Leveraging a Regulated Platform for Bitcoin & Ethereum: A Best-in-class Approach
The world of digital assets trading didn’t end 2022 on a high note. Investors have lost billions, and not all of it will be recovered. The dialogue in the financial services markets is now centred on how best to respond.
Recent research indicates that brokers deem digital assets as an area worthy of investment. The 2022 Institutional Investor Digital Assets Study by Fidelity Digital Assets1, which surveyed institutional investors in the U.S. and Europe, revealed increased familiarity with and improved perceptions of this asset class:
- The number of investors surveyed holding positive views of digital assets and bitcoin increased in these regions compared to 2021.
- 81% of respondents said they believe digital assets “should be part of an investment portfolio.”
- When asked which features of digital assets they find most appealing, respondents cited the high potential upside (43%), innovative tech play (39%) and enablement of decentralization (29%) as key factors.
Brokers have always been aware of the potential obstacles associated with investing in digital assets. Participants in the same study cited concerns about security (35%), market manipulation (35%) and the regulatory classification of certain coins as unregistered securities (33%) as key barriers to investment.
Given recent scandals, they’re more aware than ever that the regulations associated with the trade and custody of these assets are complex ‒ and that the financial and reputational impacts of falling afoul of them could be grave.
In the same way, their customers are on high alert. They need to be sure the financial institutions and brokers they’re engaged with are managing their digital assets responsibly and won’t leave them out of pocket.
The question that needs to be answered is, “What does ‘reliable’ look like to today’s investors and brokers?”
The changing perceptions of risk in digital asset investments
Investors recognize that investing in assets like bitcoin or ethereum differs from investing in bonds or equities: there are no underlying cash flows to assess the intrinsic value of digital assets.
Investors are prepared to invest in digital assets based on how they think prices will change over time. They understand that the value of their investment lies in how the short-, medium- and long-term views of a range of investors shape the market. Some are trading on short-term trends, while others are looking to invest for the long haul, believing that digital assets have a key part to play in the growth of the digital economy.
That being said, they’re not keen to take on the commercial, operational and technical risks that investing in digital assets might expose them to. Until recently, their view was that they shouldn’t need to worry about whether their coins are securely held, whether their broker is in full compliance with all relevant regulations, and how these factors might affect their investments. They never needed to ask such questions when investing in bonds and equities, so they don’t feel they should have to when investing in digital assets.
But now, on learning about how other investors have been burned by unscrupulous players, they’re seeking greater information and assurance from their service providers.
To meet these heightened expectations, brokers and investment firms need to find a way to seamlessly integrate digital asset options into their customers’ portfolios while maintaining the same frictionless service and risk guardrails that those customers have come to expect.
What you should expect from a digital currency trading and custody solution
Customers’ requirements go beyond the basic functionality of a trading solution; they’re demanding immutable proof that their interests will be managed in the same way they would be if they were investing in other asset classes.
For brokers and investment firms, this means following standards and regulations to the letter. The answer lies in engaging a provider that offers trade execution and custody of all kinds of assets, including digital ones, and assumes all the counterparty risk on their behalf.
Interoperability and ease of use
The solution should be easy to use, with an intuitive user interface that guides clients through the sign-up process quickly and easily. It also needs to integrate into standard onboarding compliance processes so that regulatory obligations are correctly managed without unnecessary manual intervention. It should be easy to make investments and arrange withdrawals securely and with full transparency.
Interoperability is just as important in providing the solution. All systems and software need to seamlessly blend into the firm’s existing technology stack and any other bespoke corporate systems and processes.
Robust and resilient
The unique nature of investing in digital assets – that the asset itself is handed to a broker or exchange to hold – means that unique technical capabilities need to be implemented to provide the assurances investors seek.
A digital asset investment solution must be functionally robust, with high physical and technical security levels. It needs to be resilient in the face of natural or technical disasters such as floods, fires, cyberattacks, power outages or other system failures. Systems management and maintenance should include failover locations with the same high standard of security and compliance mirrored across all locations.
The security needs of online investment services are well understood, with the widespread use of strong passwords, strong encryption and two-factor authentication. That being said, other requirements must be in place to maintain very high standards of security, including multi-layered physical security for data centres, strong application change management controls and comprehensive cyber risk management capabilities. This will also involve cold storage of the private keys core to accessing the digital assets.
This security can also extend to how withdrawals are managed. In addition to the extensive user access control typically put in place, there can be situations where the four-eyes principle needs to be applied to checking withdrawals, so that at least two people at the brokerage confirm that the details given by the account holder are correct. For the largest withdrawals, there may even be a need to meet the account holder in person or virtually to confirm that the withdrawal is legitimate. Email confirmations aren’t enough in this day and age of computer hacking. Telephone confirmations should be accompanied with security questions that only the client would know the answer to.
FiDAS™ Fidelity Institutional Digital Asset Solutions, a part of Fidelity Clearing Canada ULC, is uniquely placed to help qualified portfolio managers, introducing brokers and mutual or investment fund dealers meet the changing needs of investors in digital assets.
As part of our uniFide® digital business platform, FiDAS™ gives you an out-of-the-box capability to deliver new investment products and services for digital investments to your customer base.
FiDAS™ allows you to embed Fidelity Clearing Canada’s capabilities and reputation directly on your platform or as a white-label project, carrying your branding and content. However you approach it, you can be assured that you are leveraging a range of best-in-class capabilities.
Learn more here.