Cynthia Lo Bessette and Matt Horne (FDAS) on Digital Asset Management at Fidelity (EP.519)

This episode focuses on the new developments in digital asset management at Fidelity, specifically the launch of a Bitcoin ETF and the broader implications of digital asset tokenization.

1. Successful Launch of Bitcoin ETF: Fidelity's Bitcoin ETF marked a significant milestone, being the most successful ETF launch based on asset growth.
2. Importance of Tokenization: Tokenization is identified as a key driver for future investment solutions, enhancing asset accessibility and tradability.
3. Regulatory Challenges and Achievements: Extensive discussions with regulators were crucial to the Bitcoin ETF's approval, emphasizing the need for continued education and engagement.
4. Strategic Asset Management: The integration of digital assets into traditional asset management frameworks is pivotal in leveraging emerging opportunities.
5. Future Prospects and Innovations: The episode highlights ongoing efforts to expand digital asset offerings, including potential new products like an Ethereum ETF.

1. Introduction

The episode opens with discussions on the recent launch of the Bitcoin ETF and its impact on the market. Quotes include Matt Horne: "We've seen tremendous success with the ETF, marking a pivotal moment in digital asset integration."

2. The Role of Tokenization

Exploration of how blockchain technology can revolutionize asset management through tokenization. Quotes include Cynthia Lo Bessette: "Tokenization will significantly enhance how we manage and trade assets."

3. Regulatory Interactions

Details on the interactions with regulatory bodies that facilitated the Bitcoin ETF launch. Quotes include Cynthia Lo Bessette: "Engaging with regulators was crucial in clarifying the operational and legal frameworks."

4. Future of Digital Assets

Discussion on the future directions for digital asset management at Fidelity and the potential expansion into other digital products. Quotes include Matt Horne: "Looking forward, we are excited about the possibilities of including Ethereum and other digital assets in our offerings."

1. Educate yourself on the basics of digital assets and their potential to transform traditional investment portfolios.
2. Consider the implications of tokenization in your investment strategy, especially regarding accessibility and liquidity.
3. Stay informed about regulatory developments in the digital asset space to understand potential investment opportunities and risks.
4. Explore digital asset management offerings from established financial institutions like Fidelity for credible investment options.
5. Monitor market trends and technological advancements in blockchain and cryptocurrency to make informed investment decisions.

Cynthia Lo Bessette and Matt Horne of Fidelity Digital Asset Management join the show. In this episode we discuss:

The history of digital asset innovation at Fidelity. The decision to operationalize a digital asset-management capability under Fidelity’s Asset Management business unit. The launch of the Fidelity Bitcoin ETF and the path to getting this product to market. How Bitcoin ETFs are currently being consumed and the distribution of these products to various investor types and platforms. How Fidelity is approaching the tokenization of real world assets. Broader views on the future of public blockchain assets and the types of opportunities for asset managers. Learn more at Fidelity Digital Assets

People

Cynthia Lo Bessette, Matt Horne

Companies

Fidelity Digital Asset Management

Books

None

Guest Name(s):

None

Content Warnings:

None

Trey

Today on the podcast, I sat down with Cynthia Lobaset and Matt Horn at Fidelity Digital Asset Management. In this episode, we discussed the launch of the Fidelity Bitcoin ETF, the firm's views on the tokenization of securities, and the market structure evolution that's underway in the digital asset industry. I think you'll enjoy this one. So without further ado, here's my conversation with Cynthia and Matt at Fidelity. Matt Walsh and Nick Carter are partners at Castle Island Ventures.

All these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle island ventures. Guests in hosts may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments Lehman, which has 25,000 employees, will be liquidated.

Cynthia Lo Bessette

The federal government loans American International group AIg $85 billion. This is a different kind of market. And the Fed is asleep. The federal government is stepping in to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing.

Matt Horne

You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry we have something called the bitcoin. Bitcoin. Well, Cynthia and Matt, thank you for joining us today in our podcast studio. I like to do these in person.

Cynthia Lo Bessette

It's great to be here in person and thank you for having us today. So we've done a number of episodes with people at Fidelity, largely on the custody and trading front. So we'd love to start off with some backgrounds and maybe introducing fidelity digital asset management. Sure, I'd love to talk about the beginnings. We started out as a unit that was part of the overall digital asset business.

It became clear about a little over a year ago now that with all of the work that had been ongoing in collaboration with asset management, that it made sense to move the small team for digital asset management into the asset management unit, which took place in the beginning of last year. What we've been doing over the last year ish is really building out the infrastructure for investment management that includes building out a research function, the data platform, supporting investment research in the crypto token and crypto token ecosystem, and also building out functionality and operating platform support for tokenization of assets that's awesome. So asset management at Fidelity is obviously the largest business unit, I believe, certainly from a revenue perspective, what went into the decision to actually bring the crypto asset management capability under that umbrella versus keeping it separate and distinct? I think really largely it was a recognition that there was a new emerging asset class of crypto investments, and wanting to build an asset management research led culture around the investment management research function in this new investable asset class was a big part of the motivation. But I think the other part also was the broader recognition of where blockchain and blockchain related technologies can really impact the way in which we're building solutions, expanding the universe of assets available to be incorporated into investment solutions, and also thinking about providing broader access to those solutions through tokenized assets.

Trey

That's awesome. So Matt, you came at this space initially, I think, just from being really interested in the technology, but you were in the traditional asset management side. Tell us a little bit about your path to this role, Matt. So I joined Fidelity about twelve years ago. Before that I was submarine officer in the Navy.

Matt Horne

So very different background there, but made the pivot into financial services. The first half of my career, Fidelity was really spent with our traditional ETF franchise, building out that effort across fixed income equities, us global, different exposures there. And I found myself, around 2016, 2017, heavily interested into digital assets via podcasts. Really. I was podcasting as I was traveling for work, and I became really obsessed with this emerging space.

So I made a decision, how can I marry my interests with my career? And I was able, fortunately enough, to be a fidelity, to make a pivot around 2019 and really be one of the first employees to what is now Fidelity digital asset management. So I now run a team of digital asset strategists where we work with all of our distribution channels. So that's the retail channel, the intermediary channel, and our institutional channel, where we are really advocating on behalf of fidelity solutions in the space. That's great.

Trey

And Cynthia, you come at this originally from a legal perspective, which I imagine is just incredibly valuable, giving everything you have to encounter. But what was your path into being interested in digital assets? Yeah. Your point about being familiar and understanding a lot of the debates around the securities laws and applications regulation of this space. So I came to fidelity in the late summer of 2019, started out as the general counsel for asset management, and a big part of my focus when I started was looking at building out our legal and regulatory capabilities for the alternative investment space.

Cynthia Lo Bessette

And one of those areas of looking after coverage was digital assets. So that was some of the early collaboration between asset management and the digital asset management business. In some respects, I felt very much a part of that early small team in building out their capabilities and the ability to put digital assets into traditional products, which in the early days of that business was limited partnerships and non publicly registered vehicles. That certainly was also part of the early days of looking at how else can we expand customer access. There was certainly a tremendous amount of interest across the customer base in getting access to digital assets.

So there was a lot of early work which ultimately led to the almost five year journey in bringing the ETP to market. So this ETP, obviously, this is what we want to talk about first here, this bitcoin ETF product, is this the most successful launch of ETF in the history of the company? The short answer is yes on asset growth, for sure. Yes. So talk a little bit about what that process was like actually getting this bitcoin ETF to market.

Trey

Obviously, it's been a long time coming for the industry, dating back to, I think, 2013 with the Winklevoss twins filing first. It's just remarkable to see how it's developed over only 90 days here. It's been incredible, the overall client demand and reception of the whole range of products. There were ten products that went to market and launched in the beginning of January. The journey actually is quite comprehensive and complex for us.

Cynthia Lo Bessette

We began sometime in that later part of 2019, really looking at understanding the SEC's guidance and positions to date. I think there's a lot of us in the industry that would recognize that in 2013, those were the early days of bitcoin having been launched as an asset, and perhaps early days in getting the SEC and the overall regulatory infrastructure comfortable. The ten year journey to bring this product to market did involve a lot of education, education of policymakers and the regulators over how this asset trades, how the market operates. The quant team within Fidelity did a lot of great research in looking at correlation analyses and the lead lag analysis on price discovery that was also very much a part of the educational process and engagement with the regulators. And then ultimately, there's a whole body of work that went on, and I can certainly talk about all of the efforts in the go to market strategy for this product.

Matt Horne

So this was our, I think, 60, 50 ETF at the time when we launched it. We have now 67 ETF's at fidelity, but the ETF vehicle is still a fairly newer chassis for our distribution team. So just continual education on the ETF structure. This is our first grant or trust, which is slightly different than a 48 registered product. So there are some nuances there we had to really educate on.

But overall the timing of this was quite good with our focus within asset management on growing our ETF franchise. So this launch was incredibly successful. I think exceeded many peoples expectations as a category. It was really hard to handicap how this launch was going to go. You tried to project how this would go, its really hard to know, but it truly is a capital accessibility story where the ETP structure, its like a swiss army knife for accounts.

You can now hold this bitcoin exposure in IRA very easily, or trust and estate planning type registrations, which was always a hiccup because clients generally like to have their positions together under one account or they can see it together. Whereas for years here in the retail crypto space you had to have a separate experience on a different platform to access digital assets. Well, this ETP vehicle now our takers FBTC the Fidelity bitcoin as a fidelity wise origin bitcoin fund, it allows you to have easy access in any account type you want, any registration type you want, alongside your traditional stocks and bonds. So it's been a great experience for folks. I think it's probably very poorly understood how complicated the process was, even just operationally so the traditional authorized participants in the non crypto ETF market, they're not all there.

Trey

So it had to have been a heavy lift just to figure out how to actually operationalize this product. Yes, and the timeframe in which we built out some of that core infrastructure to be able to engage with authorized participants was compressed. Given the engagement with the SEC was really begun late in the late summer, early fall of last year, and there was a lot of debate and also education and engagement with the SEC over the traditional ETF mechanism for engaging with AP's involves both the in kind contribution of assets held by the fund or cash contributions. Ultimately, the SEC got comfortable with cash contributions only, so the engagement will continue on wanting to allow for in kind. That meant taking cash in from authorized participants and working with a platform of liquidity providers to trade that cash and convert it into BTC.

Cynthia Lo Bessette

We built out a trading function, and again, the wealth of knowledge and experience within the existing digital asset business really helped us to be able to shape the way in which we built out the capability. We've hired a couple of traders to staff that function within FDAM, and that alongside of the way in which we were able to design and build that product around the fidelity custody solution, which is a differentiator and also the building of that pricing index. It's a proprietary methodology which is easily available to all the market makers to understand. And it was built with the internal index team. That's awesome.

Trey

So I won't put you on the spot talking about cash create versus in kind, but hopefully we see some improvements to just the overall mechanism for building these things and a movement towards in kind. But what I would love to get your view on is just how these things get rolled out. So the flows have been staggering. I think there was a lot of public commentary around, well, people already have access to Coinbase and maybe these won't be as explosive as people think. That's clearly not the case.

So we'd love to understand from your perspective, who are the first wave buyers of this product? What do those institutions look like and where are we going? Because I know that this is not on all the private wealth platforms even yet. That's true. Building up to the rollout of this, I think we assumed it would be more intermediary and advisor heavy because they really hadn't been able to access this before.

Matt Horne

But once we launched, it was very much retail was involved in this first wave of purchasing here. And I do think it's back to the point I made earlier on. Hey, I can buy this now in any account type. I want, any registration type. I want my Hsa, my ira, anywhere.

I can buy an ETF, I can now buy spot bitcoin exposure. So wave one of this, I would say, was definitely retail driven. We still see it there, but that doesn't mean other institutional type players weren't in the space, because they definitely were. Wave two of this is going to be, I'd say, the broader advisor approval and adoption, and I think that's where we are right now. So when you say the word advisor, it depends which type of advisor you're talking about.

If you're a registered independent advisor, an RIA, you're independent, you're on your own, you're your own fiduciary, you make your own investment decisions. Those are the ones we're seeing on the early curve of the advisor space. Adopt this because they have their own autonomy to go out and do as they please. And a lot of them were actually active in the crypto space before these etps came in. This is just an easier way for them to give client exposure to the spot bitcoin price.

The next wave here is really going to be the broker dealer and warehouse type advisors that we have to go through an onboarding process to the platform there's home office gatekeepers that have multiple considerations before they approve a product for advisory. There's a lot of terms out there right now. So unsolicited versus solicited. Upon launch of any really registered products, they are available at any brokerage platform for the most part on an unsolicited basis. Meaning you, Matt Walsh, can go to your account at some brokerage platform and buy it yourself.

It's your own decision. You're making this investment decision based off your best interest and no one's telling you what to do. But when you talk about the word solicited, it means you, Matt Walsh, have hired an advisor at some platform who is now making investment decisions on your behalf. And thats where we are right now, is waiting for those advisors to have the ability to solicit trades on behalf of clients. And thats I think the next leg here is once you get more of these platforms to approve it for advisory, thats when youre going to see the new wave of capital potentially come in here.

Trey

What does that discussion look like? Is that education around what is bitcoin and why? Is it interesting in a portfolio? Or is this in the nuts and bolts of, well, heres how the cash moves in the system and here's how the custody actually works at Fidelity. What's the conversation?

Matt Horne

All of the above. So back out a little bit broader to just ETF's in general, any ETF, and this is my previous life I spent doing this with equities and fixed income ETF's, any ETF is going to go through an evaluation period before approval. And generally speaking, you need to see at least six months of performance track record and around 100 million or above in assets before most of these bigger platforms will even approve you for advisory. These are a little bit different because theyre new. There were ten issuers going at once.

There was a lot of, id say pre education on this. My team did a lot of work over the years meeting with home office gatekeepers, just keeping them updated of where we are, where we think were going. What is bitcoin? Digital assets in general. So a few firms are accelerating those traditional timelines there and they go into everything from secondary market trading to the create redeem process.

We spent a lot of time educating folks on the cash create redeem process because it was a later minute curveball than what was expected. But what is bitcoin? Where does it fit in a portfolio? So it really runs the gamut of considerations there. So id imagine selling this product in a world where theres eleven other products being fidelity is a tremendous advantage because theres so much goodwill in the crypto industry around things that fidelity has been involved with, but would love to understand just what the basis of competition is for these bitcoin ETF products in the market.

Trey it was a challenging launch, to be honest, because you have ten issuers going at once. Weve never seen that before in any other category. It's a 33 grant of trust. So it's 100% of one asset in the portfolio. So you're really banking off of your distribution team, your goodwill, your relationships, your legacy in the space to really help differentiate here.

So first and foremost, Fidelity's been in the space for a long time. As you know, as far back as 2014, we built our own custody solution for institutional clients, which we leverage for the product. So that's a key advantage too, is we truly understand what it takes to keep these assets safe. Trading of the assets. We have a thorough understanding of what it takes to trade various asset classes and cryptos.

No different bitcoins, no different distribution. At the launch, the key was really getting that first wave of natural buying in the secondary market, because in the land of ETF's, your secondary market, liquidity is critical. You want the natural buying and selling in your product. So if an advisor wanted to allocate 50 to 100 million in a client account, they could easily do it in the secondary market without picking up a phone to try to get some OTC trade going. So that was key and we achieved that.

We have great liquidity in FBTC, the fees, we ended up waiving the fee for six months just to help ease adoption into our products. We know it was going to be competitive. We're operating at scale, so we could obviously make that decision pretty easily. But that's another consideration, is cost of ownership. If you have liquid product trading well in the secondary market, no fee up front, it makes it much more palatable for adoption in a very competitive field.

Trey

It's a really unique business model when you think about fidelity digital asset management, because you have built custody and so you have the ability to not have to go out to third party custodians and negotiate a custody arrangement. But you also have almost a composable asset management capability where we're starting to see in the industry these global allocation funds and indicate that theyre interested in putting certain percentage of assets into bitcoin exchange traded products. Obviously, fidelity has a lot of other non crypto products that potentially could go down that path. So how do you think about that in terms of other types of ETF's or other types of fund products that could actually be buyers of this product. So we can certainly talk about the different channels and youve highlighted a couple of them right there in terms of models that advisors might want to gravitate towards incorporating asset allocation models and where FBTC or any of these other single asset commoditized products would be able to plug in is one aspect.

Cynthia Lo Bessette

We also think about building around a suite of exposures. So there's the single asset exposures and then as we think about other thematic and sector oriented exposures, and this certainly goes beyond the single asset and that is the advantage of what we believe the research function is going to contribute in terms of product development. Maybe lets take a step back. So you have this bitcoin ETF product out there. Its been tremendously successful.

Trey

What do you think could be next for your group at Fidelity in terms of the types of products that youd be interested in exploring? I know you cant speak about products that you have active applications on like the Ethereum ETF, but obviously thats something that youre interested in. But how do you just frame what other types of products could be? Interesting. So I did mention a little bit of some of our product exploration right now is thinking about thematic exposures and the research team is building out a research platform that cuts across multiple tokens and thinking about their investability over the long term and how to construct multi token portfolios.

Cynthia Lo Bessette

From that standpoint, I think the ability to also work across our asset management divisions and thinking about asset allocation models is another area of exploration. I know Matt, you've been talking to some of our asset allocation teams on that front. So I think on the asset allocation side, education is paramount and a lot of firms in this space have done a great job educating. Theres still so much more work to do. And back to your question on allocation.

Matt Horne

We actually have a great, I think, proof of concept, if you will, where we had an advisor this week tell us theyre going to build a custom model suite using ETF's with a 3% position in the most aggressive portfolios in FPTC. Again, this is an RIA. So the earlier adoption of the advisor side, but the reason they made this decision was because they consumed some thought leadership that we published back in January. We had a paper called the case for bitcoin. It was a collection of researchers with infidelity, including urine.

Timur wrote. The paper essentially just laid out the case in a scenario analysis using Monte Carlo simulation of the impact on a bitcoin position in a retirees portfolio over time. And thats literally how advisors think, because theyre helping clients plan, save money, plan for retirement. Thats literally how they run their business. And this paper put it in those terms.

And it was really well received with this advisor and resulted in obviously a small position for clients. But I still think its early days. A lot of these platforms weve talked about before, theres been a massive movement over the years toward home office models, meaning the days of an advisor sitting up in an office in a city somewhere just picking stocks and bonds on behalf of a client. Theyre waning. Its moving much more toward a consolidated approach where theres a more centralized team making investment decisions.

So I think once you get those teams now allocating to this asset class, thats when youre going to see more significant adoption here and just passive flows. Coming into these products. Thats really just what well see. Its been interesting to see the flows through the first few weeks because its hard to disentangle with GBTC having all these outflows. So ive never seen anything like that where you have this product that launches.

Trey

It obviously had been in the market. But is that a big factor in the flows? Is just people switching from GBTC into some of these lower priced options? The trend in ETF's is always migration to a lower cost exposure, and I think youre definitely seeing that with some of the movement here. So I want to get your guys view on tokenization.

Ive got a history of being skeptical of a lot of things that ive seen in the lets just tokenize the world. And there was this wave in 2015 and 16 around private blockchains being the conduit to tokenize fine art and hotels in Aspen and things like that. This feels a lot different, though. Youve had Larry Fink come out and almost like his case for digital assets was bitcoin, but then quickly into tokenization. So how are you guys thinking about that category?

Cynthia Lo Bessette

So absolutely agree with some of the history in terms of the different waves of tokenization projects and activity. And maybe I'll start with the thesis that we've been working under from the standpoint of the opportunities that tokenization present is thinking about modernizing the existing capital markets infrastructure, but modernizing not necessarily in terms of an overnight replatforming, which may be some of the early euphoria around the idea that tokenization is going to completely create liquidity where illiquid assets had no liquidity. That is actually something that we talk a lot about, which is tokenizing an asset doesn't miraculously create liquidity, it makes it more easily tradable. And I think a lot of the efforts around tokenizing assets are incredibly important and creative. But in order for a client to care about that asset, there has to be some utility and a market for that client to not only be able to access the asset, but to know that they can actually trade it.

So what I think about is, as we identify the infrastructure that's necessary for a digital asset ecosystem to be able to be interactive, interoperable with existing traditional back offices, that's really where I think the power of tokenization into market adoption is going to come from. Which means that there needs to be interoperability infrastructure to be able to translate those digital assets and have them be incorporated into traditional investment solutions. A client's not going to come in and say they want to buy a digital asset. They're looking for solutions that are better constructed and have more diversity because there are assets now being introduced through tokenized form to be more tradable and then incorporated into traditional solutions. That makes sense.

Trey

I remember the first wave of discussion around this. There was all this talk around taking an asset, tokenizing it, and then you get into the details and you say, well, how do you settle it? How does it trade in the back office and my fund administrator, what are they going to do in terms of valuing? And by the way, my auditor is going to come in and want to know exactly how that asset is custody, how does that interoperate with my existing back office? How does that work?

So I remember in the first wave, it was, okay, well, you just send a wire transfer, you go through, and it's a t plus three at the time settlement. I think stablecoins seem to me like they have the potential to be really important to just the settlement of these securities. I know that we're not there yet in terms of institutional scale, stablecoins, but do you see them as a category being compelling to actually make this tokenization. Story work 100% when we talk about, again, back to that interoperability, in order for a client or any asset allocator to be able to access that digital asset token and incorporate that into their traditional solutions? I think about stablecoins and tokenized money market funds as being two sides of that liquidity layer that's necessary to be able to facilitate the movement of those tokenized assets.

Cynthia Lo Bessette

So stablecoins as being, as you described, the easy way to be able to trade in and out of digital assets. But for a customer that is going to hold digital assets, there may be a cash portion of their portfolio, and rather than having to go back and forth through the on ramp into fiat, being able to hold those assets in a risk off environment, in a tokenized money market fund is going to be incredibly important to continue to facilitate the expansion of that ecosystem. I look at public equities, and it seems pretty daunting to put them all on a blockchain and figure out the settlement process. But there are these other categories that are quite large in the alternative space that seem to me like they could be very much early adopters. How do you think about those categories and the types of assets that might be interesting to investors on chain?

I think you're absolutely right. When we think about prioritization of which asset classes would naturally lend themselves more to that thesis of expanding the range of assets that are tradable assets today, publicly traded equities are easily tradable in solutions today. So they wouldn't necessarily lend themselves in the immediate sense to be tokenized. But private equity and private credit are areas that are of great interest from an alternative investment incorporation into solutions. So this is where I think tokenization would make those assets more easily tradable, more easily incorporated into investment solutions, and also potentially increasing access as well.

Trey

Its no surprise to me at least, that a lot of the large alts managers are looking at the space, because I suspect that theyre looking at this and saying alternatives as a percentage of model portfolios right now are quite small, but they probably should be quite a bit larger, just giving retail access to things like venture capital, private equity, real estate. Do you see this as part of that narrative, or is that a distinct phenomenon? Steven? I think potentially a lot of those firms have gone down market, especially into the advisor space, to source new capital. But also thats where a lot of the returns are happening now.

Matt Horne

So theres demand for access of those solutions. Because companies go private, they stay private longer before the IPO. So I think it is part of that narrative for sure. But once you interact with the crypto space, as you know, and you go back to the tradfi rails and especially the private world where you deal with private funds, it's fairly clunky from a user experience standpoint. So I do think everything Cynthia mentioned is spot on.

And ultimately, it'll result in hopefully a better client experience for these types of asset classes. I think once you get into the DeFi world and just bringing some of these primitives, if you can actually make that work with tokenization, hold shares in a REIT and you want cash today, could you imagine using something like an Aave or a compound style interface to actually take out a loan and have a stable coin, for instance? It's pretty powerful. When you think about it, it's almost like giving securities lending to the masses at scale in a safe way. Potentially.

Cynthia Lo Bessette

It's another way to think about capital allocation and maybe further down the road in terms of seeing more stability and scalability for those solutions. But in the first instance, as we think about where to prioritize and deploy this technology, thinking about how that interoperates with existing solutions seems to be the natural first place to start. I suspect it would be a lot easier to do things in this category if banks and broker dealers were able to do more things in this category. And I think the last time I checked there were something like 45 broker dealers that had applied with FINRA to get a classification that they could custody digital assets. And I dont think any of that has really moved forward at scale.

Trey

So maybe talk about some of the unlocks or some of the things that you ideally like to see in order to pursue the strategy. Maybe part of the threshold here is more infrastructure that's institutional grade and scalable. So back to your point about banks and broker dealers being able to participate in this ecosystem the same way that they do today in our traditional capital markets is going to be an important part of seeing more adoption. I think because this is a new technology, there's a lot of focus on ensuring risk management and controls and thinking about the overall systemic risk. That's an important part of how we think about constructing these solutions and how we think about interoperability into existing back office processes as well, but having more participation.

Cynthia Lo Bessette

And the banks, as you pointed out, and broker dealers are very interested because of the ability to offer their clients some of the same things that we've talked about, which is increased access to assets. So from where I sit talking to startups all day, a lot of these startups are actually in some of the banks and some of the broker dealers are selling products, custody services, compliance services. So it's not like these banks and broker dealers are just sitting around and waiting. But it strikes me that it's more of a regulatory impediment to actually get this through. Would you agree with that?

I think getting more regulatory clarity will certainly introduce more participation more broadly across banks and broker dealers. But I think to your point, we've engaged with quite a number of, probably most every one of the names that you can think of in terms of how we can work together to build that ecosystem and the infrastructure necessary to be able to bring more assets on chain. And I think that's important work, recognizing that the banks are also seeing the power of the operational efficiency and the increase in access. So while all of this is happening on the business side, the industry is not slowing down in terms of just net new blockchains that are being introduced to the world, improvements to the EVM, ways to actually make transactions happen faster, cheaper and with more resiliency on these public chains. So how are you guys staying up to speed on just the developments and net new l one s and l two s?

Matt Horne

Obviously, listening to podcasts like yours is one way to do it, but actually Cynthia mentioned it before, but we have a research team within Fidelity digital asset management who is looking at this space all day long. So it's just constantly being at their side, understanding what's interesting, what's real, what's not real. So it's really leveraging our in house. Research team and I'd even expand it beyond that. As you remember, we have quite a few areas within fidelity that actually also are focused on research and also development, experimentation.

Cynthia Lo Bessette

And that would be our fCat center for applied technology and the lab. We have regular engagements there and we have actually quite a few other venture teams across the organization. And they also are equally engaged talking to startups, talking to developers. So having that network of people in the ecosystem also adds tremendously to how we shape our ideas and priorities. Awesome.

Trey

One of the things that I think about a lot, and it's probably more of a 1015 year old thing, and it would only be an issue if you're hyper successful, is just the concentration of these assets at the custodians. It would be one thing if we had all of the custody banks that were actually playing in the space, but I think about just the definition of custody, and the interesting thing about public blockchains is that you can shard keys and you can actually have collaborative custody schemes. And personally, as a consumer, what I would love to do is have one key with a fidelity, maybe one key with myself, and decide on a third participant, maybe. Is that something that's ever going to be possible, do you think? Obviously it's technically possible, but what's your outlook on just the definition of custody changing as a result of this technology?

Matt Horne

So I think phase one is just someone do it for me that I trust. And I think thats where were at with our retail offering. With Fidelity Crypto. You sign into fidelity crypto fidelity holds the bitcoin or ethereum in your behalf. You trust fidelity and thats how its set up today.

I think as this space grows over time and people understand it better, there will be demand for individuals that want to have a multi seg setup like what a CASA has, but more on an institutional level. So I do think over time that will happen. It's just going to take probably a decade or so to get there. So I will add on to what Matt just said is to say I can think of and conceive of for individuals more of a safe deposit type concept, which you have multiple keys and you can certainly create a little bit more redundancy and security from that standpoint, from a fiduciary standpoint in being able to demonstrate that you've got control and that you actually are safekeeping the assets. Does that allow for this multi party and sharding?

Cynthia Lo Bessette

That's an interesting question and maybe continuing evolution of the way that policymakers and the regulators will think about what actually safekeeping and control means from a fiduciary standpoint. Is it safer if you are able then to create multi party custody solutions? I guess it's a lot easier in the tokenization form because if you have an interest in a company, it's not like the company is just going to disappear. So it's more of an issue with these bearer assets, I suppose. It's exactly right.

Trey

Well, this is super exciting. Congratulations on all the flows. This is refreshing the flow, one of those flow pages every day and just seeing the new flows. I don't think you guys have had a negative day yet, which is remarkable. Oh, we're going to keep crossing our fingers.

Cynthia Lo Bessette

Yes, it's a great streak we've been on. Well, where can we send people to learn more about what's going on at Fidelity digital asset management? On the retail side, you can go to fidelity.com and learn more about some thought leadership and our products there. On the advisor side and on the institutional side, it's institutional dot Fidelity.com again, that's where the thought leadership would sit and information on our products. Thanks for coming on the podcast.

Thank you for having us. This has been great. Appreciate it. Thanks for listening to another episode of on the Brink with Castle island. To find out more about Castle island, visit Castleisland VC.

Trey

To listen to all of our podcast episodes, please go to onthebrink Dash podcast.com or just click on the tab in our website. Thanks for listening.