Tom Wheatley, COO at Watson Wheatley.

This article was produced by Watson Wheatley as part of their valued industry partnership with Fund Operator.

Crypto Reconciliation

Reconciliation of cryptocurrency isn't supposed to be needed, it's on the blockchain after all. However, there are plenty of companies that need to reconcile the data and the effect of the cash flows as part of their general reconciliation processes against their internal book and record. The external data may come directly from an exchange or be a copy of the blockchain itself. Inevitably the blockchain will be correct and the comparison will show up incorrect bookings in internal systems.

While still a relatively new area for many reconciliation providers we have a number of years of experience in this area and have found a few factors, which determine the success of the process.

System Flexibility

Firstly flexibility in a reconciliation system is key. Not just so it can reconcile crypto but also so it can deal with any other tricky instruments that need reconciling such as Over the Counter (OTC) instruments. A system that is configurable enough without the need for coding is an absolute requirement when dealing with different types of crypto recs and sometimes the challenging data sources that contain the reconcilable information. While there may be a relatively standard approach for reconciling certain data types this often needs to be modified to cope with limitations on data sources or simply the preference of the system users.

Data Quality

The data quality is another area where experience is needed. With crypto being relatively new exchange reporting is not as well developed therefore is potentially a data aggregation challenge. API connections are common and files are not always available via Secure File Transfer Protocol (SFTP). In addition, the contents are not well-formed when compared with more traditional data sources such as those from a custodian or prime broker.

Another issue is the custom systems and outputs used in this environment. In the hedge fund space, there are systems such as Broadridge BIMS and Enfusion that are commonly used therefore interfaces can be standardised. In the crypto space there are lots of custom systems being built and making sure they can give up the right data on a consistent, automated basis is harder than you would expect.

Ongoing Changes

While some firms only trade a limited number of crypto currencies there are Initial Coin Offerings (ICO) on a regular basis therefore a system is required to reduce the effort, or ideally totally automate the creation of new crypto currencies as they are traded. While some clients may want a vendor to provide support and professional services at every stage of the process there are others that wish to take a self-service approach.

Instrument Specifics

Currency pair recognition is another potentially tricky item to work with. Currency pairs are typically something like BTC/USD or USD/ETH but there can be pairs that are crypto-to-crypto such as BTC/ETH. If these are represented in the same format on both internal and external data then the process is straightforward but when they aren't there needs to be sufficient flexibility in the logic and matching to allow the system to line up the correct currency pairs as well as other attributes.

How to treat Crypto?

Finally, the treatment of crypto is a little bit like we see with forward FX. Some firms treat them as currencies, others as positions. Of course, the currency codes are available but there are potential for clashes with existing ISO codes. Treatment as a position in the same way as a security is more common although there is no clear consensus on which it should be - therefore, flexibility on the approach to reconciliation is key.

Overall, the ability to successfully reconcile crypto lies in the ability to aggregate the data successfully and the flexibility of a system to cope with changes and adapt quickly. Until there is one blockchain (for the given scope), which is used by all parties, then reconciliation is going to be needed.

About the Author

Tom Wheatley is Chief Operating Officer of Watson Wheatley, a specialist in automated reconciliation solutions for hedge funds, asset managers, brokers, private equity firms and more. In his time at Watson Wheatley, he has covered sales, relationship management, partnerships and support functions. Tom's previous experience was with The Bank of New York and Cazenove Capital Management. He holds the Investment Management Certificate from the CFA Society of the UK and has an Executive MBA from Saïd Business School, University of Oxford.

 

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