Fidelity extends it’s custody services as STOs gather traction
Fidelity, with over $2.4 trillion of funds undermanagement and $6.69 trillion under administration, is one of the world’s biggest asset managers. Its CEO, Abigail Johnson, has been vocal about her support of Digital Assets for a while and, in a recent interview with the FT, has announced that Fidelity will shortly be launching further custody and other services for Digital Assets. In July 2019, Fidelity Digital Assets was rumoured to have applied to the New York Department of Financial Services which, if approved, will enable it to offer custody and the ability to trade on behalf of its clients.
Initial Coin Offerings (ICOs) flourished on the back of uncertain regulations, as ‘fear of missing out’ (FOMO) gripped the Cryptocurrency market as prices boomed. Increasingly regulators are now stating that many of the ICOs ought to be treated as securities, so removing the regulatory loophole, without eliminating the tokenisation principle. This has led to the development of Securities Token Offering (STO) — tokenising existing asset classes, but within a regulatory framework. In very simplistic terms, STOs are seeking to leverage Blockchain technology and infrastructure thus creating digital share classes to help improve the functioning of market infrastructure in illiquid assets such as real estate, private markets, intellectual property, etc. It is also believed that STOs can help to reduce the compliance and regulatory burden by building in regulatory controls and risk monitoring, whether that be for KYC/AML checks or preauthorisation trading to ensure fund managers are adhering to a client’s objectives.
However, ensuring the safekeeping of private keys and crypto addresses is essential to institutional investors and the lack of established, qualified custody providers has been a significant barrier for institutions to engage with Digital Assets, thus preventing them from joining the crypto market in greater numbers.
There are two main methods of safekeeping Digital Assets:
· “Hot Storage”, where Digital Assets are stored ‘on-line’, so are immediately accessible, but vulnerable to theft and hacks as the private key and wallet is connected to the internet
· “Cold Storage”, where the Digital Assets are kept ‘off-line’, (e.g. on a dedicated computer that is not connected to the internet). Therefore, the wallet cannot be hacked, so it is secure, but is less convenient as it takes more time to access funds.
We are beginning to see established custody service providers, like BNY Mellon, openly discussing the challenges of offering these custody services. Meanwhile, the 129 year old State Street has been helping its clients to be able to trade in Cryptocurrencies. The reason that such august organisations like these are becoming involved is aptly summarised by Pete Cherecwich, the President of Northern Trust’s corporate and institutional services. Northern Trust’s interest in cryptocurrencies states, “You can take anything today. You can take movie rights, you can take all sorts of entities, and you can create a token for those… We have to be able to figure out how to hold those tokens, value those tokens, and do those things.” State Street is another huge global custody service provider, which has over $30 trillion of assets under management. Its managing director for digital product development, Jay Biancamano, spoke about State Street’s clients’ demand for custody services saying, “It’s not just about the current cryptocurrency; it’s also about tokenization and digitalization of traditional assets too.”
The challenge the traditional custody solutions face once regulators and asset managers start using Blockchain technology is, given that there is no need for centralised exchanges and the ability to (in effect) carry out Peer2Peer transactions via ‘atomic swaps’ , will custody services really be needed or indeed sought-after?
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