Fidelity Digital Assets (FDAS), the young cryptocurrency trading business of a financial-services powerhouse, expects to sign its first exchange by the end of the year, according to its president Tom Jessop.
As a brokerage, FDAS helps institutional investors get the best deal buying or selling bitcoin from various sources. So far, those have all been over-the-counter (OTC) trading desks.
“Between launching our trading platform five months ago to year-end, we will have more than doubled the number of liquidity providers,” Jessop told CoinDesk, declining to say exactly how many that would be. “We are primarily focused on OTC liquidity providers. It’s likely we will connect to our first exchange perhaps before year-end.”
The move would likely give FDAS access to a broader market and liquidity for smaller trades. OTC desks primarily trade with larger institutions and high-roller “whale” investors, whereas exchanges serve retail traders and smaller institutions.
“An exchange has more small order activity and is more comprehensive than an OTC desk which may rely more on relationship driven activity and is mostly used for larger block trades,” said John Todaro, director of research at Tradeblock, a provider of institutional trading tools.
FDAS, a unit of Fidelity Investments, is one of several firms attempting to bridge Wall Street with the wild world of crypto, along with Bakkt, the bitcoin futures market launched this year by Intercontinental Exchange.
It’s a bold challenge. For example, OTC desks have been easier to bring on board than exchanges, FDAS has found.
“We apply a very high standard of counterparty evaluation, involving a rigorous risk management and onboarding process,” said a spokeswoman. “This approach is something we’ve been able to apply to OTC desks with post-trade settlement more readily than working with an exchange”
Plans for 2020
Earlier this week, FDAS won a trust charter from New York’s Department of Financial Services. The charter allows FDAS to onboard New York clients and gives the firm more credibility with clients that are fiduciaries looking for a custodian with a trust license.
While Jessop wouldn’t name the New York clients that FDAS is onboarding, Galaxy Digital recently announced that it was using FDAS and Bakkt to custody its two new bitcoin funds. Other New York clients will be onboarded in the next five to six weeks, Jessop said.
FDAS has a diverse client base, including hedge funds, family offices, an investment advisor and a small, U.S.-based pension fund, Jessop said. “The interest in that [pension fund] segment is there.”
“We’ve been surprised over the course of the year about the level of interest and amount of work people have done to understand the asset class,” he said.
After FDAS has onboarded New York clients, it plans in the new year to begin onboarding new assets, developing its trading capabilities, scaling its business and pursuing licenses in other states where it is not currently doing business.
As a privately held company, Fidelity has been able to experiment with innovative technology without worrying about short-term payoffs. An R&D division, the Fidelity Center for Applied Technology (FCAT), has studied the crypto space closely, even mining bitcoin.
FCAT recently completed a proof-of-concept with security token facilitator Tokensoft, according to a Medium post by Tokensoft Head of Operations Lawson Baker
Bits and Blocks Club, an FCAT internal learning group focused on digital assets and blockchain, launched a restricted ERC-1404 token on ethereum which “Fidelity employees used … in a closed-loop rewards system designed to encourage employees to attend internal events and other activities.”
“From [European] banks to innovation labs at financial institutions like Fidelity’s, TokenSoft is seeing traction up-market for institutional customers for security tokens and other financial assets,” Baker wrote in an email. “We think this trend will really show up in Q1 2020 when customers with potential registered offerings plan to come to the market.”