Fidelity Investments, the world’s fifth largest asset managers with $2.5 trillion under management, is launching a Bitcoin custodial product aimed at institutional investors to expand its “Digital Asset” service.
Scheduled for a March 2019 launch, the offering comes after Fidelity announced support for cryptocurrencies in 2018 and introduced trading services for accredited firms and family offices. However, individuals cannot obtain these services yet.
Popular opinion from those in crypto circles states institutional entry into the burgeoning market could save plunging prices and bring forth needed development. Currently, Wall Street is devoid of a trusted name for facilitating cryptocurrency trading, custody, or wallet services—but firms like Fidelity are looking to spearhead development in this regard.
In a statement, the company noted a “select set” of clients are currently offered Fidelity’s custodial services, via its “Digital Assets” subsidiary and has been a proponent for digital currencies, unlike some Wall Street rivals.
Fidelity recognizes that cryptocurrencies are a strong contender as an alternative investment vehicle in the future. In an Oct. 18 blog post, the firm stated that while currently used cryptocurrency wallets are built with sophisticated features such as multi-signature protocols and offline storage, they are largely inadequate to serve institutional needs:
“For institutions, the most pressing unanswered question is how—if they choose to hold digital assets for their customers—these assets will be secured. The answer is that full-service institutional custody solutions are needed— solutions as equally robust as those provided for traditional assets.”
However, the presence of traditional companies building a “trusted” name for cryptocurrencies is somewhat contradictory—digital assets were, after all, created to decouple money from outside institutions.
The Rise and Fall of Trusted Safekeeping
While asset safekeeping was optional for investors until the early 1900s, the U.S. stock market crisis of 1929 compelled the public to turn towards banks and big-name financial companies to protect their investments, through mechanisms such as share certificates.
Fast forward to the 2000s, centralized bodies now form the backbone of the modern financial world. Together, over trillions of dollars of customer assets are managed by a few hundred players in a largely opaque system.
But pitfalls such as the Asian stock crisis of 1997, the subprime mortgage crisis of 2008, and hyperinflation in places like Venezuela and Zimbabwe mean that individuals are rethinking the accountability and trustworthiness of some financial institutions. Public ledgers and cryptocurrencies, in this regard, may help with democratizing finance and could help identify shortcomings in popular securities, derivatives, and even currencies in the near future.
Despite a decentralized and global financial system already operational in the form Bitcoin and related cryptocurrencies, a lack of meaningful traction for the innovations suggest trusted entities are still required—mainly to derisk ownership of holding private keys.
Millions of dollars worth of cryptocurrencies have been stolen from the industry’s biggest exchanges, like Mt.Gox, Bitfinex, and CoinCheck. It seems unlikely that large institutions would trust crypto-startups with their finances, but perhaps that could also change with time.
The scenario above creates a paradox. Institutional investors and “smart money” will not enter the crypto markets until there are trusted services, and trusted services will not invest in a custodial product unless there is proven demand.
Here is where Fidelity is willing to take the plunge. The company is investing in an unproven sector, and if it gains traction among institutional players, the cost of the investment could be small in comparison to the potential upside.
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