Insider Insights November 2019 Issue

Fidelity Investments acquires a BitLicense, Opening the Door to New York’s Financial Market 

Regulators Combine and Focus Their Efforts

This summer, the New York State Department of Financial Services (NYDFS) has assembled its personnel that are focused on supervising and regulating business operating in digital assets into a single, unified team. Previously, the staff tasked with this responsibility were spread over different siloed departments, making it difficult for them to communicate. Although the regulatory body has been operating and issuing a small number of digital asset charters, colloquially known as BitLicenses to well-known cryptocurrency exchanges such as BitStamp and Coinbase in the past, its latest issuance to Fidelity Investments is notable being the first major institution to receive one of the coveted licenses.

This represents the 23rd such license granted to institutions in New York State to date, the most recent prior to this being Bakkt, which proceeded to launch regulated Bitcoin futures on the New York Stock Exchange. Other recent license recipients include PAX Gold, a gold-pegged asset-backed token, and BUSD, a USD-pegged asset-backed token.

What goes into a BitLicense?

The NYDFS requires any organization engaging in controlling or administered a digital asset, performing exchange services as a customer business, buying and selling digital assets, storing, holding, or maintain control of digital assets for others, or transmitting virtual currency. BitLicenses are not required for consumers to purchase digital assets, nor for merchants merely to accept them as payments for goods or services from customers. Essentially, the line is drawn where a business is selling or exchanging assets as their primary business model, and not just using them as a means of facilitation for their business activities.

BitLicenses can be laborious and expensive to procure, involving a 30-page application and a $5,000 application fee, with additional costs involved in gathering and constructing the information needed to submit the form. Applicants will be asked about their business history, financial records, and AML/KYC compliance, and have to undergo rigorous standards placed on traditional institutions such as having a qualified CISO and written disaster recovery processes. To maintain the license, a quarterly financial report and annual audits and inspections are required. This makes a BitLicense a rather exclusive and coveted item, especially in a state as heavily involved in the finance sector as New York is.

These requirements leave a rather significant gap in this market, where smaller businesses can struggle to get their foot in the door. When the BitLicense regulations arrived in 2015, it was described as a “Great Bitcoin Exodus” where a lot of digital-asset based companies left the state when they were not able to field the resources needed to secure a charter, including well-known exchanges such as Kraken and Bittrex. NYDFS Superintendent Linda Lacewell indicated last month that the regulatory body is open to feedback and will be soliciting statements from existing and potential licensees as to what needs to change to better suit the financial ecosystem, remarking, “Maybe there’s some things that could be within a license’s discretion, maybe there could be all kinds of permutations and our mind is open. With any new and emerging industry, it’s good to take a close look and see if there’s any aspect maybe [where] there’s something we need to add.” Currently, the BitLicense is regarded as one of the toughest sets of regulations for digital assets in the United States.

Presidential candidate Andrew Yang recently made reference to the BitLicense as well, stating that he would be interested in streamlining some of the license’s tenets and rolling them into regulation at the federal level. While the BitLicense has certainly not been without controversy, it has nevertheless made a huge impact on the New York State financial sector and has the potential to drive regulation going forward.

Fidelity’s Statement on Digital Assets

Fidelity released a statement in a blog post, reading in part, Fidelity released a statement in a blog post, reading in part, “We believe that we are uniquely positioned to drive adoption of digital assets across a range of use cases and client segments, which is why we are committed to the continued development of the digital assets industry. Our clients are a fascinating set of forward-thinking organizations who have engaged with the emerging digital assets space after tremendous research, diligence, and a long-term strategy.” Michael O’Reilly, CEO of Fidelity Digital Assets went on to describe that the digital asset space is changing to include institutions and enterprises rather than focusing on individual assets, and the desire to acquire such a license reflects their desire to proceed further.

Their main focus will be on providing services to institutional investors, reflecting the environment that New York state has been moving towards. Fidelity Digital Asset Services LLC described their strategy thusly: “We look forward to making our custody and trade execution services available to firms based in New York.” The firm added, “We have experienced a high interest level from these firms and anticipate that their increased involvement in this industry would enable more activities and development across the spectrum.

Fidelity does have history in the digital assets space. In 2017, Fidelity’s CEO Abigail Johnson stated that they were involved in mining Bitcoin and Ethereum which began as a research venture but ended up being profitable enough to continue. Furthermore, the Fidelity website was then integrated with Coinbase, allowing those who hold accounts with both organizations to view their digital asset balances on Fidelity’s website. Over time, it appears that the sentiment of Fidelity has transitioned from inquisitive to entrepreneurial, reflected by their desire to secure such a coveted license.

Additionally, Fidelity went on a hiring spree earlier this year, seeking ten additional blockchain and digital asset professional leadership positions ranging from leading software architects to vice presidents and director, another move that suggests they have big investments planned in the space. Many of the hiring requisitioned focused on institutional trading, DLT programs such as Corda and Hyperledger Fabric, and blockchain knowledge. In particular, the Vice President position included the objective of “design, architecture and delivery of a new platform, maintenance of existing platforms.”

Conclusion

Although the BitLicense at times has proven to be controversial, it is still clearly a coveted possession. The difficulty involved attaining such a license speaks that those organizations that do have demonstrated they are clearly serious about investing time and effort into the digital assets space. In addition to acquiring the license, the technical and personnel investments they have made show that they have big plans in the very near future.

If you have questions about our fund or would like to be sent investor documents, you can contact our investor relations department at contact@varys.capital.

Regards,

Darius & Saul
Managing Partners

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