On The Brink with Castle Island - Terrence Dempsey (Head of Product at Fidelity Digital Assets) (EP.26)

Episode Date: December 16, 2019

Terrence Dempsey, the Head of Product at Fidelity Digital Assets joins the show. In this episode we discuss:  - Terrence's career trajectory, including his role at Second Market prior to Fidelity - Fidelity's product offering and ambitions in the cryptoasset industry - Terrence's views on the current state of play for market infrastructure

Hey, everyone. Thanks for tuning in to another episode of On the Brink. So we've been having a lot of fun going deep into topics on this podcast. And this is going to be another one of those deep dives. So we're excited to have a close friend of the pod, Terrence Dempsey, the head of product at Fidelity Digital Assets on the show this week. Terrence is definitely a below the radar type of guy. But anyone who's ever interacted with Fidelity or before that digital currency group where he used to work, over the years, you know that he's one of the most talented and hard work. people in this industry. And as our former colleague, we can certainly attest to that from firsthand experience. In this podcast, we spent a lot of time talking about how Terrence actually got into Bitcoin. And so he was working at Second Market for Barry Silbert before the company became Digital Currency Group and was really on the ground floor of that journey. We also spent time talking about Fidelity Digital Assets and the types of products and services that the firm is offering to their clients on the institutional side. Before he was the head of product at Fidelity, Digital Asset Group, he actually worked on the liquidity provisioning for this product line.

So some really good content that I think will be new material for a lot of people. This one was a lot of fun for us, and I think you'll enjoy it too. So without much further ado, here is our conversation with Terrence Dempsey. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market. is asleep. The federal government is stepping it 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 to Britain's ailing economy with a new round of course, it's easy, and 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. Welcome to On the Break. I'm Matt Walsh. And I'm Nick Carter. And we're very lucky to have Terence Dempsey, head of product of Fidelity Digital Assets. Thanks for joining the pod. having me. Very excited to be here. Very fortunate to be here. You've been a lot of great guests. First podcast for you. First podcast, indeed. So Terrence is a former colleague, and we're very excited to dive into a lot of content with you. So as we do with most guests, we'd love to just

start with your career arc. So how did you become involved in the space? What was the road that led you to be the head of product at Fidelity Digital Assets? Yeah, I mean, I wish I could say I had the foresight to say this was going to be the next biggest thing. You know, for me, frankly, it was right place, right time. I was working at Second Market, actually right out of college as an analyst there, focused on mainly their private company marketplace, and our CEO and founder of Second Market, Barry Silbert, most famously now runs Digital Currency Group or DCG, started getting excited about Bitcoin and started talking about it and actually saw some of the friction in the market

to be able to buy, sell, hold, store digital assets, and at the time, namely Bitcoin. So he was talking a lot about it and wanted to solve a way to do it. And I was just in the right seat at the right time and had the opportunity to help build out the Bitcoin Investment Trust and what's now great scale investments. That ultimately led me to Fidelity here in Boston. So moved up to Boston in 2017 to take on a role within Fidelity Center for Applied Technology as they were looking at this space and operationalizing in general

a number of businesses within there. And so the work that was getting on in Fidelity Center for Applied Technologies was really interesting to me, especially the work they were doing around Bitcoin and blockchain and the focus that the team had on doing that was really interesting.

So kind of packed up my bags and moved up to Boston from New York in February of 2017. It had been here ever since. And so joined much more on the operational side We announced in October of 2018 the launch of Fidelity Digital Assets as a business looking to serve institutional customers, and I was fortunate enough to help oversee the product function there. So that's an awesome story, and definitely want to dive into a lot of the fidelity parts.

But curious, you talk about being at second market when Bitcoin kind of burst on the scene. A lot of people know digital currency group now. They have a venture arm, they have Genesis trading, they have gray scale asset management. but you were there before any of that was there. And so what was that like? I mean, did you even know what Bitcoin was? How was the initial origin of that story? How did that start?

Yeah, the introduction. So actually, I started there in 2008. Day I'll never forget, September 15th, 2008, famously the day Lehman filed. So really interesting, you know, full circle here. You know, the intro to your podcast now has got some of that story in there. and I was kind of thrown right into a hot seat. And funny enough, I was an intern.

So I joined as an intern. The market was kind of going away. I graduated college. I ended up going to Australia. I played lacrosse in Australia for the summer, came back and was fortunate enough to get a role at a company at the time. It was called Restricted Stock Partners as an intern.

And six weeks later, it was Halloween. They offered me a full-time role as an analyst doing data and analytics. And so that was... Bitcoin white paper came out as well on that day. Yeah, and I'll never forget. It was Halloween. We were actually moving offices. We're all the way downtown of Manhattan when they told me that I can join on a full-time basis. And, you know, that was super exciting to me. The company then changed name to second market. I started working on the private company side of things, actually helping to facilitate transactions in private company stock. And, you know, kind of through some of that work, we'd heard about more financial services, fintech companies that are coming about. And obviously, Barry was very much. part of that work and he's the one to start talking about it.

We'd have these all hands of meetings. He would just bring up Bitcoin? Yes, we'd have all hands meetings. And one of the things for every new employee, they would introduce themselves, we'd also talk about something they're passionate about. And Barry would always give the example. And he started talking about what he's passionate about outside of work being Bitcoin. And I'm not going to lie, dismissed it at first, you know.

It took me reading the white paper a couple of times. It took me to fully actually start working on what the problems were. If we think market structure is bad now, you can only imagine what it was like back then in late 2012 or 2013 when we started thinking about how to productize that and was just fortunate enough to be in a desk working in an operational role to be able to think about different structures there. And for me at the time, it was just an asset, right? It was something, it was a problem, there was a market structure issue, and it took me,

and I'll never forget the day when someone had asked, I'm pretty sure it was Barry, which is, you know, where do you fall on the scale? Are you an evangelist or you're a skeptic or you're somewhere in the middle? And it was, you know, I kind of said, I'm a Bitcoin evangelist. It must have been sometime in early 2014. And I remember that because I think about it all the time, which was the day that I realized that this was actually a really cool, powerful asset. Did you think that, did you ever foresee that GBDC would grow to the size that it has?

No. You know, I think that is, it's remarkable. And I shouldn't say no, I shouldn't be so dismissive. You know, I think at the time that we were doing it in the early days of that when we launched in September 2013, you know, for me, this was a fundraising mechanism. We had launched a number of funds as well, things to like whole Facebook stock. And that, to me, was like at the time very interesting, it's much more mature. And so, you know. Pre-IPO, I guess.

Yeah, it's pre-IPO, correct. But yeah, by the time, you know, I left in 2017, it was pretty large. And obviously, you had the price run up in late 2017, where that's now ballooned, I think, something around $2 billion in assets. And so, you know, at the time that I think in five years or four years even that this would be the size it is, no, did I think sometime at maturity would have grown to be that large? Of course, right? That ultimately, you can look at GLD, and that's what we did a lot.

We look at GLD as a comp, and that grew a significant asset size. So even at Inception, you didn't necessarily just see the Bitcoin Investment Trust as a curiosity. You felt that it could be a virtual commodity and treated as such. Well, no, me personally, at Inception, which was September 2013, it was a problem, right? It was people wanted access to this investment. I didn't see it as a virtual commodity at the time personally, right? I think a lot of people saw it that way, but it definitely took me a lot of time reading into the white paper to almost say. And by the way, when this launched, it wasn't my only role, right?

This was a single vehicle that was being distributed and operated on by the folks at second market. And so, you know, I still had other responsibilities. And ultimately that became a full-time role for me, which was kind of that turning point. So anyone who's met you understands that you're really passionate about the space and that, you know, you spend a ton of time. It's, it is your hobby, just really digging into it, reading as much as you can. speaking to people in the industry, and you've been in the industry for a really long time. So curious what your particular affinity is. Are there parts of this industry, whether it be Bitcoin or other assets that you really identify with?

And how do you think about that? Yeah, I think for me, it's the perfect asset to solve a lot of, how do you say, curiosity, perhaps, that I have. You know, my whole career, I was the general generalist, right? You know, whether it was, you know, marketing, operations, distribution, market structure, you know, even a little bit of sales, and then economics, accounting, legal history, all things that I find very interesting. And getting to work in the space, you get access to all of those things, right? You know, you're not in this vertical, just kind of stuck pigeonholed about one idea.

You're not just a technical person that's a developer or a coder. You're not just an economist. You know, you're not just a salesperson. You have to have a really good understanding of a wide variety and breadth of different topics to really, you know, be able to piece everything together for what Bitcoin is. You know, Bitcoin's not just a technology movement. It's not just an economic movement. It's not just a legal movement.

And all of those things have been super interesting to me. And so, you know, it's packaging all of that together, which is what we're. what I find to be the most interesting. And so you've seen, obviously, since you started at Second Market, there's been a lot more than Bitcoin. In 2017, we had this blow off the top with all of these ICOs, which a lot of those are unregistered securities offerings, obviously, but I certainly didn't see that coming.

I mean, that took me by surprise. Curious what your reaction was in 2017 when things just started getting crazy. Yeah, and again, I was fortunate enough to be in a seat actually facilitating a lot of private companies. transactions, right? And so for me it was really interesting in that here's a new way for companies to have a capital formation process, right? You are kind of taking out a lot of the intermediaries or intermediaries look a lot different than normal and kind of tying it back to understanding some of the legal regulatory implications of what some of those token issuers

have done and that we're kind of just seeing the ramifications on. To me, what was most interesting about that was the potential tangential way for companies to raise capital outside of a traditional method. And to me, that's still very interesting, right? Being able to go direct to a consumer to be able to raise funds as long as you do it, obviously in a regulatory-compliant way is very interesting. A way that you can actually trade those funds and actually program those securities to me is very interesting. So, you know, while it was a mania, right, that everyone would kind of agree to, for me from a pure market structure interest standpoint, was really interesting.

Do you think that, so you feel that there's merit in the notion of raising capital through something like a token offering, although the first wave were meritless, basically, or the implementation was very poor? Yeah, I think at some point maturity, that there's some merit there. We're definitely not there today. But, you know, I think to potentially gain some efficiencies, to create a really great user experience, for consumers, it is a very interesting way to actually go out and raise capital and actually have a formation process from a company lifecycle standpoint. Now, today I think what's talked about a lot is more of the illiquid securities or assets that can be more freely tradable.

I don't know if that's necessarily the case, right? That's the big pitch today. You know, I kind of disagree a little bit that that's the case, but I think at some point of maturity as we see more market infrastructure pick up, as we see the full life cycle of a company from inception all the way through to some either closing out of the company, M&A activity, whatever it may be, actually be able to raise capital, trade capital, move capital efficiently. There is merit to that, definitely.

It's interesting that even before blockchains existed, you were working on this problem of rendering private securities liquid. And that has been a huge motivation behind all the security. tokenization. Yeah. And like I say, right place, right time, and a little bit of blind faith, you know, it has been awesome, right? And I think it has given me, you know, really great experience to help my role that I'm in

today. Since you got started at Second Market, a lot's happened in the Bitcoin community. There's definitely been a lot of scares. So just off the top of my head, Mount Gok, Segwit 2X, Craig Wright, various like BitFinex hacks, Bananx hacks, Mike Kern, Rage quit. Was there ever a time where you lost faith in Bitcoin that you thought this might be going away? Yeah, I mean, that's a tough question. It hasn't been the big cuts.

There have definitely been time where you lose faith. And it actually is what helps drive me today and helps, I think, make me a pretty good product manager at Fidelity today. You know, I think user experience for Bitcoin is tough. I think it's the death by 1,000 cuts every time I hear a friend that got his phone hacked and lost even $1,000 a couple hundred. even shoot $10 a Bitcoin. You kind of hear that story over and over again. You hear somebody sent Bitcoin to the wrong address. It's those things that I haven't, trust me, it's really moved along quickly,

but it hasn't progressed to a level where I feel like your everyday user can actually use it yet, right? And those are a lot of things that we're working to solve here. And at times it's, you know, what's taking so long? so long, what's taking this industry so long to be able to figure that out. But I think the human capital that's now flowing into the industry and the asset class, I think it's going to take something pretty monstrous to help destroy even a little bit of my optimism. What do you see as the major structural barriers, maybe the buckets of barriers that are preventing more widespread adoption of Bitcoin?

Yeah, there's, you know, there's a couple there, right? So, It has a history, right, 10 years, 10 plus years of history, but a big portion of that history is overshadowed by negative news and media and attention. And I think a large number of households or folks here in the U.S. and even abroad don't actually know what to do, right? They don't know if it's an investment, is it a current, you know, you're still here today, Is it a currency or is it a commodity? They're called cryptocurrencies.

They're called digital assets, but the CFTC oversees them, so are they commodity. I think a lot of people still have big questions there. I think the user experience is one that I think people still struggle with, right? Until we see, you know, somewhere where someone can access, if they're looking at this as an investment alongside their other investment accounts, that will be really interesting to folks. if they can access it very easily through their mobile device and have a really good feeling of security,

that's going to be really interesting, I think, to folks. If, you know, again, going to classification, if people can classify this somehow, right, for themselves, I think that will get people to a place that's very comfortable. Do you have an opinion on the best analogy for something like Bitcoin in terms of the existing asset classes? You know, I think there are a ton of them, right? For me, personally, I'm still the digital gold stored value. Makes a lot of sense, right? Supply and demand.

That to me, it resonates with me personally. It resonates with people that I speak with. But, you know, I think ultimately people are going to form their own opinion based on analogy that they have, right? And, you know, it's still essentially an early stage, you know, If I were to liken this to more venture company, from where the technology is, it's still kind of early stage, even though it's 10 years in. I mean, look at Amazon when they were 10 years in.

It's still a very interesting story, right? No one would have thought that Amazon would have been the world, you know, this retail online bookstore would be the world's largest provider of cloud computing. So I think that story and narrative will start to unfold itself as more applications get built using it. Yeah, it's been interesting to see how so many of the. big conflicts in Bitcoin have been a function of people having different visions of what it should be with, you know, obviously the main one being the, you know, the big block episode in 2017,

which your former employer was obviously very involved in, you know, where there was just this fundamental view from many of the early bitcoins that it was a fundamentally a payments technology. And I think many in that camp would see some sort of irony in terms of treating it as an asset to be stored and custody, especially by a third party. Is this an objection that you deal with at all, given your mandate? Yeah, so a mandate being here at Fidelity. Yeah. Yeah, I mean, so Fidelity Digital Assets, right, we're providing access for institutional investors to be able to buy, store, trade, serve it, and we can service their digital assets. assets. You know, think about the institutional market is, is they typically require a third party to do that.

So it would be out of the question for them to really engage with the asset directly in the first place? What do you mean engage with? As in like literally transact with it. No, I mean, institutions use dollars, right? And they transact in dollars. They just, and that has to be held somewhere. They're not holding dollars under their bed. They're using a bank to do that. And if that is the way that they see that technology working, then that's their right and they can absolutely do that. Now, you know, there are some practical limitations to doing that, right? Like, you can't go buy something and do you wait for a confirmation? Do you not wait for a confirmation to actually make sure that's a good transaction?

You know, you're going to wait at the store for 10 minutes to make sure that happened or, you know, you're going to release securities to an institutional investor immediately if there's not a confirmation. So, you know, I think that's what's really interesting about what's the application being built on top of Bitcoin and helping improve that UX. So I want to dive into a little bit more about what Fidelity is doing. So for those of you who are not familiar in the audience, it would be great if you could just set the stage in terms of what the product offering is right now for Fidelity Digital Assets. And also maybe weave in why you decided to join, you know, once you heard this vision, what got you excited about it? Yeah, so Fidelity Digital Assets, we are an institutional, for lack of a bare term, brokerage platform for digital assets. So right now we have an institutional custody platform that allows institutional investors to hold their Bitcoin with us.

And for us, that's safekeeping security, books and records, providing them access to their Bitcoin holdings. We also have a trade execution platform that really access more of an on-ramp, off-ramp, for clients to be able to get access to Bitcoin or dispose of their holdings if they'd like. And it's been great so far, right? We announced the business October 15th of 2018. You know, we said we'd be live in Q1. You know, we met and exceeded that date.

I believe it was December of 2018 when we had our first client onboarded. And, you know, have been slowly rolling that product out to more and more institutions as we scale the business. You know, I'm lucky enough, as I was explaining earlier, you know, kind of joined in Fidelity Center for applied technology and so was kind of in on the ground for help set the vision, right, and helped us think about what the institutional market looks like. And, you know, at the time that we started building out the business,

if we kind of surveyed the landscape and saw that there is a big hole in the institutional servicing market for this. You know, the industry very much started retail first. or consumer first. And it was really easy for consumers to access custody, to access trading applications, but it was really hard for institutions to do that, not only from a pure sign-up, right, where you're putting in your personal email and your personal name and then signing an institution to that, but, you know, even from, you know, basic reporting capitalization insurance

that wasn't really there at the time. And it was a bit of, you know, some invoicing. down from broader fidelity customers, knowing that we were doing some work in the space, showing some interest, and also us surveying clients as well, seeing if they're interested in it. And you guys were on the ground floor too, so feel free to add anything to that.

But that really resonated with me, which was here today is an underserved market, not because they don't want to be, right? Just because they physically didn't feel like they could, enter the market if they wanted to. Yeah. Yeah. So, you know, I think it's been fascinating to watch just how the company has really leaned into this technology and really been at the forefront of this. And I mean, when you started, you were actually tasked with figuring out how all the liquidity would work for

this platform. And I think people would be shocked to hear just how immature that landscape was even a couple of years ago. And so maybe talk a little bit about what it means to procure liquidity and actually service that within the context of a large regulated financial institution. What does that job look like? Yeah, deep breath there. You know, at the time when we started, and you guys had a great podcast with Dan from Circle, recently who talked a lot about what liquidity looked like in the market, even when he was starting servicing Circle's retail app.

So I'll try not to rehash that too much. But, you know, there were only a handful of, of, institutional like traders or institutional firms that were trading Bitcoin. And a lot of it was being done over the phone, over Skype, you know, over some messaging platforms. And, you know, for an institution like Fidelity, that's not the way that typically transactions happen. You know, at times you can of course go over the chat on Bloomberg,

but you're still dropping tickets and they're getting booked and they're into books and records. And to the best of my knowledge, Skype doesn't have that capability or functionality to drop trade tickets into books and records. So what we kind of had to focus on, and at the same time, the typical trading counterparties, the big banks and trading firms, weren't really touching Bitcoin yet,

and for the most part still have yet too. So we've had to go and look at a number of these companies and actually apply a very rigorous, counterparty review process on them that isn't too different than the process that we look at at normal trading parties here at Fidelity And so you know that really slimmed down the list of potential counterparties and then we also looked about you know connectivity Going back to market structure, you know Not many firms actually had electronic trading capabilities which is what we're very much used to right and and so either connect over API

You know, a lot of it was over the internet via REST APIs and not as much the fix or cross connects that we're typically used to in terms of institutional trading. So we've seen like absolutely very much large evolution of that more recently as the mark structure as it started to pick up and we started to see an evolution actually sway more towards the traditional trading of these assets. But yeah, back then it was tough. There's only a handful of firms that we'd feel comfortable doing. business with. You know, luckily enough, I had a number of, a couple of good relationships that would help get across the finish line. So within that context, maybe staying on the topic

of liquidity, the other thing that's really happened throughout the course of the life of Bitcoin is just a lot of the volume has historically been on offshore exchanges, at least for the spot markets, a lot of the volume's been on offshore exchanges that are unregulated. You know, Gox, obviously, was a large liquidity pool to start with right now. Bonance is enormous. How do you think about these venues, or these venues that could be accessible by a large traditional financial services firm, or is it a bifurcated market right now? Yeah, I mean, you said a key word in there, which is just unregulated.

As we look at potential trading counterparties, you know, one of the first things we do is just look at their regulatory capabilities, right? So we're going to look at their operational capabilities, the regulatory, what their licensure looks like from a regulatory standpoint, and what their overall operational technical implementation would look like. So to your question directly, if they're unregulated, we likely wouldn't access them.

We're not likely, we wouldn't access an unregulated venue that we felt needed to be regulated. You know, we're not gonna, we're just not gonna do it. But to your point, there are large pools of liquidity right now for folks to access. And that doesn't mean they're inaccessible. We would look to our counterparties to make sure they're only trading on regulated venues. But I think they're going to continue to be around. It's absolutely bifurcated today.

But it does provide opportunity for someone that wants to be able to play both sides to do that. It's kind of an interesting asset as a class, because with equities, you would never have a situation arise where IBM is traded on some unregulated venue in the Seychelles. But for gold, I suppose you do, right? You'd have these black market transactions happening all the time. And like Forex, right? Yeah. Yeah.

Those markets are global 24-7. Yeah, I mean, it's not to, you know, securities, obviously, they're a little bit different because they need to be traded in a certain manner. but, you know, what I'd almost call a darkpool ATS versus a fully lit exchange, you know, it's not too different there, right? You have certain players that go to one, certain players that go to another. And so, you know, bifurcated markets aren't new and, you know, wherever we decide that as a business we're going to tap into, that's where we're going to tap into.

One of the things where it becomes potentially a problem is around investment products. And so we've seen ETF denials for the Winklevoss, ETF proposal, as well as for for BitWIs that really call out the fact that on the spot markets, a great number of these venues are not surveilled and they don't have agreements between themselves. And also just the volume is on these unregulated exchanges. And so do you see this being a permanently gating factor for asset management product in this category? Permanently gating is tough, right?

Because we just listed four or five other assets that are similar and that there are investment products wrapped around them. I think until there's more clarity and understanding of the data that's being pumped out of them, right? We've seen reports that 95% of the volume is fake, 99% of the volume is fake, 40% of the volume is fake. And I think, you know, kind of that disparity is what's also just causing a lot of confusion. And so, you know, being able to actually prove that through really great data analysis and cleansing, and there's a bunch of great companies out there that's doing that. One comes immediately to mine coin metrics.

But, you know, I think that's what's going to help solve that, right, is actually providing clear articulated data to ultimately folks that want to prove it. And look, if I'm an investor, if I'm a regular person and I see all these disparate headlines, I'm probably not going to invest anyway. And so I think that's, you know, that's going to be the struggle as well. The one proposal that lots of people have made on that axis is looking to the ground truth of the, assets which are held on deposit in some of these institutions so that you could compare that to the claimed trading volume and see if the relationship makes sense or not. You know, for instance, in the case of Kodriga, you know, if they had been imposing some sort of transparency policy like this, then, you know, you might have been able to detect

the issues there before it was insolvent. So is this something that you've contemplated at all? Any of these notions of proof or reserve? Totally. Yeah, I mean, proof of reserve to us is super important, but I don't know if that solves necessarily the trading problem, right? Because what's your turnover multiple going to be on all the assets that are traded? You know, what is turned over at fidelity may be a lot less than what's turned over on GDAX or, excuse me, Coinbase Pro, versus BitMax, right? Yeah, but you could use it to spot extreme outliers, for instance. You know, like exchanges that are claiming very high volumes and you, you know, have virtual.

nothing reserve for instance. Yes, if you have virtually nothing reserved. Yes, so yes, extreme outlier sure, but does that absolutely solve the problem? I'm not sure. Yeah, I mean, I think what might be interesting is if exchanges actually become engaged in creating a public-facing audit or attestation as to their assets, because that's one of the interesting things about the asset class is that you can prove ownership of some coins to a third party. Although so far, most of the main exchanges have been reticent to do that, all of them, really. Yeah, it's a competitive advantage, right, that they want to... Secrecy? Yeah, for now.

For now. No, totally, for now, right? And as, you know, again, mark structure is still basically in its infancy. And I'm not sure that exchange A would want to share information with Exchange B that could be seen as competitive. So let's dig into some of that market structure and something. that we almost feel like a broken record talking about when we think about the market is we often say qualified custody, regulated spot markets, or surveillance sharing agreements, these are some key enablers, this is going to make the whole pie grow, this is going to allow institutions that previously could not access the market to actually get in. But what is qualified custody?

I mean, why don't you just break this down for us? And what does it mean to be an institutional custodian? We hear a lot of companies claim that they're institutional. What does it actually mean to be institutional? Yeah, so to me that's a two-part question. So you have the one question of what is a qualified custodian. A qualified custodian is a very, is a term that's part of the Advisors Act, which is subjected to all registered investment advisors. And it just says if they're holding funds or securities, it describes where those funds

or securities need to be held. And it's been really interesting, you know, that this has become such a hot topic. and everyone's lining institutional investors to this qualified custody role because it's only, you know, is a portion of the institutional market. And so, you know, I hope that clears up what qualified custody is, right? It's a very clear-cut role as part of the Advisors Act and is really only focused on those entities or advisors that are registered investment advisors. That's not to say that there are other such roles for things like broker-dealer.

I heard you say on your podcast many times, you know, good control location or 15C3-3-3, which is what broker-dealer needs to look at. Right. So there's a number of these issues, as lawyers like to call them, that are very much legal in nature, right? And so it's very much a legal term. And so, you know, that's one aspect of the question. I think your other question around what is in the question.

institutional custody is really interesting, right? So in traditional markets, I saw it very simply explained recently or in an article, which is, you know, in traditional markets, custody is books and records keeping, right? That's all it is. It's debits and credits and keeping track of customers' assets. And it's everything that says on top of that books and records that makes a really great user experience.

So, you know, if you're an institution, it's an easy onboarding as an institution that may have accounts and sub-accounts and may have certain employees that can access one of those accounts, but not a sub-account. And so it looks like entitlement. It's providing reporting out to customers on a periodic or certain ad hoc basis. It's how do you integrate some of that data upstream with some of their other consolidated data reporting feeds.

And it ultimately just comes down to what does safety and security look like? How do we think about risk management? How do firms think about insurance against their assets as an ultimate backstop? And so when you wrap all of those things together, to me that is what institutional custody is. And a firm like Fidelity, we're fortunate enough to have a lot of those aspects, right? And so we're super innovative, right? And we're always thinking about new technologies and new ways to offer products and services,

but at the core of it, we're going to safeguard assets, right? in the digital asset world, that's number one. You have to safeguard your assets. Then you're going to have books and records sit on top of that, and then a portal on a dashboard and a view into all of that when reporting, and it also ties some of the risk management into there. So we had a big four, provisive stock one type one. We believe we're probably the first digital asset custodian

to receive that from a big four. And so that really speaks to our risk management and control structure. I didn't realize that. That's great. So that is definitely the first time I've heard that there's been a big four firm opine on that issue. The messaging I've always heard from the big four is that they don't want to get involved in crypto assets or digital assets. Yeah, you know, I've, that's interesting, right, because I'd argue that they do. And that we've even seen, I think it's EY actually put out, I'm going to butcher this, nightfall maybe, which is an ERC.

standard on that right so they're one of the big four you know we've seen I believe KPMG has a blockchain digital asset practice now and a lead there and you know the other two being PWC and Deloitte all have practices that are looking at this and so you know going back to your proof of reserves you know I think a lot of them there's actually a conference recently where a lot of the big four rat and there was you know a talk on zero knowledge proofs and how you know, audit firm should be thinking about proof of reserves and running those to actually check balances. Yeah, there's a paper called Provisions, which uses a CKP for a proof of reserve.

So that's actually quite encouraging to hear. That's good. Yeah, audit is back, we like to say. So let's talk a little bit about the roadmap. So Fidelity has launched Bitcoin Custody, has launched trade execution, both really great products. Where is it going from here? Yeah, you know, our tagline here or mission statement is, you know, we want to be a full-service brokerage platform for digital assets. And so we want to provide, you know, a seamless platform for institutional investors to be able to access and have their digital assets treated very much like other assets that they

hold. And so that, you know, we grow vertically by having new products and services. And, you know, very natural, there's a very natural extension that moves up from their upstream. And so those are all things that we're looking, you know, we're looking at doing. You know, for us, innovation is awesome, right? We're going to be super innovative, but also safety and security is going to be key for us. You know, so I think we're going to focus the most from a robot perspective is probably more horizontal. You know, how do we expand geographically into new markets? Right, right now, we're just here in the U.S. How do we actually enable ourselves to service

other types or a full spectrum of institutions, right? I think what we've seen so far very much, you know, a lot of your family offices, crypto hedge funds, and some traditional hedge funds mixed in with some of your more traditional institutional investors, pensions, endowments, and others. But it's really how do we focus on bringing those institutions into market that aren't in market yet. And that's really where we're spending a lot of time focusing. And for a product standpoint, where are the features and services that they need?

and going out and working with them directly to actually bring that back in-house. As we think about roadmap, what's most important to us. One thing that's interesting is that the crypto market has been somewhat fixated on fidelity as maybe the first mover among firms of its size in terms of being so aggressive about digital assets. What has it been like internally observing the, what has it been like internally observing the, the kind of rabble of the crypto market looking to Fidelity so expectantly in terms of building products, to service this asset class. Has it been like a surreal experience to have your work be so public in terms of the way that's interpreted? Yeah, it has been surreal. You know,

and you get lost in the moment a lot, right? And so, you know, for me coming from what I'd call startup and transitioning to fidelity digital assets, you know, we very much operated like a startup. And so, you know, for me, it didn't feel like I was within, you know, the fidelity actually building this and working on this. To me, it just seemed like work, right, and doing things. And then when, you know, you do go out and you read articles or you go to a conference, it is a little bit surreal to see that. And when you see, you know, institutions enter their information, your contact us form. saying like, wow, that's a name that literally just came through our contact us form is super interesting as well.

And so, you know, it surreal is a good word. And it has been interesting, but at the same time, the spotlight's on, right? And it's really on us to make sure that we're building the right products and services for the customers that need this. So I know in 2017 one of the most common requests made by just, I guess, I guess, I guess retail investors was, you know, would you, Fidelity help us deal with our digital assets? Has the level of uptake in terms of that more narrow set of clients that you're targeting now, has that been, has that met your expectations? Yes, from the institutional side.

Yeah, it absolutely has met our expectations. You know, we're on, we set a goal for ourselves and we're on target to meet that goal. And so we feel really great about where we are as a business in kind of, providing products and services to, you know, where we had focused and where we thought there was a need in the institutional marketplace. And so when you launched, a lot of the messaging was about Bitcoin naturally is the kind of the preeminent, you know, digital asset, whatever you want to call it. Can you talk a little bit about your methodology for evaluating these assets and why, you know,

Bitcoin was the first choice for you and why, you know, there hasn't been anything else since? That was to satisfy the XRP army, right? That question. So, you know, the initial focus on Bitcoin was just a function of the work that we'd put into it, right? It's been around the longest. And, you know, Fidelity's story dates back to 2013, 2014, when they started doing a lot of work on Bitcoin. It had been out in the wild, for lack of a fair term, for some time. We could mine it. The market cap was by far the biggest.

And we were able, there was some semblance of market structure there, right? And I know it was talked about a bunch that we launched a mining effort in 2014. Fidelity launched the ability for customers to pay for coffee and sandwiches in the cafeteria in Bitcoin. And so a lot of that infrastructure was there for us to do a lot of proof of concepts on it. That's not to say that nothing was done in other assets, but those were the ones that really stuck. And so, you know, our valuation methodology, for other digital assets is really focused on one customer demand, right? So we're very much filling this institutional segment

or providing services to this institutional segment of the marketplace. And what we hear the most from them is Bitcoin. And it could be that's where they've done the most work. It could be that's where they see the most infrastructure out there for them to be able to trade, store, and hold that. You know, number two, what we do is we do a full technical, analysis and deep dive on on each blockchain and the native assets and it's you know it's not only you know what's their consensus mechanism and you know what does that look like it is also understanding

who are the developers on the project how much developer growth has there been is there been any contraction of developer growth for any reason what you know what are all the applications that are being built in and around it and kind of helping us tease out what the use case would be for investors and why they may be interested in. And we feel like that passes enough, you know, muster will then look at a legal regulatory compliance lens and view on that and look to provide that. And then we'll do a lot of security work as well and understanding what are the cybersecurity implications to offering a product like that. You know, and so for us, we did publicly announce Bitcoin and Ether

when we launched. We right now just have support for Bitcoin or continue to work on making Ether available for our clients. One of the things that has been continually fascinating to me over the years and obviously I was here for a good part of this is, you know, you think about this asset class and the creation of Bitcoin and digital assets and you look at other financial institutions

and how they're trading this technology. So for the longest time, you know, we've just seen custody banks just stare at this and just don't care. Or they're doing private blockchains and they're trying to re-platform their back office. Meanwhile, you have this technology that's the emergence of a new asset class

that people are just demanding to hold. And by the way, the people that are asking for it largely are the people that you would want for, you know, next generation of customers. These are the people that are young and savvy and, you know, by and large, in positions to eventually have, you know, wealth to be able to put on some of these platforms.

So it's really been fascinating to me to see the inactivity of a lot of Fidelity's competitors. But at the same time, I think I have to kind of pull myself back to the, you know, there's some like really dark days, right? Like there's, you know, 2014, 15 prices crashing. No one cares about this. But I think my view is that there's going to be like case studies written about the Fidelity Digital Assets and the persistence here. So what has it been about Fidelity that has allowed the firm to continue to innovate while its competitive? are just largely sitting on the sidelines for now. Yeah, it's got to be Fidelity's commitment to innovation.

When I first joined, they had said that Fidelity was a technology company at heart. That just happened to do financial services, and I thought it was the funniest thing in the world. Right. Here you have all of these regional centers and sites in every city. This is not what a technology company looks like. Right now, coming from a seat where I was helping venture back technology companies, companies actually facilitate some transactions in their stock. So I had a good feel for what, in my mind, a technology company really was.

And I get to walk into Fidelity Center for Applied Technology here on my first day and take a tour and you actually see a commitment to innovation, which for me has been eye-opening. And the firm is, I mean, the fact they even have a Fidelity Center for Applied Technology, which is separate than Fidelity Labs, which is another place. where teams and businesses are looking after innovative products and services to offer into the businesses has been really awesome. And so the firm is a very strong commitment to looking at new transformative technologies that could impact how the business operates in 5, 10, 15 years, and actually starting to get

a really good understanding of that. And so for us, you know, that has been really the catalyst that helped drive the business here and being able to have a team that's focused on continued innovation, not only in digital assets and blockchain, but all these other new technologies is only going to make not only our product better, but the rest of fidelity better. I think it's that level of commitment, which provides or force fidelity the ability to have a business like this. Do you think that the competitive set of existing custodians and existing brokerages that are not in the crypto space yet? Are these folks waking up to this opportunity

and starting to mobilize? How do you see that? Is that maturing at all? Yeah, I mean, I have a middle row seat to some of that, right? By just going to conferences and hearing some of them speak, yeah, I think that they're viewing it and they're watching it and they're working on what products and services they might be able to build around it. So absolutely, I think that they're, you know, I think that they're awake and that they're trying to see where they may be able to fit in for their, for their business to actually operate in the ecosystem. What do you make of the messaging by many of these kind of crypto startups or crypto firms that have been around for a while pitching themselves as institutional, which is something

we hear a lot? Do you think that is, you know, credible or is it just kind of a PR? strategy for them. Look, it's got to be credible, right? They're not just, you know, I hope they're not just putting institutional at the back half of their name and, you know, just hoping that things come in. You know, there is a segment of the market, as I was mentioned, that I felt that when we felt, when we looked at this landscape a couple years ago, was underserved. And, you know, everyone's trying to kind of fill that void.

And so, you know, great companies have been founded. as startups that have met institutional investor needs. And I think we're going to continue to see that. Fidelity is a large asset manager. We mentioned earlier that have been various ETF proposals over the years for Bitcoin products. The window's clearly not open for that right now. But there are products out there. I mean, Bitcoin Investment Trust, you help build that.

That is a listed product that you can buy on Fidelity.com. You can buy on an existing brokerage platform. So for those who might not be as deep in the weeds on how these products actually work, what is actually possible right now from an investment perspective in terms of creating products that hold Bitcoin and other crypto assets and what's not possible? Yeah, I'd say broadly speaking, with a few exceptions, which I'll touch on, are mainly private vehicles. Right. And here in the U.S. where a private vehicle looks like is a limited partnership, LLC, some type of special purpose vehicle that is set up for the sole purpose of, you know,

holding an asset. And that could be Bitcoin. It could be a basket of digital currencies. And I think that's what we're seeing a lot of today. You know, you mentioned Gray Scales Bitcoin Investment Trust that largely is a private vehicle that has shares that trade publicly through a seasoning process. You have, what was the announcement this week,

was Wisdom Tree on Six having some type of offering. And I think we've seen a couple of other types of companies looking to offer their shares on other venues. But at least here in the U.S., it's very much private vehicles, right? And that runs the gamut from, as I said, like a limited partnership, you know, which provides certain benefits to an LLC or an SPV. Before Nick asked the question of, like, well, why would you want that instead of just holding, you know, the underlying directly or the spot market directly,

I think there is a thesis and one that is validated through the success of Grayscale and others, you know, that holding a security, holding something known, resonates with folks. And having a more managed-like account resonates with a number of folks, right? They know what a, you know, Reg D offering is. They know how to review a PPM. And that resonates with folks. And so are you optimistic about the potential to eventually have ETF? and mutual funds and more retail-oriented and accessible line of products here?

Is it just a matter of building some of this infrastructure? Absolutely. Yeah. I mean, I think it's going to take time and thankfully that clock's already started, right? Some would argue that it's six years in on the clock. That's been ticking. And absolutely, I wouldn't be surprised if we saw an investable product that's publicly traded. that provides access to investors around digital assets.

Do you think many people in the industry would say that there's this kind of existential conflict between the kind of cyberpunk origins of something like Bitcoin and then the business that would financialize the asset in terms of, well, if Bitcoin ends up, you know, a large fraction of supply ends up captured within the wild gardens of institutional finance, where there's lots of surveillance and KYC and compliance attached to the circulation of the asset, then that sort of defeats the purpose of the asset in the first place, which is that it's meant to circulate freely and without encumbrance and so on. Do you see this as attention or in your mind are you just satisfying a certain demand to hold the asset

and you have to do it in a certain way? Yeah, I'd say it's more the latter. that we see a certain demand to hold an asset. It has characteristics that people find appealing from an investment standpoint and that will provide that to them. And there are rules and regulations that need to be complied with,

and you'll have to comply with those rules and regulations, I hate to say, but regardless of the ethos of that, right? Of where that came from. And for us, it is, or for me personally, it's something very, you know, interesting and near and dear, you know, to me, which is, you know, I think the initial, under my initial kind of interest in Bitcoin was that ethos, right, of being able to hold an asset on your own, right, that you could feel comfortable doing, free and clear of any other intermediary. And, you know, in a way that resonated with me as

someone that enjoyed technology and was a technologist, not having to worry about suitcases of cash under my bed. Although it could have been a very small duffel bag at my age when I learned that Bitcoin. But, you know, it, I think what I think about this, right, is, you know, we are absolutely just satisfying, you know, demand and that there are plenty of things that the community will do if they're needed and if a fidelity may support that, we'll Is there a critical threshold of supply that if it ends up within these custodial institutions, you consider the Bitcoin project to have lost its way, for instance? You know, like if 80% of Bitcoin ends up held with various custodians, is that a threat to Bitcoin?

It's a threat to what Bitcoin was in 2008. It's a complete win for a brand new technology. an infrastructure that is kind of remaking how rails, for lack of a better term, work across industry. Have you guys given any thought to potential protocol level changes that would impair your ability to operate? So, for instance, the addition of confidential transactions to Bitcoin, would that be something which would be a hindrance to the way that your products are operationalized? If it wouldn't allow us to do our, or wouldn't allow us to run our business, the way that we're set out to run our business, which is following certain rules and regulations, then it would absolutely impair the way that we do that, right? And I think, I guess my hope would be for things like that. There's some level of optionality that's included that would allow, you know, folks to be able to operate businesses, but also allow folks to be able to use the same rails for transactions that they'd prefer.

So Nick brings up kind of an interesting example of something that I, I wonder a lot about, we talk a lot about, which is just this idea of building a company on a nascent protocol, building a company that operates using a nascent protocol. And if you've looked at the history of Bitcoin, as I know you have, there's been a lot of companies that were kind of started with this idea that Bitcoin was a certain thing. And it ends up that they were building on building with the wrong assumptions. And so the payment processors really come to mind in 2012 and 13 of, hey, Bitcoin's going to be a credit card replacement.

Well, it turns out on the base layer, you're definitely not going to be able to do that. So those folks ended up having their business really compromised. So how do you stay close to the protocol and make sure that you're not making some more mistakes? Yeah. So, you know, I'd say the way that, you know, from an architecture standpoint, we have to understand that fundamentally the blockchain orderling protocol could go and even the businesses and ideas and use cases are wide, right? And they could go any which way. and so me personally how do we stay close to make sure that we're not building businesses and we're being very adaptive is it's tough right just like everyone else you have to kind of live breathe sleep you know this asset class and you know whether that's reading I listen to one podcast on the space you know there are meetups you know you guys host one we host you know we co-house you know we co-house host one here in Boston, you know, kind of staying close to events and, you know, having a network

of very trusted people that you can talk to about the industry. You know, I'd also say having Fidelity Center for Applied Technologies and a number of academic partnerships really does help us as well in understanding what's going on in academia where a lot of this work is being tested and thought about and to a degree implemented and taking some of those learnings back to our business has been super helpful. And so, you know, we kind of have to have to have a foot, or folks like me and folks my team need to have a foot on, you know, what's being built around us, but also what's being built within us here at Fidelity. So we can make sure that, you know, we're not being left behind. And you guys have done a great job of

sponsoring core development and being a very active part of the DCI amongst other things. So that's got to help as well. Absolutely. And those were some of the partnerships. you know, that we've talked to and some of the investments that the firm, you know, has made in our level of commitment to the asset class, you know, there's a number of academic partnerships, there's a number of professional organizations, you know, industry groups that, you know, we are part of to help get a lot of our messaging and help understand where we need to go from a product perspective. All right. So Terrance, you've been super generous with your time. Our closing question is, what are you the most excited about over?

the next year in the crypto asset space? Yeah, so over the next year, I'm very excited about the amount of capital flowing into the space. And so not only the institutional capital and actual capital, but a lot of the human capital is going into the space. And I think we're starting to see now are people that are entering the space on a full-time basis and applying their real world, I shouldn't say real world, but a lot of their experience in traditional markets and asset classes and technologies and applying them here. But we're also starting to see some of the offspring of academia actually come out, right?

And so we're starting to see universities offer classes about blockchain technology, about digital assets. And we're starting to see a number of those folks actually start to flow into this asset class and start businesses, join companies, and really help promote. what is needed in the space, right, and really help us pick up where, really help us build out the U.S. that is as much needed to help drive this more mainstream. And so that's got to be what I'm most excited about is just, you know, the continued increase in folks entering the asset class on a daily basis. I couldn't agree more.

I mean, if you had told me back in 2014 that we'd have some of the caliber of people streaming out of technology firms and financial services firms and actually building companies in the space and in joining companies like Fidelity, the talent is just crazy. So I think you usually can't go wrong following the talent. So I couldn't agree more with what you're saying. So where can people learn more about FDAS if you're an institution looking to get in the space or park some assets, park some Bitcoin somewhere, buy some Bitcoin, where can they learn more about Fidelity digital assets? Yeah, so website Fidelitydigitalassets.com or on Twitter, digital assets, and you can find me on LinkedIn, Twitter, Telegram, just look me up.

Awesome. All right, Terrence, this has been fun. Thanks so much for joining. Thank you.