing that together. But there is definitely evidence of growing evolution and issuance in that space. It's very hard to go on social media or any industry publications without reading multiple things about it every day.
FBP: What is making adoption challenges that we discussed earlier, they are competing standards as well. So for a market participant, how do they navigate the different standards as an offer? We referred to a few earlier. Is that interoperability? Should there be interoperability for all standards to coexist?
SD: Interoperability should be absolutely an objective of those organisations that are responsible for developing and maintaining the standards. It's ultimately up to the market participants to understand which standards are to be best utilised. Regulation drives a lot of that. So as regulators look at incorporating standards into particular directives, that helps to increase the adoption for one particular over another. But each standard ultimately is devised for a specific purpose and those purposes may be different. But bringing them together is what gives the value.
FBP: So tell us in terms of how does the regulator look at the ISIN standard? We know in Europe, ISIN is adopted by the European securities market.
SD: Correct. You'll see a lot of references to standards like ISIN and I mentioned CFI before. We also have legal entity identifier. And those are key, well established standards that have been introduced, in particular in Europe, but also outside of Europe, into a lot of legislation. And that speaks for standards like ISIN to continue to be used. So if I'm issuing a stock or a bond, and in order to be able to trade and do my regulatory reporting, I need ISIN, CFI, that same benefit exists, that same need to have the same standard, even though the asset may be tokenised.
FBP: Then tell us today, the adoption of ISIN for some of these digital assets, what are the numbers and the statistics? Are there additional assets out there being created that already carry the ISIN standard? What is the future development for more to adopt the standard?
Digital assets and ISINs
SD: Even prior to ANNA, looking at a formal recommendation that what the taskforce ultimately produce as a recommendation for the numbering of digital assets. There were securities that were being issued in a tokenised form, which through the process, and the relationship to each would have had with a member agency, would have already received an ISIN. The numbers are not astounding, when you think about the number of ISINs that are out there in terms of traditional assets. For traditional assets, we're looking at about 75 million ISINs that have been issued with about 12.5 million currently active and only a fraction of that is actually tokenised at the moment. But part of the process is really making sure that in amending the ISIN guidelines, putting these recommendations out there, is that the market understands that ISIN is fit for purpose in this space. The key as the next step is really looking at the non-traditional assets where we look more at the referential instruments such as cryptocurrencies and where those are integrated as reference points. So let's say you have a fund of crypto assets or an index, which is comprised of cryptocurrencies or derivatives on a particular crypto, and the numbering, the ISIN allocation for those underlying referential instruments will be a key step forward and increase the value for market participants.
FBP: How do you see the development of an evolution of digital assets? Whether they are reference instruments or they are actual investment assets? Today, there's a lot of interest or as you've mentioned, not just bitcoins but other crypto currencies are attracting a lot of investors’ interest. Is it because of the flush of liquidity out there in the market? And what when it stops? There is also a lot of volatility in the prices of crypto assets today?
SD: Yes, absolutely. Obviously, you have the Bitcoin hype and cryptocurrencies and whatnot, you have quite a few out there. But you only have a small number, which actually makes up the largest volumes. And with any new development, you see in the beginning a lot, and then you see a tailoring down to the key ones, whatever product that is – whether it's mobile phones, cars – a lot of people go in, and then there's a few that survive that I think the same will be there. But there is evidence that the digital asset volumes will grow. Again, you see more and more institutions whether on the sell side or the buy side, investing in the infrastructure to expand infrastructure to accommodate for these. Also, the specific interest of a lot of countries, national governments looking at things like digital currencies, central bank digital currencies is another kind of key drivers so that that regulatory landscape will continue to evolve, the technology will continue to evolve and its application. So, absolutely, where it stops or how far it goes, it remains to be seen, I think that there will be for some time to come still space for traditional assets. There will be people who may not want to move as quickly from that, particularly, let's say on the retail side. But that remains to be seen. The more interest there is in things like cryptocurrencies, Bitcoin that may pique that retail interest, much, much more.
FBP: Would you consider the new non-fungible tokens (NFTs) as part of the investment assets as well?
SD: They could be. There's a lot of talk about it. It's about looking at specific use cases and examples. But certainly, if you have those type of non-fungible assets, which become a reference point for investment, or you start seeing direct investment in there or again, as a reference asset for another financial instrument, then absolutely and again, here's a role that ISIN can play in helping to uniquely identify those.
FBP: ISIN and the national numbering agencies. What is the business model for the numbering agency? Is there a subscription to the client for the numbering services once it's issued? I read that these assets can ask for ISIN number and that there is no fee involved.
SD: There's no fee involved. Basically, we follow the ISO principles. Agencies can operate on a cost-recovery basis. Which means you know the cost of doing that business they can charge. But that's only very few examples that we have of that in particular markets. But more broadly, we don't see a charging of fees for the allocation of ISINs or any of the other standards.
FBP: So most of the number agencies are also part of the market infrastructure and perhaps that is where they make most of their money, so to speak. But how is ANNA funded?
SD: So ANNA’s funded through membership fees. We have the ANNA service bureau where the number agencies send all of their ISIN information to. There is a subscription available to the ANNA service bureau for that data that basically covers the costs of doing that consolidation effort. The actual ISIN records are freely available to the market. We have a free lookup service on the website. But those are primarily through the membership fees.
FBP: Thank you, Stephan for speaking to us. It's been quite insightful. We very seldom speak to a numbering association or numbering agencies. You are very essential part of the whole financial market infrastructure. But it's good to get a sense of the different paths that makes trading in the financial markets work. Obviously, there are a number of providers, but different framework, they're so different as you mentioned. So all the best for your work and the Taskforce 22 as you go about bringing digital assets into the mainframe of financial market.
SD: Great, thank you. It was a pleasure speaking to you.