The value of digital assets in a regulated future
Digital asset trading and custody solutions are under increased scrutiny by regulators aiming to ensure a high standard of industry expertise and robust, secure and transparent services. Will these efforts improve market growth? Attract new capital? Bring in more investors? Find out what recent surveys by Fidelity Digital Assets and the Ontario Securities Commission reveal.
Given the recent headlines dominating the news cycle for cryptocurrency (a term that includes bitcoin, ethereum and others, and which we refer to as “digital assets”), one might think that investors are growing wary about participating in this asset class.
But speaking with many of our clients across the brokerage community, it’s clear that there’s still a keen interest in investing in digital assets as part of a diversified investment portfolio strategy. According to the 2022 Institutional Investor Digital Assets Study by Fidelity Digital Assets1, the number of institutional investors holding positive views of digital assets and bitcoin increased in the U.S. and Europe in 2022, and 74% plan to buy or invest in digital assets in the future. There are also indicators that the level of interest in digital assets among consumers is on the rise. A recent study by the Ontario Securities Commission (OSC)2 revealed that
- 13% of Canadians currently own crypto assets or crypto funds, and 31% plan to buy crypto assets in the next 12 months.
- The primary motivation for their investment in crypto assets and funds was to make a long-term buy for a variety of reasons:
- because they believed in the value of the technology (29% for assets, 21% for funds)
- as a speculative investment or gamble (28% for assets, 21% for funds)
- to make more money compared with a traditional savings account (25% for assets, 26% for funds)
- to diversify their portfolio (25% for assets, 18% for funds).
- More than half (55%) of Canadians who currently own or used to own crypto assets said they don’t regret their decision.
Some investors are looking to profit from short-term trends; others see opportunities over a longer-term horizon. However, in light of recent news stories, there is a more acute awareness of the commercial, operational and technical risks involved in digital asset trading.
Regulation and responsible risk management
Regulation and responsible risk management will become more prominent features when it comes to digital assets investment, trading and custody. Industry and government regulators want to avoid situations where issues involving the management of digital asset exchanges spill over into other areas of the financial services sector, harming the reputation of the wider investment industry.
Investors are looking for the protection and security of working with experienced, compliant brokers while still capitalizing on the opportunities that digital assets such as bitcoin and ethereum offer. Specifically, they expect their brokers to deliver the same reliable, robust and secure service experience they enjoy when investing in other assets like bonds or equities.
Brokers must find a way to deliver digital asset investment services to their customer base while removing excess risk from the equation. This comes in the form of a compliant digital asset trading and custody solution that serves and protects them and their customers while offering the same functionality as other asset classes. Some brokers are seeking out third-party trading solution providers that offer comprehensive counterparty risk guarantees; others are looking to build their own.
Ultimately, the goal is to establish a level playing field where investors need only focus on the risks and opportunities offered by digital assets. They shouldn’t have to be concerned about any issues involving the compliance, security and operational and commercial management of the brokers they work with and the solutions they use.
Next, we’ll consider the challenge ahead for brokers in more depth.
Customer expectations
Brokers need to identify an efficient means to meet investors’ expectations for adopting regulatory best practices and compliant trading solutions in the short timeframes in which they’re working. They need quick access to valuable resources for developing and launching a digital asset investment service that works as advertised. This is challenging at the best of times, but in the fast-paced market of digital assets, it is especially difficult, as these resources are hard to find.
Plenty of moving parts are involved in offering digital financial products to investors, including onboarding, transaction management and reporting. All of these must integrate with the customer expectation of the standard user experience.
Technology resources and expertise
Building a fit-for-purpose digital asset trading solution requires significant investment in infrastructure, personnel and policy.
The technology capabilities that underpin the management and processing of investments in digital assets include comprehensive physical security, cybersecurity, business continuity, user identity management and control, transaction security and more. There are other complex technical issues specifically related to bitcoin and ethereum to consider, such as the use of secure, vaulted cold storage.
The challenge is that in a relatively new market, resources with the experience to design a high-quality digital trading solution are hard to find. Building a solution from the ground up takes innovation, time, prudence and input from clients, users, regulators and experienced developers.
Conclusion
Regulators are now scrutinizing digital asset trading and custody solutions with extra care to ensure a high standard of industry expertise and that services are robust, secure and transparent. This is a positive development, as it will help the market grow, attracting more capital, more customers and the release of new investment products by brokers.
FiDAS™ Fidelity Institutional Digital Asset Solutions, a part of Fidelity Clearing Canada ULC (FCC), is uniquely placed to help brokers meet the changing needs of investors in digital assets and the regulators overseeing the industry. We offer a powerful, robust regulated digital currency trading and custody solution for institutional investors. It gives qualified portfolio managers, introducing brokers or mutual or investment fund dealers the opportunity to prudently access a new asset class.
As part of our uniFide® digital business platform, FiDAS™ offers the scope to use FCC’s capabilities directly or on a white-label basis. uniFide® and FiDAS™ leverage industry best practices, ensuring technical, security and operational robustness.
We have been working with our clients and other industry practitioners to create a solution that delivers. We’ve also worked with all relevant regulators to understand their expectations, requirements and plans.
FCC is the first custodian and clearing agent to receive approval from both CIRO and the Canadian Securities Administrators to bring a regulated digital currency trading and custody solution for institutional investors to the Canadian market. FCC’s regulated dealer platform leverages the strength and scale of Fidelity’s broad expertise and deep knowledge of digital assets while providing access to our unique partnership approach.
Learn more here.
2 https://www.osc.ca/sites/default/files/2022-10/inv_research_20220928_crypto-asset-survey_EN.pdf