Fidelity Investments just days ago announced the upcoming launch of their crypto exchange for institutional customers. This initiative marks their first foray into cryptocurrency exchange services. But today, we have news pouring in about hackers stealing 7000 bitcoins from Binance, one of the world’s largest cryptocurrency exchanges. So goes the world of crypto! But what is Fidelity’s answer to protecting exchange assets? And will the recent Binance episode cause Fidelity’s customers to balk at bitcoin?
Fidelity Crypto Developments
As an asset management company, Fidelity has been working on developing their unique bitcoin strategy. Gradually, as cryptocurrencies have evolved, they’ve been proactive in creating ways to bridge the market. A few of their projects in the space include setting up their own mining operations, creating Fidelity Digital Assets to handle virtual currencies. They also recently began offering bitcoin custody services.
Based in Boston, Fidelity has offices in eight countries, with over 40,000 associates, and $2,459 billion in assets. Managing over $6.7 trillion in customer assets, their institutional investors represent one-third of Fortune 500 companies and make up a base of over 13,000 advisory and brokerage firms. The rollout of crypto exchange services will affect only their institutional customers. At this writing, Fidelity does not plan to make this service available to retail investors.
How will Fidelity secure their exchange assets?
The Fidelity Digital Assets white paper, published in late 2018, discusses in detail the shortcomings of cryptocurrency exchanges. It also covers the need for custodial services. Cold storage solutions such as hardware wallets are part of the plan to secure Fidelity crypto investments. This along with other “physical and cyber controls”.
One of the main goals of the paper was to propose a solution for crypto custodial services. With bitcoin acceptance growing, Fidelity saw a need for investing and providing crypto custodial services for their non-technical institutional investors. As a result, they recently rolled out a custody product. How they will solve the ‘not your keys not your bitcoin’ dilemma remains to be seen. Otherwise, the whitepaper provided an entry-level explanation of digital assets and the market as a whole.
“…it has become apparent that exchanges by themselves are not immune to security failures. Institutional concerns for client safety have fueled the demand for custodial services, separate from exchanges, that can provide safe, secure storage for digital assets.”
Fidelity Digital Assets white paper
We look forward to hearing any details as to how they will store digital assets like bitcoin safely while operating a crypto exchange and while in custody.
Binance Hack – Is it really that bad?
Certainly, a hack is never good news. But Binance has shown resiliency before and appears to be doing so again. In this most recent hack, the approximately $4 million worth of bitcoin stolen came from Binance’s bitcoin hot wallet. This online wallet was mainly kept for liquidity purposes. Usually, the most careful crypto investor only holds a minimal amount of assets in their hot wallet, as Binance did.
The hack represented 2% of Binance’s $20,000,000 in overall assets. Additionally, CEO Changpeng Zhao (CZ) assured the Binance community that all investor funds are backed by their SAFU program. This “Secure Assets Fund” is set up to act like as an insurance policy for the hot wallet in the case of hacks like this.
Self regulation at work?
There’s a lot of buzz around the hack itself, with theories ranging from ‘it’s an inside job’ to vague references to Tether. Others are suspicious that Binance is shutting down deposits and withdrawals for at least a week to audit and get everything set and secure. Trading on the exchange, incidentally, will continue during the audit period.
What made Twitter go through the roof was a suggestion that Binance push for a reorg of the Bitcoin Blockchain and CZ’s subsequent comment that he would consider it. The tweetstorm that followed showed that the community was against any exchange even thinking they might have that much control.
But all in all, it may be an example of working cryptocurrency self-regulation. Also on the upside, the Binance CEO immediately announced the breach in a transparent manner, vowing to set it straight. He’s also been proactively communicative throughout the predicament:
What happened after the hack was reported?
The hack did cause major FUD, which led the Binance coin to drop sharply when news about the hack hit social media. But as it always seems with Binance, they continue to be a favorite exchange for retail crypto investors.
Quite possibly the ‘any press is good press’ mentality is intensified in the crypto industry as it attempts to break out of nascency
To put things in perspective, Binance’s loss of just over $4 million is a mere drop in the bucket to what Fidelity is managing. Not to mention other big players entering the space, such as Goldman Sacs and Barclays. Crypto enthusiasts are quite excited about this kind of institutional money coming into bitcoin. At the same time, the strength of bitcoin continues to grow.
Bitcoin fever is spreading
The fever has spread and almost half of Fidelity’s clients are showing bullishness when it comes to bitcoin, according to an April 2019 survey held by Fidelity. Hopefully, with institutional money, will also come some enterprise-grade solutions for exchange security. Until then, Binance seems to be handling the hack at the moment.
As to whether this bit of news will have any effect on the Fidelity crypto exchange rollout, we’ll have to wait and see. Will institutional investors back down from their interest in bitcoin investments after yet another big hack? Stay tuned for more updates on these developments!
Also published on Medium.