As you may have seen, Fidelity Investments announced yesterday that it will store and trade bitcoin for hedge funds and other professional investors via Fidelity digital assets, becoming one of the first Wall Street companies to break into this space.
In the fintech space, Huhnsik has been at the forefront of blockchain development and deployment in his representation of accelerators, exchanges and sponsors of initial coin offerings in offshore jurisdictions, has the following comments:
Huhnsik Chung, partner at Stroock & Stroock & Lavan LLP:
“Fidelity Investment’s announcement that it will store and trade bitcoin for hedge funds and other professional investors in Fidelity Digital Assets, a first among the well-known Wall Street financial institutions, is a significant step for the digital asset class in gaining acceptance as an alternative investment option. There are significant hurdles in the providing of custody and trading services for BTC from a regulatory and risk perspective in light of licensure requirements and hacking risks for hot wallets and trading platforms. These hurdles have delayed the development and proliferation of services that will now be offered by Fidelity Digital Assets.
This offering appears to be a response to the growing market demand that hedge funds and professional investors have been looking for to create a custody solution for digital assets which exist in the cloud with a key providing access and possession.
The lack of such services has stifled the growth of the digital asset class. The entry of Fidelity Digital Assets lends creditability to this asset class and is a step toward acceptance of digital assets which will likely increase trading volume and reduce volatility as long as this trend continues. This will also likely create greater liquidity in this asset class. It is the lack of such services and the regulatory opaqueness which has had an impact on BTC pricing. ETH, likewise, which had been the fuel for ICOs, has lost 91% of its value from its peak earlier this year.
The entry of hedge funds and professional investors in trading of BTC, which is a base value of all other crypto-currencies, reflects a greater acceptance of digital assets and will likely be viewed by the crypto-currency community as an indicia of the trend towards mainstream acceptance of BTC.”
Additionally, below is a quote from Anthony Tu-Sekine, partner and head of the Blockchain and Cryptocurrency Group at Seward & Kissel LLP.
“Many industry observers agree that the next domino that needs to fall in order for crypto assets to reach wide-spread adoption is large scale entry into the market by institutional investors. So far, custody of crypto assets has been one of the significant barriers for institutional investors; many of the custody providers that are currently willing to hold crypto assets are either relatively small, fairly new or not operating in a fashion that traditional institutional investors are accustomed to.
The creation of Fidelity Digital Assets may remove that obstacle and should make it easier for institutional investors to have access to a custodian with which they are comfortable. Unfortunately, it is not clear from the information made available by Fidelity so far whether the creation of Fidelity Digital Assets answers all of the issues that need solving. For instance, it is not clear which crypto assets other than bitcoin and Ether Fidelity will custody, and whether it would be willing to custody crypto assets that are deemed to be securities under U.S. laws. It is currently easier to find a well-established custodian for “common” crypto assets like bitcoin and Ether than for more-thinly traded crypto assets, particularly those that may be deemed securities.
Fidelity Digital Assets also does not make it clear whether the new custodian is a new business line for one of its existing entities or a separate, new legal entity, and whether the entity providing the service is of a type that would make it a “qualified custodian” for purposes of the Security and Exchange Commission’s “custody rule”; many funds and their advisers are required to have certain fund assets held by such “qualified custodians.”
If Fidelity Digital Assets is a “qualified custodian” and is willing to hold a large number of different crypto assets, this could result in the entrance of a substantial amount of additional investments in crypto assets by institutional investors.”