Is Crypto Post-Trade Reporting on the Horizon?

Financial reporting requirements around trading instruments are crucial for compliance. However, when it comes to cryptocurrencies, this becomes complex.

Post-trade reporting requires a timebound publication of all trade-related data to regulators. The methods and technicality vary with asset classes. For Europe, these reporting requirements were defined under the EMIR and MiFIR regimes.

However, cryptocurrencies are an oddball to this system. These instruments came into existence a little more than a decade ago but have caught mainstream attention in recent years. Despite the global popularity of cryptocurrencies, regulations around them are still murky.

The lack of a proper definition of cryptocurrencies and its clarification have kept the requirement of their post-trade reporting out of the regulatory jurisdiction. However, the same does not apply to crypto derivatives, the instruments which are now listed on several mainstream trading venues.

“The main post-trade regulatory reporting requirements are for crypto derivatives that fall under existing derivative reporting regulation such as EMIR in the EU/UK, CFTC Dodd-Frank in the US and MAS and ASIC OTC Derivative Reporting rules on Singapore and Australia,” Ron Finberg, the Director of Global Regulatory Reporting Solutions at IHS Markit, explained to Finance Magnates.

In Europe, the European Securities and Markets Authority (ESMA ) is yet to come up with a clear post-trade reporting regime for cryptocurrencies. However, a guideline issued by the pan-European agency in January 2019 still remains the only available reporting guidance.

The regulator then stated: “Our survey of NCAs highlighted that some crypto-assets may qualify as MiFID financial instruments, in which case the full set of EU financial rules would apply. However, because the existing rules were not designed with these instruments in mind, NCAs face challenges in interpreting the existing requirements, and certain requirements are not adapted to the specific characteristics of crypto-assets.”

The guidance does not provide a clear picture of the crypto post-trade reporting regime, but it still is the basis of cryptocurrency post-trade reporting to date. However, the scope of it is only limited to crypto derivatives and not the underlying crypto assets.

For non-EEA and non-UK listed crypto derivative products, the post-trade reporting should be done under EMIR. The non-listed cryptocurrency derivatives, like crypto contracts for differences (CFDs), also need to be reported under the same regime.

Though there is a reporting requirement for UK and EEA-listed cryptocurrency derivatives, these products do not exist yet. Exchange-listed crypto derivatives are currently available on only two United States-based exchanges, Cboe and CME.

“Due to the fact the EMIR Reporting Rules were not designed with these instruments in mind, there isn’t a category that perfectly fits a cryptocurrency, and, therefore, some interpretation is required in order to report these instruments,” Quinn Perrott, the Co-CEO and Founder of TRAction, explained an earlier post.

“At this stage, the wider derivative industry and Trade Repositories suggest reporting under the commodity asset class as a cryptocurrency does not have an ISO standard currency code, which is required for it to be reported as a currency.”

Crypto Reporting Requirements Are Coming?

The growing size of the cryptocurrency market and the increasing demand on both the retail and institutional fronts have also spurred the demand for bringing cryptocurrency post-trade reporting, not only with derivatives but also with the trading of assets.

Additionally, a survey conducted by IHS Markit (now a part of the S&P Global) revealed that 51 percent of the participants are expecting cryptocurrency post-trade reporting regulations in the coming three years.

The participants of the survey include banks, asset managers and brokers along with various financial and non-financial institutions. Many of them see these regulations to be implemented in the United States, European Union, the United Kingdom, Switzerland and even Singapore.

Moreover, the expectation of the financial industry companies for crypto post-trade reporting was fueled by the listing of the digital asset investment instruments on mainstream platforms. The first Bitcoin ETF was launched by Purpose Investments in Canada in February 2021 and Proshares followed it with the first US launch in October.

“Cryptocurrencies remain largely unregulated around the world, but if their importance continues to grow at the pace they are sure to attract regulatory scrutiny,” the IHS Markit report stated.

Further, the recent collapse of the stablecoin project, Terra, is pushing the regulators to expedite their efforts to bring crypto regulations. The regulators in the United States and the United Kingdom are among the ones who are evaluating the market situation after the crash of the project.

“At the moment the SEC and CFTC are assessing the underlying cryptocurrencies and whether they fall under the designation as a security or derivative and would be under the scope for existing reporting regulations in the US,” Finberg added.

“Of specific interest to many is whether stablecoins will be designated as derivatives. If yes, as an OTC product it would trigger any transactions in them to fall under CFTC reporting, which will be a big challenge for firms to comply with.”

But How?

Despite the willingness of the regulators, implementing crypto regulatory regimes are not easy. The decentralized nature of the assets makes it hard to enforce controls. Also, the debate around properly classifying crypto assets remains.

“There is plenty of existing reporting regulation that regulators can lean on to use for cryptos, and there is no need to ‘reinvent the wheel’ for cryptos,” Finberg said. “But, what is needed are clear examples from regulators on how to report crypto transactions within the existing framework. For example, clear guidance if they fall under the commodity or FX asset class. If the latter, how should currency codes be entered since cryptocurrencies don’t have an approved ISO 4217 currency code.”

The introduction of crypto regulations now looks imminent. The only question that remains is how the regulators would implement the regulation in an industry that is decentralized. Furthermore, the requirement of post-trade reporting on crypto assets (not derivatives) would also address the issue of wash trading on exchanges, making the industry more transparent.