Legal entity identifiers were a post-financial-crisis innovation designed to facilitate transparency of corporate interconnections of the sort that made transactions tied to the Lehman Brothers bankruptcy notoriously difficult to unravel.
The Global Legal Entity Identifier Foundation (GLEIF) was established in 2014 to maintain the standard and carry the mission forward on an international scale. By now, with the U.S. Office of Financial Research LEI tracker showing more than 2.8 million entities registered worldwide (the U.S., U.K., France, Germany, China and India combined account for 1.2 million of them), more far-reaching goals and challenges lie ahead.
Promoting “Trust as the Foundation of Global Economy,” as goes the title of a 10th anniversary article on the GLEIF website, the organization is looking to bring LEIs into line with a financial industry that is rapidly digitizing and demonstrating ways to tokenize assets on blockchain, or distributed ledger technology.
The vLEI, or verifiable LEI, enhancement is designed to be compatible with digital and tokenization platforms, explains Alexandre Kech, CEO of GLEIF since last June. Having served previously as digital securities business head at SDX (Swiss Digital Exchange), the digital-assets unit of Zurich-based SIX Group, and with Bank of New York Mellon, Swift, Onchain Custodian (which he co-founded) and Citi Ventures on his c.v., Kech succeeded Stephan Wolf, who had led GLEIF since its inception.
GLEIF announced on January 14 an initiative with the U.K. business registry Companies House to simplify online access to registration data and streamline Know Your Customer (KYC), Know Your Supplier (KYS) and other due diligence processes. Kech said the two organizations “are on a mission to drive corporate transparency, bringing significant benefits to global marketplaces engaging with the U.K.”
While many industry players have been working to address blockchain-based infrastructure issues such as data portability, GLEIF is in a position to support identification and credentialing across platforms. Before Kech came on board, the foundation had realized that using only an Ethereum digital identity, for example, “would not work because another blockchain would not want to use the other blockchain identity system, just based on competition,” the CEO said.
GLEIF Chief Executive Alexandre Kech
The vLEI can reconcile across blockchains because it is available on web 2.0 and cloud-based platforms, according to Kech. After starting with use cases for authenticating and verifying companies, and digital signatures of documents, GLEIF is piloting the vLEI with the European Banking Authority.
Conversations around vLEI are ongoing with other organizations pursuing interoperability initiatives: Chainlink and its Cross-Chain Interoperability Protocol (CCIP); LayerZero; and the Swift interbank communications cooperative.
“We are in testing mode, implementation mode, a conceptualizing mode of how this would apply to the various use cases that would be on blockchain, like digital assets, central bank digital currencies, tokenized money, stablecoins, everything,” Kech comments.
If a crisis occurred involving digital currency, vLEIs could play a key verification role.
“In a public chain where there is a lot of fraud or fake tokens,” Kech says, “that would help to verify and identify the issuer of a token.” The vLEI could also verify a digital wallet accessing a particular token.
The vLEI is modeled on established authentication technologies, like those guarding against hacks of retail customers’ financial information, Kech adds.
Allan Grody, president and founder of Financial InterGroup and a longtime observer and critic of the LEI implementation, says that responsibility for a blockchain standard should rest with a different organization that is better suited to other industries.
“Establish another entity, separate from the Financial Stability Board [the G-20-chartered body that founded the GLEIF], under the auspices of the appropriate global, neutral institution, perhaps the World Trade Organization (WTO),” Grody suggested in an exchange of emails.
Allan Grody of Financial InterGroup
“The WTO has 166 member governments, accounting for 98% of world trade and, in my opinion, is a better place to embrace the LEI for commercial trade and digital commerce. It will lessen the distraction of the GLEIF and allow it to focus solely on the financial sector where there is still lots left to do.”
Grody contended that because GLEIF has unfinished business, it would be wiser not to put much more on its plate. It is well short of 20 million LEIs. According to Grody, that was a target discussed by a Financial Stability Board private-sector advisory group of which he was a member.
GLEIF has never stated that number as a goal, a representative of the foundation said.
Grody is also concerned about “apparent abandonment of establishing relationship hierarchies between related intermediate/ultimate parent LEIs. This was so fundamental at the outset to being able to observe the contagion of systemic risk.”
The GLEIF representative commented that each registered LEI has information collected on its direct and ultimate accounting consolidation parents, as set by GLEIF’s Regulatory Oversight Committee, and there are no indications from regulators of any changes to this policy or process.
The Global LEI System is endorsed by the Financial Stability Board and G-20.
Allan Mendelowitz, architect of the ACTUS standard, which is designed to close analytical gaps in financial data, sees the vLEI as useful for tokenized transactions.
“Tokenization holds all sorts of promising value for the legacy world,” says Mendelowitz, president of the ACTUS Financial Research Foundation and ACTUS Users Association. “Anytime you increase transparency and verifiability with respect to who you’re dealing with and what you’re dealing with, that should be good in finance.”
Blockchain, however, introduces complications.
“If your verified LEI includes both a unique identifier for the counterparty, as well as the individuals who have the authority to enter into such contracts, you are introducing counterparty identifiers that chip away at the anonymity,” the ACTUS leader says. “If you're a blockchain purist, that's not something you should be enthusiastic about.”
The vLEI’s greater value and importance, above that of the original LEI standard, is in standardized representation of obligations. “You'll not only know who your counterparty is,” as Mendelowitz puts it. “You'll also know who is transacting on the other side of your contract on behalf of that counterparty, and that the person you're transacting with has the authority to do this.”
Bringing that level of security to tokenized financial instruments could make custody and settlement much easier and, by extension, make the digital-asset space safer for big banks and institutional use cases.