Titan Platform’s Michelle Morgan works at the intersection of crypto and a less glamorous but crucial arena: recordkeeping.
Morgan, a Canadian CPA, was a director of a successful fund administration company in Bermuda. But after several frustrating nights working past midnight because their software couldn’t keep pace with client and employee needs, Morgan declared “that’s it” and paired up with a fellow director to build Titan, a cloud-based platform that facilitates crypto and other types of asset recordkeeping for funds.
Alternatives Watch: The crypto winter is alive and real. Still many asset management firms trade crypto, despite the headlines, and the servicing needs are specialized. Tell us what you’ve seen in the asset class in the last year or so.
Morgan: In the last year, FOMO has clearly left the market and now we are in a more stable environment from a pricing perspective. But, at the same time, we have seen some spectacular failures of exchanges and investment funds that have shaken investor confidence and prompted regulators to take a deeper look at how to mitigate risk in the sector.
Alternatives Watch: What do you think about the regulatory landscape?
Morgan: Regulators struggle to understand the best way to govern digital assets.
In many countries, individuals that are charged with regulation of this new asset class are actually prohibited from trading it themselves. How can they design regulation for something they don’t have firsthand experience with?
The decentralized nature of the asset class presents a problem for the more traditional regulation approaches.
That being said, the recent World Economic Conference in Davos hosted discussions on how the industry can be better regulated in order to better protect investors against events like the collapse of the FTX exchange or Three Arrows Capital. For crypto regulation to be discussed at Davos shows it is being given priority by global leaders.
Alternatives Watch: What is the biggest challenge in “keeping up with crypto” from a recordkeeping perspective?
Morgan: The biggest challenges are volume of trades and the use of many exchanges, including OTC. Legacy platforms are over 25 years old and were originally built to handle 30,000 trades per day. Crypto volumes can be millions of trades per day and from multiple sources. Legacy systems can’t keep up.
For fund portfolios, a manager needs to be able to track cost and generate a journal entry for each trade so that their investors are getting the correct information for their tax returns.
It can get even more complicated. If there is a back dated or out-of-market trade, the cost relief calculations may have to be redone for this outlying trade. Re-running the allocation for 30,000 daily trades may be achievable but at three million trades, you need a modern system like Titan.
Alternatives Watch: So is volume the only differentiator between servicing crypto assets and servicing traditional assets?
Morgan: The other differentiator, and this may surprise some people, is decimal places. Bitcoin, as an example, is priced to 16 decimal places. Most legacy systems are built for 2 or 4 decimal places and changing that is proving to be a monumental task.
When we built Titan, we told the programmers not to make any assumptions, so they didn’t assume a fixed number of decimal places for pricing. At the time we had no idea that there would be an entire new asset class created that would require a price point up to 16 decimal places, but here we are.
Alternatives Watch: So, if legacy systems could handle increased decimal places and increase their volume, they’d be able to keep up?
Morgan: They may be able to keep up with some trading strategies. But if managers employ price arbitrage opportunities across exchanges, this presents an entirely new challenge. Most exchanges don’t have anything within their reporting to indicate whether a transaction is a transfer from another exchange or just an account deposit.
So what you need is a platform that can amalgamate all activity, look at micro-second level timestamps, use artificial intelligence to determine transfers and fees, and build the chronological trade order from exchange transfers, DEX trades, and OTC movements.
Alternatives Watch: I’m surprised there isn’t better reporting from exchanges. Can you expand more on that?
Morgan: The exchanges are all about use of REST API’s to obtain data. There are hundreds of exchanges that are used and no standard that is followed on data structure, end point organization or workflow.
For example, at one of the largest exchanges, you cannot simply call to get a list of all trades. You have to make the call and specify a trade pair. If you want the Bitcoin to Ethereum trades, you call with those specific tickers. If you want Dogecoin to Litecoin, it is another call. So, you have to make a large series of calls that iterate through different trade pair possibilities in order to get a full trade history. And after you get the data, you have to run a series of reconciliations to ensure that you have all the data that you need and then build a chronological trade file from the result.
If you are trading one specific trade pair, this isn’t overly complex, but most managers make thousands of trades with many different crypto securities.
Alternatives Watch: What do all these challenges mean for managers and investors?
Morgan: Not being able to provide accurate and timely reporting will have a ripple effect. If you can’t track it, you can’t audit it, and if you can’t audit it, you can’t regulate it. This can lead to knee-jerk reactions from governments/regulators who will either try to ban crypto or put in place extensive and expensive regulation.
There needs to be investment in modern technology that can keep up with crypto.
Alternatives Watch: Thanks for sharing your insights with us, Michelle.
Morgan: Thanks for having me.
