Everyone in cryptocurrency has a story about the time they went down the proverbial rabbit hole. Tom Jessop’s takes place in his kitchen.
It was around 2013 or 2014 when Jessop, then a managing director at Goldman Sachs with two decades of Wall Street experience, became enthralled with bitcoin – at the time an obscure topic in finance circles.
"This idea of this scarce asset, this fully digital money, cryptographic trust replacing institutional trust – all these things, I thought, were interesting," Jessop recalls.
As part of his self-education, he tried to explain the phenomenon to his wife and three sons. "We ended up watching a Khan Academy video there in the kitchen," Jessop told CoinDesk. "My youngest son at the time was 10 or 11. No one understood it. My little guy said 'I understand it.' For an 11- year-old, he did a reasonably passable job explaining it to me."
Looking back on it all, he understands why people struggle with the concept, explaining:
Jessop, however, did get to that next level of understanding. And now, nearly five years later, he and his team at Fidelity Digital Assets (FDAS) are poised to help take the cryptocurrency market to a new level of maturity – and, perhaps eventually, liquidity.
Fidelity Investments will officially launch the new business, a trading platform built for institutional investors, in the first quarter of 2019. The product of years of behind-the-scenes research, experimentation and planning at the Boston-based asset management giant, FDAS represents one of the boldest moves to date in the space by an incumbent financial institution.
The platform promises to address market structure problems that have kept crypto-curious big-money investors on the sidelines, specifically around issues like custody of assets and price discovery. By offering to safekeep bitcoin and ether on behalf of hedge funds, family offices and the like, and to match their buy and sell offers with a range of liquidity providers and exchanges, FDAS aims to make these institutions feel at home in a nascent market infamous for hacks, thefts and a lack of transparency.
That doesn’t necessarily mean the launch of FDAS, or other soon-to-open institutional markets like New York Stock Exchange parent ICE Group’s futures platform Bakkt, will immediately resuscitate crypto prices from their year-long funk. But they are laying important groundwork for the industry’s long-term growth.
"What will really make an impact is the next bull run, when these institutional tools are available," said Daniel Cawrey, chief executive officer of Pactum Capital, an over-the-counter (OTC) trading firm.
Jessop is perhaps unusually suited to lead such an effort, given his pedigree. He’s worked in traditional capital markets, but also invested in blockchain startups and helped run one for a time. He sees the long-term promise in open financial networks but has also pitched blockchain tech to enterprises and knows what they require to be comfortable, and compliant, dealing with crypto assets.
"He has this unique combination of skill sets bridging all these areas and real experience in bringing emerging technologies to market," said Jill Carlson, a blockchain consultant and fellow Wall Street veteran who worked with Jessop at the startup Chain in 2017.
The road to Fidelity
"He just doesn’t have a bad bone in his body, and he's no pushover, a unique combination,” said Brad Levy, who worked with Jessop in Goldman’s principal strategic investments (PSI) group. "He somehow finds a way to be ambitious and forward without hurting people in the process."
Levy credits Jessop for helping Goldman to reshape the U.S. equity markets in the early 2000s, for example, through the firm’s investment in Archipelago, an early electronic stock trading platform (which eventually merged with the New York Stock Exchange).
"Tom played a big role in all that coming together from a Goldman perspective, benefiting the market and us at that time," said Levy, now the CEO of MarkitSERV and global head of loans at IHS Markit.
By the mid-2010s, Jessop was helping to put together Goldman’s investments in fintech startups, including a small but symbolically important stake in one of the longest-running exchange services, Circle Internet Financial. "In 2015, there had not been a lot of large players in banking who had made investments in companies in the space, so it was noteworthy back then," said Circle co-founder Jeremy Allaire.
Carlson, who was working at Goldman as a bond trader around that time, agreed that taking a stake in a bitcoin startup was a bold move for that era.
"It's easy to forget now, but just a few years ago, to use the word 'bitcoin' or 'blockchain' within a bank would get you raised eyebrows or people looking at you with a puzzled look, like, 'What is this thing you’re talking about?'" she said. "Now there’s this stereotype of the Wall Street person who bought into bitcoin, but when Tom got into the space, making the investment in Circle, that was definitely not the case."
Jessop himself sounds more humble than anything else when he talks about this period, when he met with early evangelists of the space like Digital Currency Group founder Barry Silbert, and spoke on panels with the likes of Balaji Srinivasan of venture capital firm Andreessen Horowitz (now the CTO at Coinbase).
"It was crazy, trying to learn at the same time as these people, who were further ahead, were doing interesting stuff," Jessop told CoinDesk.
In April 2017, no longer content with just investing and learning from startups, he joined one, becoming the president of Chain. That company, founded by Adam Ludwin, had started in 2014 as a provider of APIs for bitcoin developers but repositioned itself the following year as a vendor of blockchain technology to enterprises. "Visa was a big client. That was exciting because Visa had something in production," Jessop said.
Stepping back, the conventional wisdom during the 2014-2016 bear market was that digital currencies running on public networks weren't going anywhere anytime soon, but that businesses could leverage the tech to create their own private versions.
But the year he came on board at Chain, the crypto market came roaring back, and the zeitgeist once again shifted away from gated corporate blockchains in favor of the public ones powering digital coins and tokens. So did his new employer.
"The founders decided to do something more in the public space," Jessop said. "In the span of nine months to a year they completely pivoted the business model." (The transformation became apparent to outsiders in September 2018, when Chain was acquired by Lightyear, a for-profit company building on top of the public Stellar protocol.)
It wasn't what Jessop had signed up for – though that’s not to say he was averse to public blockchains. "By no stretch of the imagination am I a private-versus-public guy," he said. "Everything we’re doing here [at Fidelity] is public, and I love it. And I’ve always had a keen interest in both." But at Chain, "I didn’t feel I could be particularly helpful to them in where their business was headed."
As Chain moved in a new direction, Jessop started talking to Fidelity, and he joined the company in January 2018 as head of corporate business development. It was a similar job to one he'd held at Goldman, scouting for M&A, venture and partnership opportunities.
But very soon, Fidelity would hand him a bigger challenge.
Not your grandfather’s money manager
To understand the significance of that challenge, it helps to recall how Fidelity, the world’s fourth-largest asset manager, had positioned itself as an unusually crypto-friendly corporation.
For years, Fidelity had been studying bitcoin. Not just "the blockchain," which had been the politically correct area of interest for regulated, reputation-conscious financial institutions, but bitcoin itself. This curiosity had stemmed from a wargaming exercise that took place in 2014.
"We were trying to envision what potential futures might look like that we weren't putting any probability against but just trying to prepare for and imagine the possibilities of," recalled Katie Chase, a senior vice president at Fidelity who was involved in these scenario-planning discussions. "One of them was 'frictionless capital markets.'"
"Frictionless" described bitcoin, or at least certain aspects of it. Transactions in the cryptocurrency typically settled in minutes, rather than the days it took for bank transfers or securities trades (and weeks or even months for instruments like syndicated loans).
While buying or selling bitcoin through exchanges like the now-defunct Mt. Gox was a cumbersome process for early adopters, once on-boarded, you could zap value across the globe instantaneously. (Well, nearly instantaneously; more on that shortly.) Picture the Autobahn… except with really crummy on- and off-ramps.
Was this the "straight-through processing" that financial professionals had long dreamed of? The strategic planners at Fidelity thought it was worth at least investigating.
The company started experimenting with crypto in the Fidelity Center for Applied Technology (FCAT), an R&D lab. Some of its early trials had inauspicious results, such as allowing employees to buy food with bitcoin at the company cafeteria. Chase recalls an awkward time when a senior executive held up the line trying to pay for a snack with the cryptocurrency.
"The cashier was trying to wait for the transaction to clear. That can take a while, as opposed to giving him his banana and assuming the transaction would come through," she said. Unlike a credit card transaction, in crypto there’s no intermediary to guarantee eventual payment. So even though a merchant won't have to wait days to see the money, as they would with Visa or Mastercard, it might take 20 minutes to get a confirmation that the transaction was recorded in the blockchain rather than an immediate authorization.
Friction at the point of sale aside, the employee pilot taught FCAT another lesson. "People don’t want to spend their bitcoin," Chase said, because it tends to appreciate over time. "You hear all these stories about how someone transferred $1 to their friend, 'Yay, good job.' They come to realize that that $1 in today's terms is many many more dollars."
While that didn’t bode well for bitcoin as an everyday currency, it underscored the case for the asset as "digital gold," a long-term store of value for those willing to stomach the volatility.
Fidelity's explorations continued. In 2015, a blockchain incubator was spun up within FCAT. The researchers started mining bitcoin, an activity that continues to this day, according to Chase, who now runs the incubator. Fidelity's charitable arm began accepting crypto donations.
And then there was the coming-out party: In May 2017, Abigail Johnson, the chairman and CEO of Fidelity, spoke at CoinDesk’s Consensus 2017. "I love this stuff," she declared, sporting a "Vote Nakamoto" pin, a humorous reference to bitcoin’s pseudonymous creator.
The fact that Fidelity is a privately held company (49 percent owned by Johnson’s family) helps explain why it can push the envelope this way. Spared from the pressure of having to show short-term profit growth quarter after quarter, it can invest in cutting-edge projects that might not pay off fast enough to satisfy Wall Street analysts’ expectations.
Crypto is not the only example of Fidelity’s adventurousness. Jessop notes that Fidelity was one of the first firms to offer online trading back in 1993, via the internet but not on the World Wide Web, which was still in its infancy. "There’s this reinvestment in innovation here which I think is unique," he said.
"To date, the technology isn’t mature enough for it to be particularly impactful in the securities space," explained Chase, citing scalability and privacy issues. She said:
All things considered, then, it wasn't a huge surprise that the first business to graduate from the FCAT blockchain incubator was not some esoteric back-office play, like using a shared ledger to track proxy votes or audits. Instead, Fidelity decided to build a business around what is arguably the most successful application of blockchain so far: trading crypto.
The corporate type
Not long after Jessop arrived at Fidelity in January 2018, he was asked to lead the new business, which would fill a gap the team had identified.
"We didn’t see an institutional quality offering in the market," he said. "People are trying to be institutional, but not the way institutions want to consume that service."
Further, Fidelity saw institutions are the more appropriate investor category to make its initial focus. "Digital assets is an emerging asset class, [with] a lot of volatility," Jessop said. "A lot of things still need to be proven out. Institutions are more sophisticated in terms of how they think about this stuff."
The business plan was kept under wraps for most of 2018, as Jessop recruited employees (his team is now 100 strong) and got the wallet and other technology that the incubator had already developed ready for production.
"When you’re using things internally, you don’t really need fancy, intuitive front ends. But when you have a customer who’s going to be interfacing with the system, you have to do UI/UX design," he explained, by way of example. "So it’s really just productizing these technical components and objects that we’d already been using internally."
After FDAS was unveiled in mid-October, some on Wall Street scratched their heads that Fidelity, best known as a consumer financial brand, was courting institutions. "People see us as an asset manager and a personal wealth manager. But we have an institutional business," Jessop said. "We have a capital markets business. We service about 13,000 banks, broker-dealers, funds. So we have that DNA."
And with that DNA, FDAS aims to bring a level of sophistication to the market previously unseen from service providers in crypto. Take, for example, its custody offering.
For context, the blockchain industry has already developed innovative ways to safeguard assets, such as cold storage (keeping the cryptographic private key to a wallet offline, either on a device disconnected from the internet or a piece of paper locked away in a safe) and multi-signature wallets (which can be programmed to require more than one private key to release funds).
According to Jessop, FDAS will marry crypto security methods with processes and procedures that enterprise clients expect, things Fidelity does as a matter of course in its traditional custody business. "You think about another custodian keeping your own personal coins at Xapo or Coinbase, there's a single login. Institutions don't want that," he said. "Institutions want something called 'maker-checker' – the segregation of duties in which two individuals within an organization must sign off on a transaction."
Think of it as the corporate, pre-crypto forerunner of multi-sig. "You might be able to say, 'I want to transfer bitcoin out of a wallet' but guess what, there's someone else in your organization who needs to approve that electronically before it can happen," Jessop said.
Another potential differentiator: Leveraging Fidelity’s insurance relationships, FDAS has obtained an insurance policy against theft or loss of the digital asset it will custody for clients. Such coverage is notoriously scarce right now, in part because the insurance industry doesn’t have much of a track record to go on in underwriting the risk. As Cawrey of Pactum put it: "Any insurance policy in crypto is bespoke."
Jessop would not name the carriers or say how much coverage FDAS secured, but he said it is significant. "Based on what our knowledge was of industry capacity at the time we asked for the insurance, we were pleasantly surprised by how much we got," he said.
However, Jessop was clear that Fidelity's own balance sheet won't be an additional backstop for losses, since FDAS is separately capitalized from the parent company, "a standalone business unit." This is also one reason FDAS is pursuing state licenses rather than piggybacking on Fidelity’s federal broker-dealer license, Jessop said.
A slow burn
On the trading side, Jessop emphasizes that FDAS will not be an exchange. Rather, it will act as a brokerage, helping clients find the best price available across a highly fragmented global market.
"If you’re an institution now and you want to trade digital assets you need to open accounts at various exchanges and fund those accounts," he explained. "There’s no concept of a consolidated tape. I have to interrogate those exchanges separately to see who's got the best price and then execute."
To address this problem, at the outset FDAS will allow clients to submit buy or sell orders and have liquidity providers compete for their business.
"Our goal is that those liquidity providers will quote tight markets around some benchmark or index," Jessop said. "So clients have a sense that they are getting a best-price experience through Fidelity."
And over time, it may "cross" orders, i.e. match one investor client’s order with another’s, he added, though "that won’t happen until there’s a critical mass of trading activity on the system."
Implicit in that statement is the assumption that critical mass won’t be there on Day 1. So it bears repeating: anyone expecting bitcoin or ether prices to go "to the moon" in the first quarter simply as a result of FDAS (or Bakkt) coming online is likely to be disappointed.
To put things in perspective: Allaire says Circle signed up 1,000 institutional clients in 2018, and while the majority have started trading crypto, many are "waiting and getting ready."
"The nature of the institutions involved today, it’s not the BlackRocks or pension funds or large asset managers," Allaire went on. Rather, the players to date have been smaller pools of capital, like hedge funds and family offices.
Hence, while Fidelity’s platform "is going to be useful" in bringing in the larger investors, "they’re a little bit ahead of the market," Allaire said. "It’s not like asset managers are banging down the door to get some bitcoin."
Such caveats aside, it’s still fair to say FDAS’ conception is a milestone for cryptocurrency.
"Fidelity was one of the more real and most exciting announcements of 2018," Carlson said, adding:
Even Caitlin Long, a former Morgan Stanley executive turned bitcoin and blockchain advocate who has expressed worries that Wall Street will ruin crypto by "financializing" it through practices like rehypothecation (essentially, creating multiple claims on the same asset), said this is less of a concern with Fidelity.
"Fidelity is a lot more likely to be careful about these issues than the sell-side firms ... because Fidelity (and other mutual fund companies) are on the losing end of these practices in securities markets," Long said. "So I’m more optimistic that Fidelity will do this right."
2019 and beyond
By December, FDAS had signed its first investor client. Jessop said the platform will launch in the first quarter of 2019 and will spend the first half of the year "executing on the richer pipeline opportunities, things we’ve been cultivating for a couple of months," while making sure "everything is working and we’ve shaken off the kinks, so to speak."
As for the revenue model, Jessop said FDAS will charge a commission on trades (no spread, since it won’t be taking a principal position) and a fee based on assets under custody.
To start, it will facilitate the trading of bitcoin and ether, and then look selectively at adding the rest of the top five to seven coins by market cap. Notably, the other reason FDAS won’t seek a broker-dealer license, according to Jessop, is that it doesn’t need one, since it won’t be dealing in securities – suggesting that tokens from initial coin offerings (ICOs) that are at risk of being designated securities by regulators won’t be supported on the platform for the foreseeable future.
But that doesn’t mean Fidelity doesn’t see a bright future for the representation of securities with tokens on a blockchain.
"We envision a day when people will trade stocks, bonds, real estate, private securities in tokenized format," Jessop said. "It’s not just getting this parallel universe with these new assets, but the application of the underlying technology to the existing financial system. Which is incredibly powerful."
Five years out, he predicted:
In the meantime, Jessop advises observers of the blockchain industry not to put too much stock in the price doldrums of 2018.
"It’s very easy to over-index on what’s going on in the market right now from a price standpoint," he said. "If you look at the uptake of [bitcoin scaling project] Lightning, if you look at institutional investor attitudes in this space … things are probably more robust than the casual observer would see."
For example, he noted that venture funding for the industry in 2018 approached $3 billion, a nearly threefold experience from the year before.
"There’s a lot more smart money coming into the field, a lot more smart people from academia," he said.
And showing that his passion for crypto goes way beyond lucre, Jessop expressed wonderment at the accomplishments of the community’s open-source software developers.
Original art by HyperDragons / MixMarvel (@mixhyperdragons)
Photos by Marc Hochstein for CoinDesk
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