It’s not quite a seal of approval, but one of Europe’s largest financial markets is giving cryptocurrencies the equivalent of the bar codes found on soup cans and jam jars.
Late last month, the London Stock Exchange Group (LSEG) added 169 digital assets to its SEDOL Masterfile service, a global database that assigns unique identifiers to financial instruments. The assignees included digital currencies (such as bitcoin), “digital platforms” that allow issuance of multiple assets (such as Ethereum) and security tokens. The seven-digit alphanumeric codes help LSEG’s customers keep track of traded assets from execution to settlement.
The addition of bitcoin and its ilk to the database, in response to customer demand, is a sign that institutional investors are slowly embracing the asset class.
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“Naturally with the gradual institutionalisation of digital assets, a number of our clients were starting to invest in that space, so we felt it was an appropriate time to add these to SEDOL,” said LSEG’s Head of Data Solutions, James Nevin.
He was quick to add that assigning a code does not add any particular legitimacy to any digital asset.
Last year, the company’s main operating subsidiary, the London Stock Exchange (LSE), licensed its Millennium Exchange trade-matching technology to build AAX, a virtual assets exchange based in Hong Kong that went live in November.
Time-tested taxonomy
Market participants use SEDOL Masterfile to identify individual securities across asset classes including stocks, bonds and exchange-traded derivatives worldwide.
The service was created 30 years ago as a registry of codes to identify securities traded on LSE, said Nevin.
Since then, it has grown to include identifiers for over 100 million securities traded all over the world, including U.S. municipal and corporate bonds.
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“Within that 100 million, there are about 20 million that are active,” Nevin said.
If a company is liquidated or acquired, it disappears in reality but the SEDOL code is kept active to make sure it isn’t reused, and LSEG can “retain full corporate action history” of those securities, Nevin said.
LSEG worked with data provider Digital Asset Research for the last three years to create a vetting process for cryptocurrencies and the like.
Issuer? What issuer?
Normally, with stocks or bonds, customers have the ability to log in and create SEDOL codes within the system, instantly, said LSEG Senior Project Manager Laura Stanley. For the time being, users will not be able to do the same for digital assets, given that this untamed territory is rife with dubious investments.
“Due to the fact that it is a new asset class, there is an eligibility criteria for inclusion,” Stanley said.
The SEDOL Masterfile is made up of an issuer table, a security table and a markets table that are linked together. Cryptocurrencies are hard to shoehorn into this framework given their leaderless nature.
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“Not having an issuer does potentially create some challenges but we have managed to get around that by displaying a digital asset, where it doesn’t have an effectual issuer, we display it at the issuer level and at the security level so that it’s easier to locate within the SEDOL Masterfile,” Stanley said.
The digital assets are categorized based on their primary function, Stanley said. Digital Currencies (XA) like bitcoin function as a medium of exchange or store of value, and Digital Platforms (XB) like Ethereum allow the creation of smart contracts to facilitate, verify and uphold an agreement between parties that is then recorded on a blockchain. LSEG has also added Security Tokens (XC) under financial instruments.
“That is the way we have chosen to do that today. In the future, we could increase the granularity based on customer feedback,” she said.