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  • B Vrettos and M Bacina

Digital Asset Custody: Fidelity Flourishing and Australian guidance absent

Fidelity Investments, one of the world's largest financial services providers, has recently been making major strides in developing their blockchain solutions through its subsidiary Fidelity Digital Assets. Fidelity Digital Assets offers custody solutions including offline storage and vaulted deep-cold storage, execution services, and onboarding and support services.

Fidelity Investments takes an inclusive view towards DLT, saying their institutional focus is geared towards:

a future where all types of assets are issued natively on blockchains or represented in tokenized format.

And adding they are

the first step towards a long-term vision to create a full-service enterprise-grade platform for storing, trading, and supporting eligible digital assets. This platform is built to the same exacting standard as exists in other Fidelity businesses, while incorporating the unique capabilities of blockchain technology to deliver a completely new offering for institutional investors.

How did they get here? - A bit of background

Fidelity was an early mover in the space, beginning bitcoin mining operations in 2016. CEO of Fidelity investments, Abigail Johnson, recently shared in an interview her surprise at the success of the custody solutions stating that:

If you had asked me at the beginning, if we or anybody was going to be prioritizing custody of bitcoin I would have said ‘No way. I mean that’s kind of the opposite of what it’s all about'.

She continued:

But the reality is that you do need it because if you’re an individual who engages an advisor and you want to make an estate plan you actually need someone to custody your bitcoin.

The next steps

Fidelity’s success in custody solutions comes at a time that many other countries and regulators are still grappling with the demand for security for digital assets and the race to develop solutions to facilitate its custody.

Fidelity has also recently announced it will allow its institutional customers to pledge bitcoin as collateral against cash loans in a partnership with blockchain startup BlockFi. The loans seek to target Bitcoin investors, hedge funds and crypto miners who want to turn their digital assets into cash without selling them.

The loan to value ration will be set at 60% meaning that $1,000 in collateral can back at most $600 in borrowed money. Fidelity will not be involved in setting the loan terms but will contribute to the safe keeping of the Bitcoin. BlockFi told Bloomberg that there was:

room for client-level customization (in the loan terms) and (the program) may be adjusted to meet the needs of large firms.

As more large private companies harness blockchain for traditional financial services offerings and bolster security of blockchain assets it will be interesting to see how regulation continues to maintain this pace.

Australian regulators note that if a digital asset is a financial product, then a custody authorisation under an Australian Financial Services Licence will be required. There is as yet no guidance from regulators as to what is expected from licensed custodians or others providing custody solutions for digital assets leaving much uncertainty. The ongoing growth of custody solutions increasingly seems to be a technological innovation which may pass Australia by.

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