Fidelity is taking yet another enormous step into the cryptocurrency industry. We’ve talked about how Fidelity is taking steps to offer cryptocurrency products. Fidelity is entering the markets full force! Are you excited? We’re excited!
The 72 year old firm will be launching a separate company called Fidelity Digital Asset Services that will handle cryptocurrency custody and trading for institutional investors.
Abigail Johnson, Fidelity Investments Chairman and CEO, said in a press statement: “Our goal is to make digitally native assets, such as Bitcoin, more accessible to investors. We expect to continue investing and experimenting, over the long-term, with ways to make this emerging asset class easier for our clients to understand and use.”
The idea of commercializing a platform for cryptocurrencies and having a separate company handle it began as an idea in the middle of 2017, according to Tom Jessop, head of Fidelity Digital Assets.
Currently, Fidelity Digital Asset Services (FDAS) is only available to institutions, such as hedge funds, endowments, and family offices. FDAS is not available to the retail investor.
Jessop continued, saying: “We saw that there were certain things institutions needed that only a firm like Fidelity could provide. We’ve got some technology that we’ve repurposed from other parts of Fidelity – we can leverage all of the resources of a big organization.” He added that Fidelity already works with 13,000 institutional clients.
Fidelity currently administers $7.2 trillion in customer assets, has 27 million customers, and spends $2.5 billion per year on technology. This is possible through projects on artificial intelligence and blockchain. FDAS was born out of Fidelity Center for Applied Technology (FCAT).
FDAS will handle custody of the cryptoassets safely. This can be a challenge in this industry. This challenge is currently being tackled by Crypto companies like Coinbase, Gemini, BitGo, Ledger, and ItBit. Nomura, a Japanese bank, also announced plans in May to offer crypto custody. Goldman Sachs and Northern Trust are also reportedly exploring crypto custodial services. But until now, there was a noticeable lack of a big US based firm like Fidelity officially entering the space.
A big part of the risk in cryptocurrency investing is the very high risk of hacking. As of the start of July, $1.6 billion in cryptocurrency had been stolen from clients, according to CoinDesk’s 2018 State of Blockchain report. This risk has been a deterrent for large financial institutions from entering the space.
Focusing in on Cybersecurity
Fidelity has dealt with enterprise security, as well as public and private key cryptography, to ensure operational security. Its custody solution will include vaulted “cold storage”, which involves taking the cryptocurrency offline, and multilevel physical and cyber controls. Fidelity also plans on implementing other security protocols that have protected Fidelity and adhering to its security principles from other parts of its business.
“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. 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,” Jessop remarked.
Despite the crypto bear of 2018, acceptance and adoption by institutions is growing. While retail investor interest has waned, institutions have quietly started to take a stand towards researching and potentially offering products in the future, if not outright adopting it.
David Swensen, Yale’s chief investment officer who manages the school’s $29.4 billion endowment, has invested in two funds dedicated to cryptocurrencies. Other well-known endowments, such as Harvard, Standford, Dartmouth, MIT, and UNC, have also reportedly made investments in at least one cryptocurrency fund, The Information reported.
Fidelity’s bold move may encourage more endowments to do so.
FDAS, on top of storing cryptocurrencies, will attempt to make trade executions smarter and faster. Using a smart order router, Fidelity institutional customers will be able to execute trades for Bitcoin, Ether, and other assets at multiple market venues. Jessop didn’t clarify which venues would be included, but did add that any venue chosen will have the same “Fidelity standard” applied in other parts of the business.
“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,” Jessop clarified.
FDAS is the result of Johnson’s early interest in cryptocurrency. The CEO had an interest in cryptocurrencies, one of the riskiest and most volatile asset classes of the past year, as early as 2014.
Fidelity even “mined” Bitcoin when Bitcoin’s price was around $180.00, and has a partnership with Coinbase that allows Fidelity customers to check their crypto balances on the Fidelity app.
Johnson “is very interested in this and stays up on developments in the space in quite a significant way,” Jessop remarked. Jessop joined Fidelity in January and had previously spent 17 years working for Goldman Sachs.
FDAS, a stand-alone company, has around 100 employees and will be headquartered in Boston. They’re in the process of onboarding their first clients and will be in the market and generally available in early 2019.
Cryptocurrencies are still struggling, however. Bitcoin is down more than 50% from their all-time highs. Jessop stressed that Fidelity nor its clients distracted by price. He compared the tech’s long-term potential with the internet and how it revolutionized financial services.
Ending, Jessop remarked: “No one said when some of these early-stage Internet companies in 2000 were going out of business, ‘Gee, the Internet is toast.’ We don’t focus too much on the price. It’s a foundational technology – people are trying to get exposure to the trend and expect volatility in the assets themselves.”
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