Fidelity Continues Digital Currency Experimentation with Coinbase Link

Fidelity Investments has partnered with Coinbase to enable client views of digital currency holdings in its portfolio management platform, following internal tests with staff members. The project has been driven by Fidelity Labs, the firm’s innovation arm, as previously reported by WatersTechnology.

Fidelity.com clients are now able to link their portfolio with holdings at Coinbase, a digital wallet and digital currency exchange operator, to include assets such as bitcoin, litecoin and ether in their overall portfolio view.

“Through Fidelity.com we allow customers to view a large number of third-party assets that are held elsewhere, whether that’s bank accounts, credit cards, loans, etc., so this is just another type of asset that we’re allowing them to view in their portfolio summary view,” says Hadley Stern, senior vice president and managing director at Fidelity Labs.

Holdings are represented in real time and converted on the fly to US dollar amounts, Stern continues.

“Whenever those assets change throughout the day, that amount is shown in bitcoin, ether or litecoin, and then it’s also translated into US dollar amounts for your total portfolio of all your assets,” he explains.

Trial and Error

The rollout of the Coinbase link is one of the ways in which Fidelity, one of the largest buy-side firms in the US, with around $3.1 trillion in assets under management, has engaged and experimented with digital currencies in recent years.

The firm has long been an ardent supporter of digital currencies. In May, its CEO, Abigail Johnson, gave a keynote address at a blockchain conference in New York—while sporting a pin badge that read “Vote Nakamoto President,” a reference to the anonymous programmer or group of programmers credited with creating bitcoin—where she described herself as a “true believer.”

Notably, the firm has often trialed projects internally at first, and initiatives have ranged from allowing users to donate bitcoin to Fidelity Charitable donor-advised funds, and even use the digital currency to pay for lunch in the staff cafeteria.

“There’s a lot of exuberance around bitcoin being used as a payment system, and that was really the genesis of our cafeteria experiment, to really understand how it could work, how it would integrate with our current vendor’s payments systems, how our users would use it—all that fun stuff,” says Stern.

These experiments haven’t always been overnight successes, he explains, but they have allowed Fidelity to gain a deeper understanding of not just how bitcoin and digital currencies work in the field, so to speak, but also about the psychology and behavior of users.

“We learned some really good things, which sort of foreshadow why, at least in the developed world, it really hasn’t taken off. That’s because, while the underlying technology is incredibly elegant and sophisticated, one thing we found was that the usability layer was really a bit rough,” Stern says. “Another finding that we found from user research was that people really like their points on their credit cards, so if they’re going to spend money to buy lunch, the credit card companies really have that down—you buy a five-dollar sandwich, and you get five points. With bitcoin, you don’t.”

Intriguingly, bitcoin’s increasing potential as an investable asset class has driven its growth, but is also stalling its wider usage among everyday users, he says.

“Another reason was that with bitcoin emerging as a store of value, and an investment of sorts, why would you use that when it may go up tomorrow?”

While Fidelity’s experiments have largely been focused either on the retail end of the spectrum or on everyday usage, the findings do have wider implications for financial markets as digital currencies continue to gain ground and mature.

Recent developments in the institutional space include the approval of LedgerX as both a swap execution facility (SEF) and a designated clearing organization by the US Commodity Futures Trading Commission (CFTC), which could allow a regulated derivatives market to develop around bitcoin, ether and other digital assets.

There are also moves under way to list exchange-traded funds (ETFs) based on bitcoin, as well as other experiments in market structure. Notably, the US Securities and Exchange Commission (SEC) said in July that initial coin offerings could qualify as investments under Federal law.

However, most admit that it is still early days for digital currencies. While some liken their early growth to that of certain commodities in the late 1980s, Stern has a more recent analogy, and perhaps a lesson in looking too far ahead in the future.

“Everyone strives for analogies in this space, but it’s like when we were talking about the web and Yahoo just launched with its directory, and people were asking whether it would be the directory of the web,” he says. “Nobody could have imagined Google and its approach to search, or the millions of websites that have emerged. My sense is that we’re very early, and there’s going to be continued experimentation from governments, from private entities both looking to create new cryptocurrencies to do different things.”