For six years, Fidelity Investments has been laying the foundation for a major play in the world of cryptocurrency.
In 2015, the Boston investment firm started to dabble in bitcoin “mining,” using high-powered computers to produce new digital coins — an activity that continues today. It now offers custodial services to large institutional investors who want a safe place to stash their bitcoin holdings. In March, Fidelity announced its intention to create an exchange-traded fund to give individual investors access to the volatile cryptocurrency. (The Securities and Exchange Commission hasn’t yet green-lit any funds that would hold cryptocurrency.) And this summer, Fidelity said it will add about 100 new jobs to its “digital assets” team, on top of a headcount of about 150.
Tom Jessop, president of the digital asset business unit at Fidelity, says the company is making a long-term bet on the emergence of a new kind of financial infrastructure. And he notes that Fideilty chief executive Abigail Johnson often participates in startup demonstrations and educational talks related to cryptocurrency — observing that it’s helpful to have support at the top, especially since his group is operating in uncharted (and mostly unregulated) terrain.
To get a feel for Fidelity’s ambitions, and what may be ahead, I dropped by the company’s Boston headquarters to talk with Jessop, in-person, and with three of his colleagues via videoconference.
Bitcoin is the key focus now. While the cryptocurrency world sees regular cycles of hype around newly created cryptocurrencies, Fidelity is focused for the moment on bitcoin, which was born in early 2009. Up until earlier this year, says Christine Sandler, head of sales and marketing for Fidelity Digital Assets, 90 percent of what Fidelity’s biggest clients were asking about was bitcoin. “We’re dealing with the more traditional investors, and the entry vehicle to this space is largely bitcoin,” she says. But she adds that the interest for ethereum, another type of cryptocurrency, “has been escalating in the last few months, but it’s not anything close to what we see in bitcoin.”
Jessop says that Fidelity built its cryptocurrency offering to support many different types of currency, but he says, “I don’t think we’ll ever be the most full-service provider, in terms of asset coverage.” Jessop says that “safety, soundness, and security” come first — and given that essentially anyone can invent a new cryptocurrency, Fidelity will ask lots of questions before adding newer currencies.
The pandemic has sparked new interest. Large institutional investors were learning about cryptocurrency before the pandemic, but may not have actually purchased any prior to last spring, Jessop says. “What really got people off the fence was the pandemic, because you’ve got this scarce asset class — there will only ever be 21 million bitcoin created — and an environment where our currency is being debased, and there’s a ton of money printing.” Then, starting in late 2020, high-profile investors such as Stanley Druckenmiller and Paul Tudor Jones began to talk about bitcoin as a hedge against inflation. “That’s when the match was set to the bonfire,” Jessop says.
More regulation is coming, and that’s OK. Congress is enacting new rules, as part of the infrastructure bill, around how tax reporting will work for cryptocurrency holdings. SEC chairman Gary Gensler said earlier in August that his agency needs more authority to oversee cryptocurrency exchanges and protect consumers who may use cryptocurrency as an alternative to traditional financial institutions.
“We’re supportive of regulation,” Jessop says. ”For this asset class to grow, and for investors to have trust in what we and others are doing, you need regulations commensurate with other asset classes. We’re not saying that it should be overregulated, but we think that it should be regulated consistent with other financial products that consumers and institutions purchase today.” But Jessop says that the way that blockchain technology works — the system of digital ledgers that record transactions with bitcoin and other digital currencies — is different from the way established banks and brokerages operate, with open source software code and networks of servers supplanting entities with headquarters, boards of directors, and regular audits.
Fidelity is trying to educate — and lobby — lawmakers for what it considers the right level of regulation, through industry groups like the Crypto Council for Innovation, which it formed in 2018 with companies like Square and Coinbase, and its own government relations staffers.
The plan is to give individual investors access to cryptocurrency. While most of Fidelity’s cryptocurrency offerings so far, like a fund called Wise Origin Bitcoin Index fund, have targeted wealthy individuals or hedge fund managers, Fidelity may soon offer an exchange-traded fund bearing the Wise Origin name to other customers, pending the SEC’s approval.
“If someone just woke up one day and said, ‘I need to have exposure to bitcoin,’ their options are limited,” and often carry high fees, says Sandler, who previously worked at Coinbase, a marketplace for buying and selling cryptocurrencies. “The ETF would be a much more accessible product.”
The environmental impact of cryptocurrency is a concern. The “mining” of cryptocurrencies with high-powered computers is an energy-intensive process, as are the transactions that use them. Figures like Elon Musk and Bill Gates have called attention to the environmental impact of the new field. “Investors definitely are concerned,” says Terrence Dempsey, vice president of product at Fidelity Digital Assets. A key question for the future, he says, is “how do we make sure there are more sustainable energy sources going toward crypto and mining in particular?” Fidelity says its own small-scale bitcoin mining operation relies predominantly on hydropower from Canada and other renewable sources, but it has recently invested in other companies, including Marathon Digital Holdings, that mine bitcoin using power from coal-fired plants.
Fidelity’s own mining activity, says Peter Jubber, managing director of Fidelity Digital Funds, is still fairly small scale, and is “focused on learning, experimentation, and understanding how the entire bitcoin-blockchain ecosystem has evolved over time.” Jubber didn’t want to divulge specifics about the size of the mining operation today, but Johnson boasted at a 2017 cryptocurrency conference that it was making “a lot of money.”
Fidelity is putting capital into cryptocurrency startups. Through a venture capital division called Devonshire Investors, Fidelity has invested in promising startups like ErisX, Talos, and Boston-based Coin Metrics, which collects and publishes data related to cryptocurrencies. Those kinds of investments, Jessop says, “keep us sharper on what’s actually happening, which is super-important given how fast things are moving.”
Supporting registered investment advisers will be key for Fidelity. Financial advisers who rely on Fidelity for trading and custody services want to see cryptocurrency options integrated into Fidelity’s existing portfolio management technology. “Advisers want to keep assets on the platform,” says Jessop. “Otherwise, the client wires out X amount of dollars to fund their Coinbase account or their PayPal account,” purchasing cryptocurrency there instead.
Fidelity believes we’re still in the early days of cryptocurrency. Digital assets like bitcoin and ethereum are just one planet in an expanding cryptocurrency universe; people are building all sorts of new ways to conduct transactions, sell one-of-a-kind digital collectibles, replace physical certificates of security ownership, and send cross-border remittance payments that will all rely on blockchain technology and various types of cryptocurrency.
“The rate of change will get faster from here,” Jessop says, comparing this era with the early days of the Internet, when many people used America Online to access it. Sandler notes that the “career risk” of professional money managers adding this wacky new kind of asset to a portfolio has also diminished markedly over the last few years, which will bring in major new flows of capital.
And as investors get more educated about different ways to seek upside, or counterbalance other positions with cryptocurrencies, Jessop says, “You’re seeing the emergence of a real asset class.”