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Last October Tom Jessop stepped on stage at an industry conference in New York to debut to the world Fidelity's ambitions to launch a new crypto trading and custody business, Fidelity Digital Assets.
"We built a lot of the capabilities underlying this platform months and years ago," Jessop, who leads the business, said at the time.
Now, part of the platform is live — with five clients. To start, the firm is offering bitcoin custody for crypto native firms, Jessop told The Block in an interview at the Chamber of Digital Commerce's DC Blockchain Summit in the nation's capital.
Jessop, a soft-spoken veteran of the financial services world, has 17 years experience at investment banking giant Goldman Sachs in his pocket, and he has the Wall Street know-how and gray streaks to prove it.
In the interview, he confirmed The Block's earlier reporting that Fidelity is taking a slow and steady approach to the nascent crypto world, which counts few Wall Street firms as supporters. Jessop also painted a picture of firm's trading business, which will help clients execute trades across various markets; and shared details about a recent survey the firm conducted of investors in the market about digital assets.
Following is a conversation between Jessop and The Block's Senior Correspondent Frank Chaparro (edited for clarity and brevity).
Chaparro: The firm is starting with just a few clients. But you are accepting new applications and are obviously taking in all sorts of feedback. Has any of that feedback changed the roadmap from where you saw it six months ago?
Jessop: That's a great question. I think we started with what I'll call "crypto-native" types — so a lot of crypto hedge funds showed interest early on. I think following that, we've seen interest from hedge funds that have convinced their management to allocate reasonably large amounts of capital to the asset class, which is a positive. We have gotten inquiries from family offices, some of whom already are allocated, and want to move assets into our custody, others that have dollar-based mandates, but won't activate until there's a custodian.
Then, we're also seeing, quite frankly, even from the advisor community, interest from financial advisors, and then a little bit from the pension and endowment world. I wouldn't say that those are clients that have done their work and are ready to allocate, but I think more have done work, and as part of their exploration are talking to service providers. That to me is kind of the most interesting. If you had asked me six months ago, or nine months ago if we'd be talking to pensions and endowments, I probably would have said "unlikely." Again, these are not robust business development conversations, but there is some interaction, and engagement, which is quite interesting.
Chaparro: When I think about Fidelity, and a lot of people may not know this, it has this massive, robust, wholesale retirement 401(k) business. To what degree are you guys, in your little crypto island over here, tapping into other businesses, let's say for instance, the wholesale 401(k) business, to grow the crypto business?
Jessop: Yeah. Look, I don't think that market's ready for this. The way that we built this business is that we're in a swim lane, we are focused on institutions. We are largely developing those relationships ourselves, and that's because again most of the adoption so far has been from the early adopters. I think that at an appropriate time we will figure out how to tap those channels, but for the time being, we're trying to process the folks that we know are in market today.
To your point, the nice thing about this business with Fidelity is that as the asset class takes off, we have many ways to market, which is kind of an important decision in building this business in the first place, or even exploring the technology. I mean, if you take a big step back, if you believe that this technology will change how assets are issued, and traded, and administered this has long-term implications for any financial institutions setting aside what's happening to bitcoin today.
In some ways, what we're doing is we're building this business, but we're really getting smart about what could be this financial fabric of the future. Imagine if, call it a "mainstream" Fidelity client says, "I've invested in crypto, I've invested in these five security tokens, I bought a bond issued as a token, and I'm still invested in all the things I've invested in previously," we have to be able to support that. The way we support that is largely on the same infrastructure that we built to support this nascent business.
Chaparro: I think there was a misconception in the market about the degree to which firms like Fidelity, Bakkt, etc., would have a presence in the market. Just because you're Fidelity you can't just open up shop and then have a billion dollars in custody.
Jessop: Yeah. I think it would be imprudent for us to do that. Look, first and foremost, we have to make sure that we have a rock-solid product, and we can support, or exceed the expectations that clients have put on us. It is very much a walk before you run. Quite frankly, I think if it was anything other than that, I'm sure clients would not be that excited.
Chaparro: Custody fees are compressing. My understanding is this was a soft launch and you're offering folks discounted rates. How profitable can this business be?
Jessop: Yeah. I mean, you're right. Custody, and most other products is more of a commodity. I think that for us, and for our customers, that's sort of table stakes, that's the base-level capability that allows them to participate in this market, and allows us to build more businesses on top of that. I think over time you'll see custody fees compress. I think the discussions that we've been having with clients, and kind of where we are in the market is what I would call "high-value, highly trusted, high-service availability provider." We can make good money, and we can get the business well past break-even with conservative assumptions, but you're right, we have to build more of a full service business.
Chaparro: Just bitcoin to start, correct?
Jessop: Correct. We have what we call a "business acceptance process" where we have our crypto engineering team, risk, compliance, etc., and we make pretty detailed decisions of what we're gonna do next. The client I'm in now is in the more liquid, higher market capped coins, but each one of those may have idiosyncrasies where we might say, "Even though there's client demand, we think there are reasons why it's not appropriate to list at this time."
An example that I might give you is Ethereum Classic, with the recent 51% attack. We would be thinking very carefully about the decentralization of that protocol, or any protocol in other considerations before we'd even consider listing it. There's a lot of work that goes into deciding what's next.
I think with Ethereum, there's a hard fork that's planned sometime later this year, some upgrades, and so I think that's something where we just wanna make sure there's progress in that direction, and that the risk associated with that transition is understood.
Chaparro: Let's chat about the execution business. Is that live?
Jessop: Right now that is in testing, and that's coming along very soon.
Chaparro: Will that run off strictly internal liquidity?
Jessop: No. We are not prop trading, we don't have a desk. We are purely acting as effectively an agent, and that's what our clients want. Our clients want to avoid the issues associated with funding on multiple exchanges, both administrative risk, or otherwise, they want something resembling the best price experience, and so we'll try to do that by bringing liquidity providers, and other sources of liquidity onto our platform. I think effectively a smart order router, or logic, that would interrogate the market, find the best better offer, and allow the client to execute at that price.
I think as far as exchange liquidity is concerned, clearly there are issues with some of the exchanges in terms of market surveillance, and other things. There was a report by the New York AG that illustrated a lot of that. I think we're very circumspect about exchanges. I also think that when you're talking about institutional liquidity, given that many of these exchanges have effectively retail order books, the price impact of big, institutional orders into a framework like that can be significant.
Chaparro: What can you share about your recent survey of institutions about this space?
Jessop: Sure. We just completed a survey of about 450 institutions, so everything from family offices to registered investment advisors to hedge funds. It's interesting, I think about 20% indicated that they currently allocate to digital assets with an intention to grow that. I think when you think about blockers, and the issues that people cite for not being in the space, interestingly, volatility is number one, which is a solvable problem. Lack of regulatory certainty is number two, and in some cases, lack of fundamental data is a third.
I think the first and the third are probably solvable with time, and regulation as well, but there's probably a dependency outside of the ecosystem. So, that was very encouraging. Of the folks they allocated, they will increase their allocation on average. They'll double their allocation over the next five years. What's interesting when you look at the data, as you might expect, it's still very much an early adopter market, like the folks that you would look at, and say would tend to be more of the risk taking investors on the spectrum, so the hedge funds, and perhaps the family offices are further ahead than the pension funds and the endowments.
I'd still say that it's very promising, but the industry as a whole needs to do much more work, and continue to work around education, and basically pitching a value case to some of these investors, but overall, it really confirms everything we're doing-
Chaparro: I have to ask this now in every interview I do, because it seems everyone is launching a stable coin, are you guys launching a stable coin?
Chaparro: Okay. Good.