Fidelity blindsides cryptocurrency industry with heavy entry

Andrew Munro

Posted: 16 October 2018 6:49 pm News

This is some of that institutional investment everyone's been talking about.

Fidelity is a Wall Street giant, even by the standards of Wall Street giants. It administers $7.2 trillion in assets for its 27 million customers and spends $2.5 billion per year on tech in an effort to compete with tech companies on their own turf in the fields of artificial intelligence, virtual reality and blockchain.

As is usual for its tech ventures, these experiments take place away from Fidelity's retirement and mutual fund bread and butter.

Such is the case with Fidelity's new crypto company, Fidelity Digital Assets.

Going loud

The idea of commercialising a standalone Fidelity crypto company only came along in the middle of last year said Tom Jessop, head of Fidelity Digital Assets. But Abigail Johnson, Chairman and CEO of Fidelity Investments, has been following and trading in the cryptocurrency space as early as 2014, with ventures including a New Hampshire bitcoin mining farm in 2015.

Johnson "is very interested in this and stays up on developments in the space in quite a significant way," Jessop says.

News of Fidelity's entry just broke today, and no one knew about it in advance, Barron's says. Overall, the completeness, sophistication and market-readiness of Fidelity's solutions, coupled with its readiness to invest heavily in cryptocurrency's future, might come as a shock to many.

This isn't unusual for its tech ventures though. It's still mostly thought of as a financial services company, and as a non-public family-owned company, its spending doesn't attract the same scrutiny as other companies. If anyone could blindside the cryptocurrency industry with such a heavy landing, it would probably be Fidelity.

"You might look at the crypto world and say, 'Wow, is this a new thing?' but we've been managing key materials for a long time," Jessop said. "We took our learnings in how to run enterprise security, then through our exploration of bitcoin and some of the people we've hired, quickly developed some of the crypto native expertise and federated the two of those things."

In this way, Fidelity has been an under-the-radar crypto company for years, only stepping into the light today.

Fidelity Digital Assets

Its services will initially be available to institutions such as hedge funds, endowments and family offices, but not to retail traders. These services will initially include ways of trading bitcoin and Ether through an existing internal crossing engine and a smart order router.

However, the most significant piece of it might be that it's also offering vaulted cold storage crypto custody solutions.

This is so important for a number of reasons:

• It's been an elusive element for a long time. Despite all the wider institutional interest from Wall Street, custody and its associated security issues have been the most common stumbling block. This is why firms like Goldman Sachs and Morgan Stanley copped out with bitcoin derivatives instead. Essentially, they just started selling financial products linked to bitcoin prices, rather than "physical" bitcoin itself.
• Physical bitcoin solutions like Fidelity's offering mean cryptocurrency markets can actually start responding to demand from institutional traders who use them.
• It might be the first or second major physical institutional bitcoin solution to hit the market, facilitating the process of real, formal bitcoin price discovery for the first time. The only other similar solution moving to market right now is Bakkt, a digital asset platform operated by Intercontinental Exchange. Bakkt will be launching its physical bitcoin futures derivatives in November, while Fidelity Digital Assets is onboarding its first clients now and expects to be available in early 2019. The arrival of both of these within a couple of months of each other, where previously there were zero, might be reasonably expected to have substantial market impacts.

It's not yet known which crypto exchanges Fidelity Digital Asset customers will be purchasing through, via Fidelity, but Jessop says all counterparties will be subject to Fidelity's usual standards.

"We have a pretty extensive onboarding procedure for these types of counterparties, which involves diligence on their financial strength as well as their regulatory procedures like 'know your customer' and anti-money laundering. We are certainly only going to connect to those counterparties that we feel good about," he said.

As for the bear market, Jessop isn't concerned.

"I think for some people, price is a significant indicator of market health, but that’s not how we think about it," he said to Barron's. "We think about institutional demand irrespective of price. We think about the application of technology to new assets. I don't think our success as a business is predicated upon bitcoin at a specific price. It isn't."

Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.

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