crypto finance

March definitely came in like a lion as far as the blockchain industry is concerned. Stories have flooded news feeds and social media platforms about big companies like Facebook taking on crypto projects. The hope is that all this attention will move us ever closer to global adoption.

Meanwhile, two behemoths have made their move into the crypto finance sphere. Before we get into that, let’s quickly cover the recent Facebook travails. Hopefully, it will give us a perspective on how two different industries are planning to apply blockchain technology.

One recent story, in particular, was about the proposed Facebook coin. CEO Mark Zuckerberg made claims in March that a coin and “bitcoin-like payments” for WhatsApp users were in the works. In this new system, users could ‘own’ their encrypted data. His other big announcement revolved around his new privacy-focused platform.

Untimely Facebook Outage

Interestingly, almost directly following that press, an hours-long Facebook outage took place (still going on at this writing after 8 hours). In a somewhat ironic gesture, Facebook tweeted out information about their outage. During the down time, Zuckerberg’s announcement about Facebook’s future plans seemed to be the only available Facebook content.

crypto finance

And in another twist, AndroidPolice.com reported that some Italian speaking Facebook users had already received a glimpse of a “Pay with Facebook” option. Check it out:

crypto finance

These incidents may or may not bode well for the social media giant, who is already knee deep in public mistrust over mishandling user data. Is it the right timing to add cryptocurrency to Facebook’s platform? Additionally, many news pundits are pointing to their move into crypto as nonsensical because it takes away their billion dollar business model.

Others fear that Facebook will move towards a privacy ‘regime’ that is tightly controlled, as with China’s WeChat. Certainly not a blockchain fan’s wildest dream.

Not surprisingly, many crypto enthusiasts are less than optimistic about a Facebook coin (“Facecoin“). But behind all the hubbub, tweets and announcements, on a subtler note, finance is stepping into the world of cryptocurrencies.

Finance in the Crypto World

With a relative lack of hoopla, both Fidelity and IBM made announcements recently about the upcoming launch of services for crypto custody.

What is a crypto custody service?

In general, a custody service is a 3rd party that holds your assets and keeps them secure. So a crypto custody service would mean that you are paying a 3rd party to hold cryptocurrency assets. In this case, you would most likely be a big investor. But the idea of having a 3rd party handle your digital assets might give you pause for these 3 reasons:

  • What about our 3rd-party-less future and financial autonomy?
  • Doesn’t blockchain technology enable a more personal and private approach to crypto finance?
  • What about “not your keys, not your bitcoin“?

But don’t worry, because, unless you’re an institutional investor, this service is not for you.

Fidelity’s Take on the Current Crypto Market

The reasoning behind Fidelity’s rollout, as described in their white paper, is that there are no fully secure ways to hold your cryptocurrency now. Additionally, regulators may not be able to get a handle on it quickly enough to protect investors as blockchain products and services proliferate. Custody services will solve the problem, they say, of institutional investors wanting to know WHO is protecting their keys. It appears they have a valid point.

What Fidelity is now offering to its family office and institutional clients is a holding service designed to keep their assets safe. The service is part of their new company, Fidelity Digital Asset Services, a clearinghouse and custody service provider for cryptocurrencies and other digital assets.

With the holding and protecting of digital assets, the idea is that institutional investors won’t have to worry about the following:

  • Exchange hacks – We hear all the time about hacks on crypto exchanges. It seems that some sort of regulation or self-regulation is necessary. But until that is more developed, many investors feel at the whim of exchanges with less than perfect security. Others may feel they don’t have the time or the knowledge to store their crypto assets safely on their own.
  • Losing their keys – Crypto holders have various ways of storing their digital assets. At this point in time, the most secure way to hold them (cold storage, hardware and paper wallets) is also inconvenient. Additionally, there’s no recourse for crypto holders who lose their private keys. Again, so many projects are under development now and this is one area that is sure to see improvements in the months to come.
  • Having to figure out capital gains – Since with a crypto finance custody service like Fidelity’s, high-end clients are not trading from exchange to exchange. As such, they don’t need to worry about tracking each crypto transaction, since many countries consider crypto to crypto exchanges a taxable event. Custodial services with Fidelity will track all the crypto movements.

Fidelity’s plan is to not only hold and secure the assets, but also to provide settlement, exchange, and record keeping services.

And Here’s Where it Gets Weird

It’s strange because traditional custody services today, like those provided by Fidelity and JP Morgan, hold the assets but don’t own them. For example, a fund manager may be handling a client’s stock investments while the ownership stays with the client.

But it’s different with crypto. How can they hold your Bitcoin if they don’t have your keys? If they have your keys, then doesn’t that defeat the purpose of the financial independence that Bitcoin provides? The idea of ownership certainly gets muddied, but maybe they’ll be able to figure it out.

crypto finance

Then you think about the fact that they will be servicing hedge funds. It’s pretty much fair game as to how this will all be accomplished and where the ultimate ownership will lie. But it doesn’t sound much like these investors will be enjoying the financial privacy, cost savings and independence that blockchain technologies enable for ‘the rest of us’. On the other hand, this may enable institutional clients to enjoy a lower level of volatility and an easier way to profit with cryptocurrencies.

IBM’s Big Crypto Finance Announcement

Most of you are probably familiar with IBM’s suite of Hyperledger blockchains tools for industrial scale businesses. We’ve all heard of the Hyperledger Fabric Blockchain and many of us know of projects that are trying to integrate IBM’s blockchain into their business. Up until this point, most of the news coming from Hyperledger projects have revolved around digital identity and supply chains. Just recently they announced their oficial move into finance.

In fact, Shuttle Holdings, an investment firm based in New York, is planning to roll out their custody service’s beta version utilizing IBM’s private cloud. This is the first example of a custody service through IBM’s open source, distributed blockchain building environment.

So while IBM provides the building ecosystem for Shuttle Holding (and others), they themselves do not provide the custody service. Yet another new way of looking at the crypto custody market. Just to make the distinction, IBM blockchains are private as opposed to the Bitcoin or Ethereum Blockchains, which are public.

What’s Next?

In 2018, four of the biggest banks providing custody services, JP Morgan, Citigroup, BNY Mellon, and State Street, jointly held over $114 trillion in custodial assets. We’ll eventually see what kind of market share Shuttle Holdings and Fidelity will gain in the crypto finance space. While we wait, there’s sure to be plenty of entertaining crypto news stories about big companies like Facebook getting their feet wet with crypto.

crypto finance

Also published on Medium.