Fidelity’s New Crypto Startup Could Spark Wall Street Investment
Blockchain and cryptocurrency advocates have been waiting for large financial institutions to shed their wariness and begin investing meaningful amounts of money into the emerging technology. The sector may have gotten a significant catalyst on Monday, when Fidelity Investments announced it created a separate venture that will offer digital currency services to hedge funds, family offices, market trading firms, and other institutional investors.
The move is a noteworthy endorsement of Bitcoin and other cryptocurrencies by one of the largest financial services firms in the world. Boston-based Fidelity, which manages more than $7.2 trillion in client assets, has been one of the traditional finance sector’s most active blockchain/crypto experimenters. It has run a profitable cryptocurrency mining operation, and its independent public charity organization allows philanthropists to donate to nonprofits using digital currencies. The creation of Fidelity Digital Assets sends an even stronger signal that Fidelity views crypto assets as an important piece of the finance industry’s future—and as a viable business today.
The “fantastic” news is another signal that the cryptocurrency industry is maturing, wrote Dave Balter, co-founder and CEO of Boston startup Flipside Crypto, in an e-mail to Xconomy. “Expect more institutions to follow and for stronger technical solutions to be coming to market,” he added.
Matt Walsh, a co-founder and partner with blockchain/crypto venture firm Castle Island Ventures, also thinks Fidelity’s startup could push other financial services giants to wade deeper into blockchain systems and cryptocurrencies. (Think State Street, JPMorgan Chase, or Citigroup, perhaps.) Walsh was previously a Fidelity vice president who worked on some of its blockchain initiatives.
“I think a lot of traditional financial services firms have been outright dismissive of public blockchains,” Walsh said in a phone interview. “They will certainly have some re-evaluation to do after today.” (Both he and Balter attended an event in New York on Monday during which Fidelity announced the new venture.)
Fidelity’s move isn’t a huge surprise, given its crypto projects and CEO Abigail Johnson’s comments last month that the company might be announcing new blockchain and cryptocurrency-related products and services by the end of the year.
The new venture’s services include helping clients trade cryptocurrencies and handling “custody” of digital assets—meaning it will oversee the storage of clients’ crypto assets and take steps to secure them, including using offline storage. That service puts it in competition with the likes of Coinbase, BitGo, and Digital Asset Custody Company.
“In our conversations with institutions, they tell us that in order to engage with digital assets in a meaningful way, they need a trusted platform provider to enter this space,” said Tom Jessop, head of Fidelity Digital Assets, in a prepared statement. “These institutions require a sophisticated level of service and security, equal to the experience they’re used to when trading stocks or bonds.”
Fidelity’s reputation and experience working within the financial regulatory system could add legitimacy to its digital currency custody offering, and perhaps go a long way toward winning over hedge funds and other institutional investors, Walsh said.
“Custody is, in my opinion, the single-biggest barrier to further institutional adoption” of digital currencies, Walsh said. The industry needs “custodians that can fit within the regulatory regimes of large institutional investors.”
He thinks Fidelity will accomplish that. It wasn’t clear from Fidelity’s press release whether it has held conversations with regulators about the new venture or received any relevant approvals.
Despite its track record in the traditional finance world, Fidelity’s new venture will face the same challenges as every other startup in the young blockchain/crypto sector, Balter said.
“The tech and processes are still nascent,” Balter wrote. “And regulation is still unclear. Every day we are seeing forward progress, but it will take time. [Fidelity’s announcement] is one big leap forward.”