'They are not in a hurry and they want to do this right:' Fidelity is kicking off crypto custody with a soft launch

The launch of Fidelity's much-awaited crypto business is starting off small, according to several people briefed on the firm's plans. 

To start, the firm will only offer its custody services to a select group of clients as part of a pilot period, the people said, declining to speak on the record as they agreed not to disclose information to the media. 

In October, the firm announced the new crypto business, dubbed Fidelity Digital Assets, which would offer services spanning custody and execution services. The firm will first offer custody for bitcoin, according to people familiar with the situation. Galaxy Digital is one of the firm's pilot clients along with four others of which The Block is aware.

To be sure, it's not unusual that Fidelity is kicking things off with a pilot in order to test the crypto waters. Coinbase also soft-launched its custody business with five clients, according to a source. A soft launch will enable Fidelity, a financial services powerhouse, to get a feel for the spine-tingling volatile crypto market and its clients' needs, according to sources. "They are not in a hurry and they want to do this right," one source said. To be sure, the firm is actively accepting inbounds from potential clients for future client on-boarding waves.

The firm, which oversees more than $7.2 trillion, has actively invested in crypto through a venture capital unit. Its CEO Abigail Johnson is a noted bitcoin proponent. 

"Some of you might be wondering: Why am I here today?” Johnson once said at a crypto industry conference. “I’m here because I love this stuff…all that the future might hold.”

Fidelity enters the crypto custody market, however, as other custodians come online, including Anchorage. Other providers in the space include Kingdom Trust, Xapo, DACC, Gemini, and Prime Trust. Still, another source told The Block that Fidelity's brand and insurance differentiate its offering from the current competition. 

"They are framing it that they have more insurance than anyone else," one potential client told The Block."They were able to get and secure insurance in a way that others have not been able to. The combination of brand and insurance is incredibly attractive."

Fidelity notably offers custody and brokerage services for institutional clients in other markets including U.S. equities. Its entry into the bitcoin custody market could help convince more traditional players to trade in the nascent space. Still, the clients it is kicking things off with are all bitcoin native firms. 

Brad Koeppen, president of business development at CMT Digital, a proprietary trading shop in Chicago, told The Block it makes sense Fidelity is easing into the business. 

"Bakkt stopped putting out a date, ErisX is supposed to go in April, I believe. Fidelity is starting small, but it all makes sense because you don't want to jump in at full speed and then have an issue," Koeppen said. 

As for the trial, people familiar with the situation said participants would be offered favorable pricing relative to non-trial members. 

Fees tied to storing assets for institutions are known to be more expensive than in traditional markets. Still, they have been on a sharp decline since 2018, said Sam Jernigan, Co-CIO of Wakem Global Opportunities Fund, a macro hedge fund that trades digital assets.

“Just since the summer of 2018, we’ve seen the cost of custody decline anywhere between 50 and 100 basis points,” he said. 

As such, custody is not as big of a money maker as it was at the beginning of the year, Jernigan added.

“That’s putting pressure on firms and is forcing them to move past the commodity of custody to value-add services and additional tie ups."

A spokeswoman for Fidelity declined to comment.