Fidelity bites on bitcoin

Fidelity’s president of the digital assets business unit, Tom Jessop says that the company is placing a long-term wager on the development of a new type of financial infrastructure. He also noted that Fidelty chief executive Abigail Johnson participates in many startup demonstrations and educational talks about cryptocurrency. This is because his group operates in an uncharted (and largely unregulated) territory.

To get a sense of Fidelity’s ambitions and what might be ahead, I visited the Boston headquarters to speak with Jessop in person and with three of his coworkers via videoconference.

Bitcoin is now the main focus. __S.4__ Christine Sandler, Fidelity Digital Assets’ head of marketing and sales, said that bitcoin was the most popular topic of interest to 90% of its largest clients up until this year. She says, “We’re dealing primarily with traditional investors, and the entry route to this space is largely Bitcoin.” She adds that interest in ethereum, a different type of cryptocurrency, “has been increasing in the past few months, but not as much as what we see in Bitcoin.”

Jessop claims that Fidelity’s cryptocurrency offering was built to support many types of currencies, but he states, ‘I don’t think we’ll ever be the best-service provider in terms of asset coverage. Jessop believes that safety, soundness and security are the most important. Given that anyone can create a cryptocurrency, Fidelity will have many questions before adding more currencies.

New interest has been sparked by the pandemic. __S.11__ “The pandemic was what really drove people off the fence. There is a scarce asset class, 21 million bitcoin, and an environment in which our currency is being debased and there’s tons of money printing. In late 2020, prominent investors like Paul Tudor Jones and Stanley Druckenmiller began to discuss bitcoin as an inflation hedge. Jessop states that this is when the match was lit.

More regulation is on the horizon, and that’s okay.Congress has enacted new rules as part of its infrastructure bill to govern how tax reporting for cryptocurrency holdings will work. In August, Gary Gensler, chairman of the SEC, stated that his agency needed more authority to supervise cryptocurrency exchanges and protect customers who might use cryptocurrency in place of traditional financial institutions.

Jessop states, “We are supportive of regulation.” Jessop says that regulations must be in line with other asset classes to allow this asset class to grow and to give investors confidence in our work. While we don’t believe it should be excessively regulated, we do think it should be as regulated as other financial products consumers and institutions buy today. Jessop claims that the blockchain technology’s operation – the system that records transactions with bitcoin and other currencies – is not the same as established banks and brokerages. Open source software code and networks supplanting entities with their headquarters, boards and directors and regular audits are some of the reasons that Jessop believes that it works differently to traditional banking and brokerages.

Fidelity aims to lobby lawmakers for the appropriate level of regulation through industry groups such as the Crypto Council for Innovation. It was formed in 2018 by Coinbase and Square, along with its own government relations staffers.

Individual investors will be able to access cryptocurrency. __S.23__

Sandler previously worked for Coinbase, which is a marketplace to buy and sell cryptocurrencies. “The ETF would make it much easier to access.

It is important to consider the environmental impacts of cryptocurrency. __S.27__ Bill Gates and Elon Musk have raised concerns about the potential environmental impacts of this new field. Terrence Dempsey vice president of product, Fidelity digital assets, says that investors are very concerned. He says that the key question is how can we ensure there are more sustainable energy sources for crypto and mining. Fidelity claims that its small-scale bitcoin mining operation is primarily powered by hydropower from Canada, and other renewable sources. However, it recently invested in Marathon Digital Holdings which mines bitcoin using coal-fired power.

Peter Jubber is the managing director of Fidelity Digital Funds. He says Fidelity’s mining activity is still small and is ‘focused to learning, experimentation and understanding how the whole bitcoin-blockchain ecosystem evolved over time. Jubber wouldn’t divulge details about the current mining operation, but Johnson claimed at a 2017 cryptocurrency conference it was making a lot of money.

Fidelity has invested capital in cryptocurrency startups. Fidelity, through a venture capital division called Devonshire Investors has invested in promising startups such as ErisX, Talos and Coin Metrics in Boston. Coin Metrics collects and publishes information related to cryptocurrency. Jessop states that these types of investments ‘keep us sharper about what’s actually occurring, which is extremely important given the speed at which things are moving.

Fidelity will support registered investment advisors. __S.38__ Jessop says that advisers want to preserve assets on the platform. “Otherwise the client wires out $X to fund their Coinbase or PayPal accounts, and purchases cryptocurrency there instead.

Fidelity believes that cryptocurrency is still in its early stages. __S.42__

Jessop states that “the rate of change will increase from here,” comparing this time period with the early days Internet when many people used America Online for access. Sandler points out that professional money managers have seen their ‘career risks’ decrease over the past few years. This will result in significant new capital flows.

Jessop believes that investors are becoming more aware of the various ways they can seek upside or offset other positions with cryptocurrency. “You’re witnessing the emergence a real asset class.”