Closing the data gap at the intersection of TradFi and Crypto

Digital assets bring some unique operational challenges. Even crypto-native firms find themselves needing to bridge the technology gap between fiat and crypto systems.

How can financial institutions and crypto-native firms ensure the seamless flow of data across their organisations? Mike Walsh, Director of Institutional Operations at BlockFi and David Gallagher, Head of Custody Operations at Fidelity Digital Assets, share their views on the best practices for managing data at the intersection of traditional finance and digital assets.

Processes remain the same despite crypto data quirks

A lot is made of the difference between digital assets and their traditional counterparts. These differences certainly create some operational challenges for traditional finance data solutions.

The number of decimal places across cryptocurrencies represents one of those challenges, as David explains: “[Legacy] technology is intentionally hard coded to go to two decimal places. But if you actually look at the accounting records and what you potentially need from a books and records perspective, certain assets such as Etherium need 18 decimal places.”

While traditional systems tend to handle the “heavy movement” of fiat cash in the crypto space, they struggle to deal with the other side of the process. “One of the challenges the institutions will have to overcome in general is that where you have got very deep, ingrained legacy systems that are batch processed or anything like that, you’ve got to create the logic in the technology and the APIs to do what you need to do real time; talk to a blockchain, get your messaging back, whatever it may be, and then batch it up internally to be able to process.”

“That’s going to be an industry challenge across the board, especially as we start to transition into this becoming more of a mainstream type of asset investors want to look at.”

If you can overcome those challenges, however, David believes that your processes aren’t that much different from those that deal with traditional financial assets and systems. Once you have the capabilities to talk to the blockchain, “it links up in terms of what a legacy process flow would look like.”

Mike agrees that when you get down to it these processes aren’t too different from what everyone’s used to.

“It’s a major recurring theme … that we’re trying to kind of build traditional finance with this product, right?” he says. “As you understand how things start to function, and you see system infrastructure and you see data, all the things that I learned in traditional finance made it very easy to make an impact very quickly.”

Why is reconciliation still important when dealing with blockchains?

The similarity in processes creates the need for something financial services firms are very familiar with: reconciliations.

“The first thought that went through my process was: we need recs,” Mike says. “We need recs on a daily basis. We might run them three, four, five times a day.”

David agrees that reconciliation is still important, even though digital assets operate from a single source of truth: the blockchain.

“Fundamentally, reconciliation is still your primary control from a books and records accounting perspective to make sure everything’s in order,” David says. “And then from a primary and or secondary perspective, you need to be able to ensure that you are in line with the blockchain.”

“So even if your transactions are settling on the blockchain individually, that’s the equivalent of a transactional perspective. But then, the blockchain moves every 10 to 15 minutes and you need to make sure that you are in sync with the latest run.”

“And so making sure that you’ve got those types of reconciliations, and that you are comfortable that you are in line with the real time connection, is vitally important. Because then you can sleep safe at night knowing that your house is in order, and you’re talking to the outside world in the appropriate way.”

How technology can close the gap between fiat and digital assets

The biggest barrier to easily managing crypto data is getting traditional systems to talk to the blockchain. Is new technology able to help bridge this communication gap? Crypto native firms are in a different position to those from the world of traditional finance, in that they’re starting from scratch from a technology perspective.

“The biggest challenge, to be honest, is establishing infrastructure,” Mike says. “You don’t have all of the systems in place and you have to constantly be thinking six months ahead. You’re building as you go and trying to remediate the key functions like settlements and making sure that systems talk to each other. It’s all got to be strategic across the board. And you can’t just look at trading, you have to look at the whole picture holistically.”

This is as much an advantage as it is a drawback, though, he explains.

“It’s been a pleasure for me to move to BlockFi. It allows me to build things from scratch. So you don’t have some of the legacy problems that you see with banks. Here, if you do it right the first time and you have adequate control, it allows you to really set yourself up for the future.”

Speaking of the future, David thinks that technology needs to enable the business to grow fast even in uncertain circumstances.

“To me, it’s all about scalability and the right levels of automation, with the correct risk tolerance and controls in place to facilitate it,” he says. “Throughout my career I’ve talked about – or dreamt about, should I say – high levels of automation, STP, etc. Now we’ve got the opportunity to tap into the technology and the infrastructure to be able to do that.”

The new tools helping empower crypto firms to stay agile

Of particular interest for David are tools that put more power into the hands of data experts and away from vendors, which also lightens the workload for internal IT teams.

“We’re starting to move towards tools where the business has more power and you don’t have to rely on scheduled releases and prioritisation within either internal or external tech teams.”

One of the benefits of this is that you can focus on different aspects of the business that are important as you look to grow.

“You spend more time putting the governance layer in place to be able to manage changes more rapidly,” David explains. “And that allows you – certainly an operations user – to be able to move quicker, faster and more nimbly, and be able to adapt to some of the challenges that you may not have foreseen.”

David believes that the right technology gives the business the tools needed to navigate the uncertainty of the crypto space.

“There are curves down the road that we need to be able to adapt to. And that component of having the power in the business, more so than reliance on technology partners, is a game changer for us.”

Building data infrastructure for a new financial world

Both Mike and David agreed that the continued evolution of the crypto space presents a great deal of opportunity.

To capitalise on this, firms first need to conquer the technology challenges inherent in getting legacy financial systems and the blockchain to communicate with one another. But once that piece is solved, the processes for managing crypto data aren’t so different from any other kind of financial data. 

With the right technology you can unify these different systems and automate your data management. This will help to bring the worlds of fiat and crypto even closer together. Both TradFi and crypto-native firms now have the opportunity to think strategically about their technology and build agile infrastructure that enables them to grow with the market.

 The technology choices you make today dictate how well your firm can react to the opportunities of tomorrow.