In 2017, during the first real bull cycle for cryptocurrencies, Fidelity allowed employees to use Bitcoin to pay for lunch in the company cafeteria. To outsiders, embracing cryptocurrencies may seem like an odd choice for a long-established company like Fidelity, which was founded in 1946 and manages trillions of dollars in assets.
However, under CEO Abigail Johnson, the granddaughter of Fidelity founder Edward Johnson II, the company began dabbling in blockchain technology in 2014, including mining Bitcoin in its offices. Ta. ” Johnson said at a blockchain event in 2017.
Michael O'Reilly, Fidelity's president of digital assets, said an experiment that allowed employees to pay for burgers with Bitcoin didn't work. luck In an interview. He joked that the only people who tried it were the staff who worked on the project. But Fidelity's broader bet on cryptocurrencies has been a huge success.
The company currently offers the second-most popular Bitcoin ETF with nearly $7 billion in inflows into the hot investment class approved in January, and is rapidly gaining momentum as its competitors race to catch up. It has established an Ether custody service, giving it a head start over peers like BlackRock and Franklin Templeton, which are rapidly entering the multi-year blockchain market. As crypto prices soar again, O'Reilly and three other employees working on Fidelity's digital asset products said: luck The company is still in its infancy.
“For us, it doesn't matter whether the digital assets materialize or not,” O'Reilly said. “That's how we play in this space.”
“Qualified Custodian”
Boston-based Fidelity may have started mining Bitcoin in 2014, but its first serious foray into cryptocurrencies came in October 2018, when it began mining Bitcoin for institutional investors. It is the first traditional financial company to offer this service and plans to do so over the next four years. After that, he performed with BNY Melon. In the same month of 2018, Fidelity also launched a Bitcoin trading platform. The following year, the company formally received a license from the New York Department of Financial Services to provide trading and custody services.
Unlike exchanges such as Coinbase, Fidelity's product operates as an execution service. This means that Fidelity will act as a counterparty to every trade, and instead of matching buyers and sellers, it will find a liquidity provider for the buyer or seller. Fidelity expanded its storage and trading services to include Ether in 2022.
Fidelity product manager Terrence Dempsey said this approach not only provides more consistent pricing, but also makes it easier to bring clients into the volatile world of cryptocurrencies using a more traditional financial wrapper. said it was helpful. “We are trying to abstract away a lot of the market structure and nuances of cryptocurrencies for our customers and provide a very familiar experience,” he said. luck.
Fidelity’s flashiest crypto product is a Bitcoin ETF, but it was a custody and trading platform that helped lay the foundation for it. Fidelity is in a unique position as the Securities and Exchange Commission debates rulemaking on what types of companies are allowed to store crypto assets and how they account for them. standing.
The trust charter from DFS likely makes Fidelity fall into the main category of “qualified custodian” being considered by the SEC, and the company wrote a letter arguing that state-chartered trust companies should meet that definition. I'm sending it to the SEC. And as lawmakers battle with the agency over a controversial accounting bulletin called SAB 121, which requires custodians to record digital assets as liabilities on their balance sheets, Fidelity is a private reporting company. may deviate from the guidance provided. The proposed practices are still under development.
Unlike its publicly traded peers, Fidelity is privately held, with the Johnson family still holding 49% of the stock and voting power, according to SEC filings. In addition to avoiding the potential pitfalls of SAB 121, O'Reilly said the company's private status allows it to take a longer-term view into sectors that competitors have avoided, such as cryptocurrencies. Stated. “Being a private company is a huge advantage there,” he said. luck.
Bitcoin ETF
When the SEC approved the initial slate of Spot Bitcoin ETFs in January, eight of the 10 issuers scheduled to launch, including BlackRock, chose Coinbase to store their Bitcoin. The only exceptions were VanEck, which partnered with the Winklevoss twins Gemini, and Fidelity, which opted for its own storage service.
It may seem surprising that all the other issuers currently embroiled in litigation with the SEC have joined Coinbase, especially given that Fidelity serves as a clear alternative. do not have. But even though Fidelity's custodian service is technically part of a separate subsidiary from Fidelity Investments, which issues Bitcoin ETFs, it remains a challenger to other issuers.
“As a company, we offer ETPs, or exchange traded products,” O'Reilly said. “In many cases, you don't want to transfer your ETP's assets to a competitor.”
Cynthia Roe Bessette, head of Fidelity's internal ETF team, said she expects this to change as issuers begin to hire secondary custodians for their products. “Diversification seems to be on people's minds,” she said. luck.
But Fidelity's own ETFs are thriving despite not serving as a custodian for other issuers. The firm’s Wise Origin Bitcoin fund is the second-largest, according to Bloomberg data. inflow The new ETF has a value of nearly $7 billion, second only to BlackRock.
Coin Tacky Derby Update #bitcoin ETF. Groupwide sales last week were -$888 million. The outflows were likely related to bankruptcies, most of which were Gemini/Genesis sales. I *expect* it to slow down over the next week. They had a total of approximately $3.9 billion in funds. $GBTC sell. pic.twitter.com/qXiog228z8
— James Seyffert (@JSeyff) March 25, 2024
Bessette pointed to Fidelity's structure as a competitive advantage, saying it acts as a sole issuer that relies on its own custodial and trading services, and provides unique metrics for pricing. . “The way we designed this product is as a full stack product for Fidelity,” she said.
Amid speculation that the issuer sector will consolidate over the next year, Bessette demurred, saying it was up to individual sponsors to decide whether their product scale was worth continuing to operate. Ta. Despite the arms race over fees, inflows to the worst-performing funds were less than $400 million, and WisdomTree had raised only about $60 million as of March 25.
What's next?
Bitcoin ETFs remain Fidelity's top crypto product, but the company still plans to expand its offering. Fidelity is one of his seven companies hoping to: launch The Spot Ether ETF is pending approval process with the SEC, but analysts expect it to be rejected by the May deadline.
Still, Ether represents a strong new area for Fidelity. Unlike Bitcoin, which operates on an energy-intensive proof-of-work consensus model, Ethereum switched to proof-of-stake in 2022. This means that Ethereum holders can receive yield in exchange for staking their assets.
Although Fidelity does not currently offer staking services, Bessette said the company is considering iterating the product that includes staking. On March 18, Fidelity amended the ETF application to include a provision that would allow the fund to contribute a portion of its assets.
The SEC is likely to deny the ETH ETF application, and recent SEC lawsuits against companies like Coinbase and Kraken that offered staking-as-a-service products have made staking itself extremely difficult. Regulatory uncertainty may still prevent Fidelity from entering this space. .
Dempsey said Fidelity's digital asset subsidiary also wants to launch trading and custody services for other cryptocurrencies. “We didn’t aim to be a Bitcoin and Ethereum only shop,” he said. luckHowever, regulatory challenges regarding the security status of various assets, including Ether, remain a challenge.
Bessette said Fidelity is exploring the potential of tokenization, as competitors such as Franklin Templeton and BlackRock have begun tokenizing various assets, including money market funds. I refused.
While Fidelity may be moving faster than many of its TradFi peers, it still sits somewhere between crypto-native companies like Coinbase and mainstays like Vanguard. The result is a methodical approach that furthers blockchain experimentation while remaining wary of regulators.
“In cryptocurrencies, years are almost like decades,” O'Reilly said. luck. “That’s really what gave us an advantage.”
