Fidelity is the latest major financial institution to throw their hat into the ring to support cryptocurrency. On Monday, Fidelity Investments announced plans to launch a cryptocurrency exchange for their institutional clients. The digital asset platform will support both Bitcoin and Ethereum trading.
More credibility in the crypto space
Fidelity created a separate company for the launch, Fidelity Digital Asset Services LLC, to serve as their new crypto exchange platform. The new company will handle trade execution as well as custody for institutional investors such as family offices and hedge funds.
Such a public entrance of the 72-year old financial firm into the crypto space is sure to make waves. However, it also lends credibility to the fledgling asset class. Fidelity’s support is further proof that institutional investors and the legacy financial system won’t ignore crypto’s growing popularity.
Fidelity is a family-controlled firm and currently has $7.2 trillion in customer assets. They serve 27 million customers and 13,000 institutional clients. Additionally, through through Fidelity Labs and its Fidelity Center for Applied Technology (FCAT), the firm spends over $2.5 billion per year on technological innovation. FCAT prides itself being on the cutting edge of innovation, and in incubating projects in artificial intelligence and blockchain. (About FCAT)
Crypto gaining support in mainstream finance
Abigail Johnson, the Fidelity CEO has long been vocally supportive of Fidelity entering the crypto market. In a press release announcing the new exchange she states:
“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.”
Abigail Johnson, Fidelity CEO and Chairman, Fidelity Press Release
Fidelity’s top executives believe there is a gap in the crypto space for supporting institutional investors. They aim to close that gap with the new digital asset exchange.
Tom Jessop, head of the new company went on to say:
“We started exploring blockchain and digital assets several years ago, and those efforts have been successful in helping us understand and advance our thinking around cryptocurrencies. The creation of Fidelity Digital Assets is the first step in a long-term vision to create a full-service
Tom Jessop, head of Fidelity Digital Assets, Fidelity Press Release
enterprise-grade platform for digital assets.”
More and more mainstream financial institutions seem to be getting on the crypto train. In a report by Greenwich Associates, it was reported that “70 percent of institutional finance executives believe cryptocurrencies will have a place in the future of the industry”.
Institutional grade custody
One major distinction in crypto is the 24/7 market cycle. Unlike traditional markets, the crypto market never closes. Fidelity’s new spin-off aims to provide advising services 24 hours a day, seven days a week. This will help to align with the nonstop trading cycle of the crypto market.
Additionally, Fidelity plans to provide enterprise-grade custody solutions, which had previously been a hurdle for more institutional investors entering the space. Institutional investors such as foundations and endowments must have a qualified custodian for the assets under management.
While Coinbase, Gemini, BitGo (the Evolution IRA security firm) and Ledger are working on similar solutions, Fidelity is the first to offer custodianship at an institutional level. Goldman Sachs and Northern Trust are reportedly exploring custodial services as well.
Part of the risk of crypto investing is limiting susceptibility to hacking. With Fidelity’s experience in enterprise-grade security, they are confident they can provide custody as needed for institutions. The firm plans to include “cold storage,” which takes the cryptocurrency offline, minimizing the hacking risk. By leveraging their current security protocols and cryptography, the security and custody solution will also include multilevel physical and cyber controls.
Increasing institutional support
Fidelity has quietly been investigating Bitcoin and blockchain protocol for over five years. The firm began researching digital assets in their Blockchain Incubator in 2013 and has “since experimented with mining, enabled its customers to see their digital asset balances at Coinbase on Fidelity.com.” (Fidelity Digital Asset Press Release)
Bitcoin has a rising popularity for investors as a store of value. This is largely due to the technological breakthrough of the cryptography powering the blockchain and because crypto is an uncorrelated asset. In a society that is “online” all the time, the move toward a technologically based asset is more attractive than ever. Couple that with low cost global payments and cryptocurrencies and Bitcoin continue to gain traction.
With the entrance of a formidable pillar of the financial industry, it will be hard for institutional investors to deny the importance of crypto in the market much longer. In fact, the tide already seems to be turning. Major universities such as Harvard, Stanford, and MIT are already beginning to invest portions of their endowments into cryptocurrency focused hedge funds.
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